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We
have a large and growing domestic gas market. In the next 10 years, we
must secure a 10,000 million metric standard cubic feet per day (mmscfd)
supply of gas, more than double the current supply.
However, even
today, we see that the market can be characterized as a mismatch between
gas demand and supply.
We can reduce
this imbalance by a combination of increasing gas supply and improving
gas infrastructure to deliver gas to the centers of demand. Efforts to
combine these two approaches have been made, albeit sporadically and
hardly successfully.
What has been
lacking is recognition of the large and reliable demand for gas by
customers.
To secure
supply, we have to ensure that the market has a sufficiently large and
reliable source of demand — gas customers — and offers gas at a price
that can justify the necessary investment required to ensure a gas supply.
Developing
gas markets, if we follow international best practices, can be carried
out through reliance on anchor customers whose demand represents a
considerable part of planned supply capacity. Base-load gas power plants
are ideal anchor customers, provided they are able to pay an adequately
high price.
At a
sufficient price, the anchor customers will be able to provide the
revenue certainty required to finance investment in gas fields or for
upstream development and the development of midstream and downstream
infrastructure.
The largest
consumer of gas in our country is the electricity sector — power
generations. As gas-fired power stations, including everything from base
plants, which run fairly continuously, to peak-shaving plants, which have
continuously variable requirements and demand a continuous gas supply to
produce electricity.
But, under
existing gas policies, we find it is difficult to obtain anchor
customers. Current gas allocation strategy, which gives priority to
fulfill the demand for fertilizer and electricity generation, is
potentially hindering the development of our gas market. As both
fertilizer and electricity are now heavily subsidized, this strategy has
led to the provision of gas to customers at prices below-market levels.
This
allocation and pricing strategy has been ineffective in preventing
prolonged shortages of gas supply, and definitely is not going to
maximize the economic value of our gas resources.
The shortages
have forced state-owned electricity company PLN not to rely on new
gas-fired base-load generators for its main Java-Bali grid. The company’s
2020 business plan projects only 12 percent of total new power plant
development will be gas-fired, leaving the majority to be coal-fired.
Much of these
new gas-fired plants will be in the form of smaller isolated plants with
peak capacity and in the form of open-cycle gas turbines to replace
diesel generators.
In the
eastern part of the country, mini-LNG is expected to be the main source
of gas, given the isolated locations of planned gas-generation plants and
small demand. In the northern part of Sumatra, peak capacity would be
supplied from LNG imported through the ARUN terminal. Around Jakarta,
peak capacity would be supplied by LNG via a floating storage
regasification unit (FSRU) recently built. In none of these cases does
PLN expect significant new demand for piped gas.
Probably, the
most significant single new gas-fired will come from two power plants in
Java, each with a 750 megawatt capacity, with the first to be
commissioned in 2016 and the second in 2021.
Together,
projected gas demand from these two units will account by 2020 for 60
percent of the total increase for the PLN Java-Bali grids, which seems to
be the most likely new anchor customer over that period.
With a
declining role of gas in PLN’s generation mix, given its emphasis on
developing coal-fired generation to supply base load energy, PLN appears
to be unlikely to serve as a significant anchor customer gas demand. The
reduced emphasis on gas for future base-load generation definitely
reflects PLN’s concerns on the reliability of gas supply, despite the
supposed gas allocation priority given to power generation.
There is,
however, potentially sizeable demand from the substitution of diesel and
fuel oil at existing power plants using natural gas.
Last year,
PLN’s Java-Bali grid consumed 4.3 billion liters of diesel and 1.6
billion liters of fuel oil. Assuming that this largely represents fuel
used in combined-cycle and open-cycle gas turbines, it would represent
potential gas demand of around 550 mmscfd.
This number
is large enough to constitute an anchor customer, compared to last year’s
actual gas supplies on the grids of close to 650 mmscfd and PLN’s planned
requirement of approximately 950 mmscfd in 2013.
This
potential cannot be realized unless concern on the reliability of gas
supply is resolved. With the reluctance of PLN to develop new base-load
gas-fired generation raises a fundamental question of where future anchor
customers to support the development of domestic gas infrastructure will
come from.
If PLN does not
expect major new gas-fired base-load generation and instead prefers to
focus on LNG and CNG supplies to peaking plants, then the electricity
industry is unlikely to provide many new gas anchor customers.
This demand
uncertainty will of course influence the level of gas supply and makes it
more challenging to define the appropriate level of gas infrastructure
development.
On the other
hand, with a projected growth of our gross domestic product (GDP) of 6 to
7 percent per year for the next 10 years, we will see the demand for
electricity is expanding rapidly.
What do we do
then? A revisit is necessary to existing gas priority allocations to
allow gas price to naturally dictate allocations.
The resulting
impacts of this new regime on subsidy levels can be compensated by
increased revenues from upstream production. Of course, any such change
should be phased in over a transitional period to allow existing users
time to adjust to new regime of gas prices.
Next, a
review is also necessary on the consistency of PLN’s planning policies
with other policy objectives
including development of
the domestic gas market.
The plan for
capacity extension for base-load gas power plants must be further
reviewed, taking into account the wider implications for domestic gas
market and viability of domestic as industry, and reductions in
greenhouse gas emissions.
This is about
the time for policy makers to review overall planning policies,
particularly to strengthen consistency between the national electricity
development and the intention to broaden domestic gas markets.
Specifically,
as the demand for electricity expands, further development of gas-fired
generation is a must
to help trigger the domestic gas market, which in turn will ultimately
benefit through reliable gas supplies.
Gas-fired
capacity can be constructed relatively rapidly, probably in three years
or so from today, if a
decision is taken now to develop additional gas-fired generation.
The decision
is so crucial, as we cannot let coal-fired plants excessively dominating
the national power generation, due to the real danger of their carbon
dioxide emission.
In summary,
for electricity to be the anchor of gas customers, first, a current
strategy for gas allocation and pricing is critically reviewed allowing
gas price to dictate allocation. Second, a new regime of gas
pricing must be designed to trigger the development of PLN’s gas-fired
base load generation. Third, the new regime should be phased in over a
transitional period to allow gas consumer’s adjustment. ●
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