Foot on the gas?

By webadmin on 11:38 am Apr 25, 2011
Category Archive

Kate Lamb

As
the end of oil looms, there is global recognition that cleaner and renewable
energies will inevitably power the future. With the largest natural gas
reserves in the Asia Pacific, what will it take to get Indonesia’s gas above
ground?

 Oil
prices skyrocketed to more than $100 a barrel with the political unrest in
Libya and the Middle East. The reign of Gaddafi and oil, the uprisings
highlight, is undeniably petering out.


Paul Robertson illustrates the scale of
problem in his book The End of Oil
: “Consumption of oil is rising so fast that oil
companies must discover a new billion-barrel oil field every two weeks.”

While
lifestyles have not shifted drastically in response to dwindling resources there
is growing recognition that reserves are finite.


Indonesia is a case in point –
the former OPEC member is now a net importer of oil. Demand is outstripping
supply by 7% on average across the archipelago.
 



The
home front
 



For
many outside of the capital city, rolling blackouts are a weekly if not daily
occurrence. Signifying the strain, state-owned electricity company PT PLN has
since March offered cheap tariffs from 11 pm to 7 am in attempt to curb demand
and encourage businesses to shift their operating schedules into the wee hours.
It’s an innovative short-term fix, but hardly offers a comprehensive solution. 



At
the same time, President Susilo Bambang Yudhoyono has pledged to cut carbon
emissions by 26% by 2020 and the Energy and Mineral Resources Ministry is
espousing a “paradigm shift” in energy consumption. The ministry recently
offered incentives on renewable energy, but a mere 5% of the country’s energy
is currently drawn from renewable sources such as hydro and solar.



“Realistically it is going to take a
long time for renewable energies to become a large chunk of the energy mix
globally, mostly because they are starting from such a low baseline. Natural
gas is very
attractive for that reason,” says Mark Thurber, an associate director of
Stanford University’s
energy
and sustainable development program.
 



Gas
has come a long way from the days it was burnt off at oil fields as an unwanted
byproduct. Experts are hailing the substance as a potential bridge to
renewables and are quick to advertise the fact it emits 50% less carbon
emissions than oil and coal.

 “If
we look at the demand and trends, natural gas is now entering its golden
period,” Fatih Birol, a chief economist at the International Energy Agency told
a gas conference in Jakarta in mid-February.
 



Its
green credentials – excluding a recent damning report on an LNG plant in
Pennsylvania -coupled with the decline in oil and its apparent ubiquity, are
making natural gas the obvious alternative.

“The
supply picture of gas has changed dramatically over the past five years. Some
people are saying that gas is more or less unlimited. There are differing
opinions on this, but unconventional gas opens a lot more potential. It’s a
really appealing field of fuel,” explains Thurber, referring to new
technologies that allow tiny particles of gas to be blasted from shale.
 



The
conundrum

Only
one-third of natural gas basins have been explored in Indonesia and these alone
give it the biggest reserves in the Asia Pacific – at least on paper. The
problem is that extracting natural gas is a costly and infrastructure-intensive
process. 

 “We
enjoy telling people we have 350 trillion cubic feet (tcf) of gas, but now we
have to face the reality: Where is it?” says Satya Yudha, a lawmaker from
Commission VII, which oversees energy affairs.
 



“Indonesia
is dependent on fossil fuels, but we don’t have the infrastructure to support
our reserves. We are living on these reserves, but in energy terms we are
starving,” he says.
 



Unlike
oil, you can’t just turn up with a tanker, load up and drive away. Transporting
gas requires expensive pipelines or LNG plants that liquefy the gas so it can
be exported by sea. Again, LNG plants are needed on the receiving end so the
liquid can be turned back into gas. In short, natural gas equals billions of
dollars in long-term investment and it’s unclear how the government and the
industry will reconcile the conundrum.


“The
challenge for Indonesia, and every gas-producing country, is encouraging
businesses to invest in gas by building infrastructure and expanding supply,
while at the same time ensuring the domestic market also benefits,” says
Stanford’s Thurber.


While
eastern Indonesia in particular has been identified as a frontier for
deep-water activities, the government is struggling to balance its domestic
commitments and lure investment in the sector.

 Article
33 of Indonesia’s Constitution requires the state to ‘control’ important
branches of production and natural resources. As an indication of the hurdle
that this represents, a parliamentary revision of the 2001 law on oil and
natural gas permitting the liberalization of the gas market was rejected by the
Constitutional Court in mid-2007 on the basis that it contradicted the clause.
 



“We
want to promote investment in the region, but when investors have explored
those areas they often don’t come up with prices that will sell domestically.
Companies will exploit if they can get $10 per mmbtu (one thousand British
thermal units), but they won’t,” says Satya.
 



Creating
a pricing scheme that is viable to both developers and the public is the only
way huge resources in eastern Indonesia can be monetized, he argues, adding
that fuel subsidies have sheltered the public for too long and made everyone
unreceptive to realistic pricing.
 



The
majority of the country’s gas is currently drilled offshore Bontang in East Kalimantan
and from the Arun field in Aceh, which shipped its first LNG in 1978 but is
estimated to have reserves adequate for only three more years. More recently
the Tangguh field in Papua has come on stream to provide a third source.

 It
is likely there are five or six more gas fields the same size as these, says
Kurtubi, an economist at the University of Indonesia.


“But because investment
is so low don’t expect too much unless the government changes the system,” he
says.

 

The
business view

 

The lack of infrastructure is not the only
problem in the oil and gas industry. Oil and gas exploration is beleaguered by
inefficiency, burdensome bureaucracy and vested interests, to the point that
some industry sources say things were better when Suharto was around.


The
introduction of the cabotage principle, by which domestic shipping would have
to carry domestic cargoes, was seen as representing a major threat to the
industry, with most vessels used in the oil and gas offshore business coming
from overseas. The energy ministry in the end managed to have the industry
excluded, but not before a degree of panic. 



“In order to attract that level of investment for
natural gas, stability is required whereby terms are understood, agreed upfront
and consistently applied throughout the life of an investment,” says Terry S.
McPhail, president and general manager of ExxonMobil Affiliates in Indonesia.

 “It is important that such policies not be
driven by short-term politics but by the long-term energy needs of the country.
In order to commit funds, a predictable environment is needed to assure the
expected return. Unexpected changes in the regulatory environment raise
questions, create uncertainty and work against investor confidence,” he says.
 



Capitalizing
on Indonesia’s huge natural gas deposits will require progress on these issues
if the country is to become part of a dynamic gas market within the region. ExxonMobil
Indonesia estimates that during the next 25 years the energy demand in Asia
Pacific will grow by 65%. China’s doubling gas consumption and a proposed
trans-ASEAN gas pipeline alone point to the potential.

 Kurtubi,
who holds a PhD in mineral resources from an American university and is widely
recognized as an expert in the field, argues that gas regulator BP Migas should
be abolished altogether to make the sector more friendly to foreign investors.


“The
government should negotiate with investors in order to reach a win-win
situation where, for example, 50% of natural gas can be exported and the rest is
dedicated for domestic use,” he says.

 A
2004 contract signed with China, where gas is sold for 3.5 mmbtu on a flat rate
for the next 25 years, is a national disservice, he says.  “The pricing formula must be linked to
crude oil. Right now the price of gas being sold from Kalimantan is 15 mmbtu,
five times more than the China deal. That is a good price. If that is the case
we are happy to export our gas, we don’t want the Chinese case to happen
again,” he says.

Some
new resources are coming on stream, but not without a struggle. At the Cepu
Block in Central Java, ExxonMobil and Pertamina each hold a 45% participating
interest and four local government entities hold the remaining 10%. The
partners are currently working to establish a plan to develop the Cepu gas
fields to supply gas to the domestic Java market, explains McPhail.

While
he admits that every market has its own unique challenges, he says these
solutions do not come pre-assembled.


“They require effort and cooperation among
governments, suppliers and consumers to develop each individual market
solution,” he says, noting that regardless of the challenges, natural gas will
be a leading source of energy in the future. 

“Natural
gas has proven its ability to evolve over time to meet the needs of global
markets, including Asia, and it will continue to do so as we move into the
future,” he states.

 

Methane
bounty

 

Coal-Bed
Methane or CBM, a buzz word in the industry right now, may have even greater
potential than natural gas. CBM is a form of natural gas, or methane that is
extracted from coal beds.

 In
recent decades CBM has become widely used in countries such as Australia,
Canada and the US. In America CBM accounts for around 10% of natural gas
production, but Asia’s methane reserves remain largely untapped.

 Logistics
and extraction costs, the same factors that impede the exploitation of natural
gas, also apply to CBM. China has an estimated 30 trillion cubic feet of CBM, about
three times the reserves in the US, while preliminary studies show Indonesia
has at least 450 trillion cubic feet.



The
prospects have major oil companies hot on the trail. “Indonesia offers a couple
of non-conventional resources that could have a significant impact,” says
ExxonMobil Indonesia’s Terry S. McPhail.

 “Coal
bed methane (CBM) represents one of those resources. Government estimates are
that Indonesia’s CBM gas potential is far greater than the potential of natural
gas.


Therefore, it is definitely worth further investigation to explore and develop,”
he says, adding the industry is working with the government to determine the
best way to optimize the resource.

On
the old problem of demand and supply, McPhail says all options need to be
assessed. “We are going to need everything we can to throw into the energy
supply mix, whether it is fossil fuels, non-renewables or renewables.” 



Indonesia’s
Energy Reliance


Oil:
48.8%


Gas:
22.2%


Geothermal:
1.5%


Hydro:
2.9%


Coal:
23.5%