Natural Gas

Natural gas is a vital component of the world's energy supply. It forms an important source for the production of both fuel and ammonia (the latter being a vital component for the production of fertilizers). Similar to crude oil and coal, natural gas is a fossil fuel that emerged from the remains of plants, animals and microorganisms, stored deep underground for millions of years. But unlike other fossil fuels, gas is one of the cleanest (as it has low carbon intensity), safest and most useful of all energy sources.

The two largest producers of natural gas (the USA and Russia) together account for almost 40 percent of total global gas production.


Top Natural Gas Producing Countries in 2013:

 1. United States   687.6   6. China   117.1
 2. Russia   604.8   7. Norway   108.7
 3. Iran   166.6  8. Saudi Arabia   103.0
 4. Qatar   158.5   9. Algeria    78.6
 5. Canada   154.8  10. Indonesia    70.4

in billion m³


Top Natural Gas Consuming Countries in 2013:

 1. United States   737.2  6. Canada   103.5
 2. Russia   413.5  7. Saudi Arabia   103.0
 3. Iran   162.2  8. Germany    83.6
 4. China   161.6  9. Mexico    82.7
 5. Japan   116.9  23. Indonesia    38.4

in billion m³
Source: BP Statistical Review of World Energy 2014

An important feature of natural gas is that this fossil fuel plays a significant role in most sectors of the world economy (industrial, power generation, commercial and residential). Moreover, due to the fact that there are abundant reserves of natural gas in the world - that can be developed and produced without the need for large financial investments - the importance of gas is likely to expand in the future as nations want to cut back from reliance on expensive and environment-unfriendly energy sources such as oil. Currently, natural gas accounts for about 23 percent of global primary energy sources.

Natural Gas in Indonesia

Indonesia's Gas Production and Consumption

Indonesia contains large reserves of natural gas. Currently, the country contains the third-largest gas reserves of the Asia Pacific region (after Australia and China), accounting for 1.6 percent of total global gas reserves (BP Statistical Review of World Energy 2014).

Most centers of Indonesian gas production are located offshore. The largest of these are found in:

1. Arun, Aceh (Sumatra)
2. Bontang (East Kalimantan)
3. Tangguh (Papua)
4. Natuna Island

Gas Production in Indonesia Arun Bontang Tangguh Natuna Indonesia Investments


Indonesia produces around twice as much natural gas as it consumes. This does not mean, however, that domestic production of gas meets domestic demand. In fact, there is a shortage of gas for domestic industries in Indonesia. State-owned gas transportation and distribution company Perusahaan Gas Negara (PGN) has not been able to satisfy domestic demand. This has far-reaching consequences as it causes state electricity company Perusahaan Listrik Negara (PLN), the biggest domestic gas consumer, to have a structural lack of gas supplies and forces PLN to turn to other - more expensive and environment unfriendly - fossil fuels, such as oil, to generate electricity. However, blackouts happen frequently across the country (in particular outside the bigger cities on Java), thus hurting the nation's industries. Moreover, more than 80 million Indonesians do not yet have access to electricity as is shown through Indonesia's relatively low electrification rate of 80.4 percent by end-2013.

The government of Indonesia aims to limit the country's gas exports in an attempt to ensure domestic supplies while encouraging the use of natural gas as a fuel source for industrial and personal consumption.

A large part of Indonesia's gas production is exported as the nation's gas production is dominated by foreign companies that are only willing to invest if allowed to export the commodity. Currently, around 87 percent of Indonesia's natural gas production is accounted for by these foreign companies such as CNOOC Limited, Total E&P Indonesia, Conoco Philips, BP Tangguh, and Exxon Mobil Oil Indonesia. The remaining 13 percent is produced by state-owned company Pertamina. Around half of total gas production is sold domestically.

The table below indicates both production and consumption of gas in Indonesia during the last decade.


Indonesian Gas Production and Consumption 2004-2013:

   2004  2005  2006  2007  2008  2009  2010  2011  2012  2013
Production
in billion m³
 70.3  71.2  70.3  67.7  69.7  71.9  82.0  75.9  71.1  70.4
Consumption
in billion m³
 32.2  33.2  33.2  31.3  33.3  37.4  40.3  37.3  35.8  38.4

Source: BP Statistical Review of World Energy 2014

As shown in the table above - and contrary to national oil production - gas production in Indonesia has remained stable, reaching a record high in 2010 amid the start of production of the Tangguh field (located in Papua) in the same year (managed by BP Indonesia) and is an important player in the country's gas industry. After 2010 gas production has dropped due to supply problems.

Although numerous small companies are active in Indonesia's gas sector, most of its domestic production and exploration is in the hands of six large companies, of which only one is Indonesian (state-owned enterprise Pertamina). Together, China's CNOOC Ltd. and Pertamina account for over half of Indonesia's gas production.

Indonesia's Export of Gas

Throughout its history, Indonesia's gas production has always been directed towards export markets. However, the decline in domestic oil production in combination with a rising international oil price, made the government decide to make efforts to enlarge domestic uses of gas from the mid-2000s. In recent years domestic usage of gas has risen robustly at the expense of exports but limited infrastructural facilities in Indonesia's transmission and distribution networks complicate further development of domestic consumption.

After Qatar, Indonesia is currently the world's second-largest exporter of liquified natural gas (LNG). This does not mean - as mentioned above - that domestic demand can be satisfied by domestic production, resulting in the need to import LNG from abroad in order not to disturb export commitments. It is predicted that by 2017 additional supplies from new Indonesian gasfields will be able to replace imports. Indonesia, previously largest exporter of LNG, is experiencing a declining global LNG market share, partly due to a policy re-orientation of the Indonesian government in the mid-2000s that targets for more gas supplies for the domestic market in the context of increasing usage of gas as a source for energy (at the expense of reliance on oil). The main export destinations of Indonesian LNG are Japan, South Korea and Taiwan.

A number of long-term export contracts that were signed in the early and mid-2000s are priced below market prices, meaning Indonesia misses out on significant amounts of revenues. Instead of linking the contract rates to the fluctuating market price for gas, fixed rates were agreed upon which soon began to be out of date as the market price went up. Currently, the government is trying to renegotiate such long-term contracts in order to gain more financial benefit. However, from the perspective of business certainty such intentions to renegotiate contracts are not the best option.


Future Outlook of Indonesia's Gas Sector

Indonesia's expanding economy in combination with the government's intention to lower reliance on oil as a source for energy supply in industries, power generation and transportation will cause domestic demand for gas to rise in the future. The country contains abundant reserves of gas that can supply Indonesia as well as foreign export markets for many more decades to come. But in order to reach an efficient and productive gas sector, large-scale investments in both exploration and (distributional) infrastructure will be needed. In order to attract more foreign investments, a clear and supportive regulatory system and legal framework is required.