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Natural Gas Infrastructure in Indonesia: Modelling options from domestic supply and export Author : Yuliana Student No. : 4323696 Contact : [email protected]; [email protected] Submitted on : June 22nd, 2015 Graduation : July 6th, 2015 Graduation Committee Chair : Prof. dr. ir. M.P.C. Weijnen – TU Delft, Energy & Industry section First Supervisor : Dr. A.F. Correljé – TU Delft, Economics of Infrastructures section Second Supervisor : Dr. ir. L.J. de Vries – TU Delft, Energy & Industry section Program MSc. System Engineering, Policy Analysis and Management Section Energy and Industry Faculty of Technology, Policy and Management Delft University of Technology Preface This report is the result of six months of research. It is written as a thesis to attain a master degree in System Engineering, Policy Analysis and Management (SEPAM) at Delft University of Technology. It was started with my ambition to raise a topic of discussion about energy sector in Southeast Asia and particularly, in Indonesia. During my preliminary research, I found that there was a cross-border gas pipelines master plan, called Trans-ASEAN Gas Pipelines (TAGP), proposed by the ASEAN Council on Petroleum (ASCOPE). Besides gas pipelines, the region also actively develops LNG infrastructure to facilitate LNG export and import trades. These aroused my curiosity about the projects, especially to know whether these two gas infrastructure master plans (i.e. TAGP and LNG infrastructure) could facilitate the regional (within Southeast Asia) and international gas trades in the future. At the end (which was actually the start of this research), I decided to focus on the development of gas infrastructure and gas market in Southeast Asia. I would like to express my deepest gratitude to my God, Jesus Christ, for all His grace, favor, and blessings upon my life. When a lot of things in this world are uncertain, I know that His love and promises are always certain. To my family, Papa and Mama, and also my brothers, thank you for your endless love, support, and prayers. To Andrian Chandra, thank you for your love, patience and support for the last two years. I would also thank my graduation committee, Prof. Weijnen, Dr. Correljé, and Dr. de Vries, for their time to review my work with all comments and feedbacks that were really constructive and helpful. I did enjoy all meetings with them. They encouraged me to think outside of my simple model and be dare to cover broader issues so that I could present a profound analysis. Last but not least, to my best friends in SEPAM program (Denise, Yae Jin, Yi Wen, Dong Zhe, and Michael), and Indonesian friends from PPI Delft, for sharing the ups and downs. Thanks a lot guys! This report is aimed to give a better understanding of the Southeast Asian gas market, and in particular, to help the Indonesian government in developing its gas sector. Finally, I hope the readers will enjoy reading this report. Delft, June 2015 Yuliana i | P a g e Summary Gas producing countries in Southeast Asia, i.e. Indonesia, Malaysia, and Brunei have been known as major LNG exporters to the Northeast Asian countries such as Japan, South Korea, China, and Taiwan. Within the Southeast Asian region, natural gas is traded and transported via gas pipelines. Several cross-border gas pipelines have been constructed to deliver gas from countries with more gas supplies or reserves to countries that are short of gas supplies. Among the ASEAN policy makers, the plan to expand the gas pipeline connections is known as Trans-ASEAN gas pipeline or TAGP. Currently 12 gas pipeline connections have been in operation and according to the TAGP master plan from the ASCOPE (ASEAN Council on Petroleum), there are four possible routes for new gas pipeline connections from East Natuna, e.g. to Java (Indonesia), Kerteh (Malaysia), Erawan (Thailand), and Vietnam. Besides gas pipelines, there are also several LNG infrastructures built throughout the region. LNG liquefaction plants are mainly located in the three LNG exporting countries. Meanwhile, the LNG regasification terminals can be found not only in the gas consuming countries or countries with no gas reserves, but also in the gas producing countries, especially Indonesia and Malaysia. This is due to their geography of scattered islands which makes transporting gas via pipelines less favorable. In this case, the regasification capacities are mainly used to handle domestic gas supplies from distant supply sites. Several liquefaction and regasification facilities are proposed to be built in the upcoming years as reported by the IEA and ERIA. After being major LNG exporters for the last four decades, the gas producing countries are confronted with depleting gas resources. The whole region is facing a similar trend of increasing domestic gas consumption and a decline in domestic gas production that creates a problem of security of gas supply. As mentioned before, several projects to expand the natural gas infrastructures in Southeast Asia have been proposed. However, uncertainties such as the amount of proven gas reserves, future growth of domestic natural gas demand, gas pricing mechanism, and changes in national energy or gas policy have caused a stagnation, especially for the TAGP project. Nowadays, the ASEAN policy makers are doubtful whether or not to proceed with the TAGP project, especially the Indonesian government who owns the East Natuna gas field. Policy makers in each ASEAN member state also have to decide whether to support the TAGP project or focus on the development of their own LNG projects. In the Indonesian case, particularly, the government will face a dilemma between allocation of natural gas for domestic needs and allocation for exports. Allocating more natural gas for domestic needs will reduce the government income. However, it is expected that the benefits from domestic allocation, e.g. industrial and city gas development, could offset the revenue losses from export. This leads to the following research question: What infrastructure investment strategy should be pursued by the Indonesian government to facilitate domestic gas supply and maximize profit from gas sales? ii | P a g e A model-based approach is used to answer this research question, combining the use of gas network model on the basis of linear programming and options valuation models with simple ‘adjusted’ discounted cash-flow (DCF) and real options techniques to value the infrastructure options. ‘Adjusted’ because the DCF follows the cost structure (e.g. cost recovery mechanism, profit sharing, tax) of each production sharing contract (PSC) in each particular gas project. Two scenarios are developed in the gas network model, the Business-as-Usual (BAU) and the Reference scenario. In the BAU scenario, according to estimates from the BPPT, gas production in Indonesia will decline after 2017 with a rate of 4.14% from 2018 to 2023 and 3.80% from 2023 to 2045 while the domestic gas consumption is assumed to grow at 2.20% per annum. In this scenario, Indonesia could not extend any long term gas export contracts. In the Reference scenario, on the other hand, the Indonesian gas production will grow constantly at 0.50% per annum. The domestic consumption in this Reference scenario is assumed to be 2.70% per annum. In the Reference scenario, it is possible for Indonesia to export its gas and this could affect the future plans of gas network expansion in its neighboring countries, especially Singapore and Thailand because Indonesia could be their potential supplier. The growth of natural gas production and consumption in other countries is based on projections by the IEA. The results of the gas network model show that the current plans are hardly sufficient to meet natural gas demand especially in Indonesia, Thailand, and Singapore, and therefore, need to be revised. Indonesia in particular, according to the BAU Scenario, will need to expand its regasification capacity by 5.45 bcm in 2035 and 31.30 bcm in 2045. This is mainly due to its declining gas production and growing gas consumption. In this scenario, Indonesia cannot export its gas anymore and all gas production from East Natuna will be needed to meet Indonesian domestic gas demand. Therefore, there will be only one gas pipeline connection, i.e. from East Natuna to Java (or other demand centers in Indonesia). In the Reference Scenario, Indonesia could still export pipelined gas or LNG, given that its production will grow 0.5% per annum. New regasification capacity is not needed at least until 2044. However, this amount has not included the capacities used to manage domestic LNG supplies. In practice, additional regasification capacities might be needed especially when the domestic demands start to grow. Indonesia could export its gas production from East Natuna to Thailand either in the form of LNG or pipelined gas. When the trend of the Indonesian gas production is uncertain, an onshore LNG plant in East Natuna could become an option. When the production trend shows as such in the Reference scenario, the gas pipeline from East Natuna to Erawan, Thailand could be built. Indonesia and Singapore might agree to extend the existing pipelined gas supplies or build a gas pipeline extension to connect East Natuna gas field to the West Natuna-Singapore gas pipeline. This could support the Singaporean goal to become an Asian gas hub as there will be an alternative of gas supplies (outside LNG). Singapore could also defer the expansion of its regasification terminal up to 2040. iii | P a g e Several policy recommendations are addressed to the Indonesian government as follows: Upstream related (Production Sharing Contract) Establish criteria for negotiable PSC variables such as profit sharing, tax holiday, and contract duration in a more transparent way. Review the minimum domestic market obligation. The government especially will have to increase the minimum DMO if the production declines as such in the BAU scenario.

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