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 2012

 1. United States   681.4   6. Norway   114.9
 2. Russia   592.3   7. China   107.2
 3. Iran   160.5  8. Saudi Arabia   102.8
 4. Qatar   157.0   9. Algeria    88.5
 5. Canada   156.5  10. Indonesia    71.1

in billion m³
Source: BP Statistical Review of World Energy 2013


Top natural gas consuming countries in 2012

 1. United States  722.1  6. Saudi Arabia  102.8
 2. Russia  416.2  7. Canada  100.7
 3. Iran  156.1  8. Mexico   83.7
 4. China  143.8  9. United Kingdom   78.3
 5. Japan  116.7  24. Indonesia   35.8

in billion m³
Source: BP Statistical Review of World Energy 2013

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 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 1.4 percent of total global gas reserves.

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 current low electrification rate of less than 70 percent.

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, 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.

   2003  2004  2005  2006  2007  2008  2009  2010  2011  2012
Production
in billion m³
 73.2  70.3  71.2  70.3  67.7  69.7  71.9  82.0  75.6  71.1
Consumption
in billion m³
 35.0  32.2  33.2  33.2  31.3  33.3  37.4  40.3  37.9  35.8

Source: BP Statistical Review of World Energy 2013

As shown in the table above - and contrary to national oil production - gas production has been rising steadily in Indonesia, reaching record highs in recent years. In particular the start of production of the Tangguh field (located in Papua) in 2010, managed by BP Indonesia, contributes significantly to domestic gas production. In 2011 and 2012, however, 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 robust at the expense of exports but limited infrastructural facilities in the country'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.

Influential Companies in Indonesia's Gas Sector

 Pertamina      Company File  |  Website
 BP Indonesia      Company File  |  Website
 CNOOC Limited      Company File  |  Website
 Total      Company File  |  Website
 ExxonMobil      Company File  |  Website
• ConocoPhillips      Company File  |  Website
• Vico Indonesia      Company File  |  Website
• PetroChina      Company File  |  Website
 Chevron      Company File  |  Website
• Kodeco      Company File  |  Website