Foot on the gas?
Kate Lamb | April 25, 2011

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%    

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