Ministry suggests DMO to lower gas prices

14 January 2020

The Energy and Mineral Resources Ministry has chosen to pursue a combination of a domestic market obligation (DMO) and fiscal incentives to reduce industrial gas prices in the hope of fulfilling a four-year-old promise from President Joko “Jokowi” Widodo.

The ministry will, among others, expect oil and gas companies to prioritize selling their liquefied natural gas (LNG) to state-owned gas distributor PGN as part of efforts to bring the gas price down to US$6 per million British thermal units (mmbtu) as promised by the government, from between $8 and $9 per mmbtu at present.

“As long as PGN’s infrastructure runs at full capacity, it can sell at $6 per mmbtu,” said the ministry’s acting oil and gas director general, Djoko Siswanto, on Jan. 8.

Should PGN fail to bring gas prices down even with the higher LNG supply, then the government will reduce upstream costs — that average $5.4 mmbtu nationwide — by slashing nontax state revenue (PNBP) from oil and gas companies, he added.

President Jokowi issued a regulation in 2016 that pledged to lower gas prices to $6 per mmbtu. The pledge was meant to boost the growth of seven gas-reliant industrial sectors namely electricity production, chemicals, food, ceramics, steel, fertilizers and glass manufacturing, which collectively consume about 80 percent of Indonesia’s gas supply.

Yet, four years after the regulation’s issuance, gas prices remain unchanged. During a Cabinet meeting on Jan. 6 Jokowi offered three solutions, including easing procedures to boost gas imports, the implementation of the DMO policy and the reduction or even the elimination of state revenue from gas sales.

Energy and Mineral Resources Minister Arifin Tasrif said on Jan. 9 that his office would not apply the option to increase imports because “if we import more gas, we will face another problem, which is the current account deficit. If the deficit widens, it will put pressure on the rupiah”.

PGN was not immediately available for comment because it was still running numbers on the solutions. If PGN manages to suppress midstream costs enough to hit the elusive $6 price mark, the government will not slash state revenue.

Meanwhile, Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) financial director Arief Setiawan Handoko said on Thursday that it would be difficult to increase LNG supply for the domestic market because almost all LNG production was tied to long-term export contracts with foreign buyers in Japan, South Korea and China, among other countries.

There could be additional LNG production from the Bontang LNG plant in East Kalimantan but only if the Mahakam block, which supplies gas for the LNG plant, is able to increase its production within the next five years.

By 2026, SKKMigas expects an increase in domestic gas supply after several major gas projects come on stream. Such projects include the offshore Indonesia Deepwater Development facility in Kalimantan and onshore Tangguh Train-3 facility in Papua.

Business representatives immediately welcomed Jokowi’s plan. Indonesia Chamber of Commerce and Industry (Kadin) vice chairman for industry Johnny Darmawan called the President’s plan a sign that he was serious about making production costs efficient and competitive for industry, as gas prices have been an issue since 2016.

“We were without hope,” he said, “The manufacturing sector is facing many challenges, such as wages and logistics but at least this decision will help us.”

Indonesia’s GDP growth is expected to remain sluggish in 2020 as weakening exports, low commodity prices and global uncertainty continue to take their toll on the economy. The country’s GDP growth stood at 5.02 percent in the third quarter of last year, the lowest level in more than two years.

The manufacturing sector’s contribution to GDP has steadily declined, to 19.52 percent in the second quarter of last year, from almost 30 percent during its heyday decades ago. The sector only grew 3.6 percent year-on-year in the second quarter of this year, below GDP growth.

Source: The Jakarta Post, 14 January 2020