Earlier this month the Indonesian Ministry of Energy and Mineral Resources said that Indonesia will require an additional 3,100 million standard cubic feet per day (mmscfd) of gas supplies in the next five years to meet domestic gas demand for the country’s power stations and fertilizer plants. About 1,100 mmscfd of gas is needed for Indonesia’s plan to establish 13,400 MW of gas-fired power stations by 2020. A further 2,000 mmscfd is needed to fuel fertilizer plants in Southeast Asia’s largest economy.
Although Indonesia is blessed by abundant natural gas reserves (it contains the world’s eighth-largest gas reserves and the third-largest reserves of the Asia-Pacific region after Australia and China), the country may turn into a net gas importer by 2020 as industrialization (as well as a shift to gas by major industrial users) and an increasing number of Indonesians being connected to the country’s electricity grid causes the continuously rising domestic gas demand. Domestic gas demand is expected to double over the next two decades.
Several other factors are at play as well. Indonesian governments in the 2000s have signed long-term contracts for natural gas exports, hence limiting gas supplies to the domestic market (in 2013, 52 percent of Indonesia’s natural gas production was exported abroad). It is therefore ironic that Indonesia struggles to meet domestic gas demand considering that the country is the world’s fourth-largest liquefied natural gas/LNG exporter after Qatar, Malaysia and Australia). In fact, due to export commitments, Indonesia has had to purchase spot LNG cargoes to meet its own export obligations.
Another matter that jeopardizes Indonesia’s future gas supplies is that there has been insufficient investment in exploration and development of new gas fields. Late last year the Indonesian Petroleum Association stated that it expects investment (for exploration) to decline by 20 percent in 2015 (particularly given the current low energy prices). Analysts say that the Indonesian government should provide a more conducive investment climate as well as offer incentives to attract (foreign) investment in the country’s gas sector.
Moreover, infrastructure development remains a key issue as well as a key challenge to the Indonesian government. Due to Indonesia’s geographical make-up gas distribution by tanker is preferred over pipelines (key blocks of natural gas reserves are located far from the major demand centers).
Severe bureaucracy (red tape), or weak government management, is another matter that has been a main obstacle to investment projects. For example, Chevron’s USD $12 billion Indonesia Deepwater Development (IDD) project (the country's first ultra-deepwater natural gas project) in the Makassar Strait has been delayed as the operator does not know whether the government will extend the production-sharing contracts, implying that billions of US dollars of investment are currently on hold. The IDD project was scheduled to commence full production in 2018 but this will probably need to be postponed by two years.
Another project that has been delayed is Inpex's Masela project in the Arafura Sea. Japan-based Inpex, which holds a 65 percent stake in Masela (the remainder is in the hands of Shell), requests a 20-year extension as the current contract leaves too little time to make a return on the company’s investment.
In a move to ensure sufficient future gas supplies, the government has raised the proportion of gas output that is reserved for the domestic market (an increase to 23.4 Tcf in 2015 from 22.7 Tcf in 2014). Apart from enhancing gas production, gas infrastructure development is required as well. Indonesia would like to create a nationwide distribution network beyond the most populous island of Java, linking it to new gas power plants and fields across the archipelago (including a new pipeline which connects the gas fields of Kalimantan to Java). It will be an important task of the government, under the leadership of Joko Widodo (Jokowi), to push for reform, offer tax incentives, create a more attractive investment climate, and to combat bureaucracy (as well as corruption) in this sector.
Without immediate action to boost exploration, Indonesia may turn into a structural net gas importer from 2020 onwards as it takes up to seven or eight years to construct a new gas field. The same happened in the country’s oil sector. In the mid-1990s Indonesia - back then a member of the OPEC - had a peak oil production rate of about 1.6 million barrels per day (bpd). In 2014, the country produced an average of 794,000 bpd only, a significant decline that is due to maturing oil fields in combination with the lack of exploration as well as other investments in this sector.
Does not need to if the government was to carryout early exploration instead of relying on others to do it for them, investment will be forthcoming if the risk is decreased. Regulations also need to be addressed.