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Steering committee draft policy note 4


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Steering committee draft policy note 4

  1. 1. Gas Development Master PlanSteering Committee Meeting – 28 March 2013Draft Policy Note 4 : Policy Support for the Development ofDomestic Gas Markets
  2. 2. 2Coverage of the Policy Note• Developing the domestic gas market requires largeupstream, midstream and downstream investments• Financing these requires committed, long-term, reliabledemand from downsteam ‘anchor’ customers as well asincreases in domestic gas prices• We have reviewed the impacts of current governmentpolicies on the ability to finance the necessaryinvestments– Allocation of gas supplies– PLN as an anchor customer– Promoting natural gas use by transport– Transportation third party access (TPA)
  3. 3. 3Allocation of gas supplies• The current priority allocation to fertiliser and powergeneration creates disincentives for upstream developers– increasing gas prices to these uses pushes up subsidyrequirements– therefore, we expect pressures to keep gas prices low for sales tofertiliser production and power generation– in turn, this reduces the attractiveness to upstream developers ofsales to the domestic market• The allocation policy also appears to be ineffective– both PT Pupuk Indonesia and PLN complain of a lack of reliablegas supplies• Our initial analysis suggests that additional revenuesfrom increased domestic gas prices would offsetincreased subsidies (for fertilisers at least)
  4. 4. 4Gas prices and fertiliser subsidies05,00010,00015,00020,00025,00030,00035,00040,00045,00001,0002,0003,0004,0005,0006,0007,0008,0009,0000.00 1.00 2.00 3.00 4.00 5.00Rs bnRs/kgIncrease in domestic gas price (US$/mmbtu)Fertiliser subsidyIncrease in government PSC revenuesUrea market priceUrea break-even costUrea HRP
  5. 5. 5PLN as an anchor customer• PLN’s current plans are for little new base-load gasgeneration, in response to concerns over the lack ofreliability of supply– “gas supply to PLNs existing power plants is not secured, andgetting more critical in the longer-term“ (PLN, IndoGAS 2013)– of 6.7GW of planned gas-fired capacity in the RUPTL, 4.3GW is inthe form of gas turbines using LNG and CNG to provide peakingcapacity and serve isolated networks• New power generation, therefore, seems unlikely toprovide significant anchor load• There is potential anchor demand from switching existingGTs and CCGTs from diesel and fuel oil to gas (~550mmscfd)
  6. 6. 6Planned PLN gas demand (RUPTL)2,706 3,02110,27912,0794143229431,29102004006008001,0001,2001,4001,6001,80002,0004,0006,0008,00010,00012,00014,00016,00018,0002013 2021 2013 2021MW MMSCFDGas demand(MMSCFD)Capacity (MW)Jawa-BaliIndonesia Barat
  7. 7. 7Promoting natural gas use in transport• Current pricing differentials appear insufficient toencourage switching to CNG• Increasing these differentials requires either increasingPremium prices (but this removes much of the rationalefor promoting switching), or reducing CNG prices• The implication is that there will be further pressure toreduce gas prices for sales to the domestic market, andas a result lower incentives for upstream development
  8. 8. 8Fuel switching incentives compared3,1002,2454,50012,00002,0004,0006,0008,00010,00012,00014,000CNG Gasoline CNG GasolineIndonesia ThailandRs/LSPccConversion cost of Rs 13 millionPay-back9,285 litres125,000 km (@13.5km/litre)>6 years (@20,000km/year)Pay-back<1 yearRs 1,400/LSPRs 9,285/LSP
  9. 9. 9Transportation third party access• Current regulations appear to work reasonably well, withmultiple users of many pipelines• There is a lack of clarity over how utilisation is measuredand whether ‘use-it-or-lose-it’ requirements apply• Current tariffs reduce with pipeline use. The result is tocreate a perverse incentive for third parties to access themost heavily-used pipelinesSegment Diameter(inch)Length(km)Capacity(mmscfd)Utilisation(mmscfd)Tariff (US$/MSCF)Comparison 1Simpang Y –PURSI12 28.6 40 2 (5%) 0.2414 28.6 60 35 (58%) 0.17Comparison 2KM53 – SKGBontang16 13 200 100 (50%) 0.0520 13 250 0 (0%) 0.11Source: BPH Migas (2012)
  10. 10. 10Recommendations• Government should consider dropping the existingpriority allocation for domestic gas supplies and allowprice to dictate allocation (after a transitional period)• A review of the consistency of PLN’s planning policiesagainst policy for the domestic gas market is desirable• We question whether current pricing can support amarket for gas in transport. We recommend this policy isfurther reviewed and the wider implications for the gasindustry considered in more detail• We have minor recommendations for enhancements tothe TPA regime. These include introducing use-it-or-lose-it provisions and amending the tariff methodology