Gas Pricing and Financing Gigih Prakoso Pertamina Jakarta, 28 January 2015 PT Pertamina (Persero) Jln. Medan Merdeka Timur No.1A Jakarta 10110 Telp (62-21) 381 5111 Fax (62-21) 384 6865 http://www.pertamina.com
Gas will become the main oil substitution to fulfill Indonesia s growing energy needs Indonesia s National Energy Mix (Mboe) 2010-2025 shift Perpres 5/2006 1,138 20% 7% 48% 25% 2010 59% 2,785 17% 23% 24% 36% 2025 Government Program Energy source conversion to gas Renewable Gas Oil Coal Gas as a main energy source for power plant Gas infrastructure development across Indonesia Overview of Gas in Indonesia Energy demand is expected to grow at an increasing rate following Indonesia s economic growth and population Gas consumption will increase due to: - Diesel and fuel oil substitution on power & industrial sector - Diesel and gasoline substituted by CNG in transportation sector - LPG substitution in household and commercials As such, Indonesia has set an energy mix target to significantly increase the role of gas and coal substituting the role of gasoline/diesel Government is fully support to accelerate gas infrastructure development Source: Development Target of Renewable Energy 2025 Minister of E&MR; Pertamina Analysis 1
Energy demand mix evolution is driven by consumer growth and fuel substitution regulation impacts both dimensions Consumer Growth 100 50 Consumer Growth Power Example Indonesia Power Consumption Forecast, GW +8% 0 2012 2014 2016 2018 2020 2022 2024 2026 Role of Regulations Industrial regulations are key to growth of consumer segments: Facilitation in setting up industry units Pricing driving customer acquisition Public service obligation etc. Fuel Substitution Fuel Options for Consumers Gas Products End Consumer Oil Products Transport Power Gasoline CNG Industrial Commercial Diesel Natural Gas Fertilizer Steel Household Refinery Petrochemical Aviation Fuel Oil LPG Jet Fuel Fuel pricing regulations impact economic substitution between fuels: Price subsidies on gasoline, diesel and natural gas will determine their demand mix Mandates may drive substitution of certain fuels: Substitution of gasoline and diesel with CNG may be boosted by mandating CNG use in public transport Regulatory thrust on alternate energy may drive its adoption over conventional fuels Source: Pertamina Analysis 2
However, the lack of infrastructure leads to gas deficits across Indonesia Indonesia Gas Balance 2010-2025 (in MMscfd) Aceh -119-133 -139 North Sumatera -173-226 -226 East Kalimantan 507-118 -175 Riau Islands Central Sulawesi 0-124 -129 South Sulawesi -30-30 -83 South Maluku 2010 2020 2025 600 600 0 Central & South Sumatera -96-145 -58-580 -668-619 West Java Central Java East Java Papua -635-149 0-200 9-166 -159-195 -519-920 -106 4-94 -10-18 Source: Ministry of E&MR 3 3
Existing gas infrastructure is still significantly underserving the current and future demand Transmission pipelines (open access) : 3.795,6 km, Distribution pipelines in Sumatera 707,08 km and in Java: 3.180,17 km Installed Capacity of LPG : 4,2 MMTPA, LNG : 42,09 MMTPA Capacity of existing regasification terminal : 1,200 MMSCFD Source: Ministry of E&MR 4 4
The demand growth entails large investments in gas infrastructure Estimated Agg gregate Investment, $MM 2.500 2.000 1.500 1.000 500 0 Pipeline Cost Regasification Cost 2.065 1.769 391 391 680 680 243 243 336 18 36 233 233 69 69 120 200 204 3 3 3 21 21 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Estimated total investment : ~$ 8Bn Transmission and distribution pipeline cost : $5,9 bn (~70% of total investment) Regasification cost : $ 2,4 Bn (~30 % of total investment) Source : Bapennas 5 5
Marginal return causes less attractiveness in midstream sectors investment International Indonesia Value Distribusi distribution value of pada International mata rantai gas bisnis value gas chain Internasional business 11 $/Mmbtu $/Mmbtu Margin Portion (%) ~16% 11% ~25% 4.0 Upstream 2 0.7 Transmission 1.6 Distribution /Trading Value distribution of Indonesia gas value chain business $/Mmbtu Margin Portion (%) ~16% 5% 5.0 6.0 Upstream 2 0.6 Transmission ~ 35-45% 3.4-4.4 Distribution /Trading 6.3 End customer price 10.0 End customer price Structure of margin portion in Indonesia, especially in midstream (transmission) is below compare to international benchmark Transmission is the lowest margin contributor for developing end customer price It can be assumed that return of transmission is marginal and less attractiveness for investors IRR of transmission pipeline is 11-12%, by 90% of utilization (Regulation by BPH Migas) 1 Business margin in country that had market mechanism such as Europe UK, Spain, and Germany (2001-03) 2 include operation and production cost Source: Pertamina Analysis 6
Pertamina as NOC has taken major role by developing gas Infrastructure that covering all regions in Indonesia Gas Upstream development Pipeline, Regasification, and LNG development Gas Field Offshore Existing pipeline Existing FSRU LNG KTI development Planned pipeline Planned FSRU Arun Trans Sumatera pipeline LNG KTI development Semberah Tanjong Batu Bontang Halmahera FSRU Jabar FSRU Jateng Batakan Makassar Pomalaa FSRU Cilacap Trans Java pipeline Pesanggaran Pertamina has identified a portfolio of pipeline, regasification, LNG and mini-lng projects across Indonesia The most critical projects over the next few years are the Trans-Sumatera and Trans-Jawa pipelines, Arun regas, and LNG KTI But all those initiatives from Pertamina was not enough to meet the gas demand across Indonesian regions source: Pertamina; Litsearch; company reports; company websites 7 7
Gas infrastructures can be built and operated through a partnership Supply Storage Regasification Distribution & Marketing Demand SOE Partner(s) Partner selection based on capabilities Required Capabilities Multilateral Agencies/Export Credits Agencies Joint Venture (JV) Project Financing Commercial Banks Investment & financing Technology and O&M Asset Commerce As large investment is the main hurdle to build gas infrastructure, then business model through partnership and project financing is one of the solution. Source: Pertamina Analysis 8 8
Typical business models for gas infrastructure Typical Business Models e. g. Regasification Terminal Projects BENCHMARK Upstream-led model Downstream-led model Standalone model Definition LNG regasification is driven by upstream players A long term supply agreement and demand certainty along the value chain are required LNG regasification is mainly driven by LNG demand on end customers Off-take commitment is required LNG regasification as standalone chain Typically this is applied in: fragmented demand and LNG as important source for the security and diversification of supply Example South Hook project in UK developed by ExxonMobil and Qatar Petroleum processes LNG supplied by Qatargas. Malaysia LNG Variant DEPA s regasification terminal at Revithoussa, the terminals developed by GDF-Suez in France and the investments made by Union Fenosa and Iberdrola in the Segunto and Ferrol regasification terminals in Spain. Enagas of Spain developed terminals in Barcelona, Cartagena and Huelva. Gasunie developed the Gate terminal in Rotterdam Source: Pertamina Analysis 9 9
Key challenges to bring gas to unmet demand centers Address disparity between domestic gas prices and global LNG prices Addressing fuel subsidies creating artificial barriers to adoption of gas as fuel Pricing Simplify upstream gas supply contract process to improve speed to market Infrastructure Industry challenges Supply Regulation Construction of new gas pipelines, liquefaction & regas infrastructure to address geographical dispersion between demand centers (Java and Sumatra) and supply centers (Kalimantan, Papua and Sulawesi) More efficient use of existing infrastructure through national gas policy linked to industrial development Greater open access to gas markets and pipeline infrastructure Favorable government policies and fiscal incentives / contract terms to support development of upstream fields and gas T&D infrastructure Simplification of land acquisition process for development of gas infrastructure Source: Pertamina Analysis 10 10
Regulatory support is required to effectuate favorable demand mix and infrastructure investments Key Support required from Regulators Facilitation of Target Energy Mix Facilitation of Infrastructure Investments Facilitation of Supply Enhancement Regulatory support is required for Indonesia to achieve the target of oil substitution by increase in gas and renewable penetration. Certain steps in this direction could be: Facilitating substitution driven by economics through pricing regulations : e.g. Liquid fuel price deregulation and/or subsidies on alternative energy / CNG Volume allocation of substitutes to consumers to create certainty of supply : e.g. preferential allocation of gas to city gas distribution, fostering fuel substitution Mandates facilitating substitute adoption : e.g. mandating use of CNG in public transport Attracting global players to provide access to their existing infrastructure or invest in new infrastructure to support Indonesia s energy demand: Facilitating use of assets of global players : e.g. exemption from Cabotage to Oil & Gas shipping activities Attracting infrastructure investments : e.g. providing tax breaks to global investors Attracting investment in exploration & production as well as supply infrastructure such as refineries by easing the regulatory regime appropriately Source: Pertamina analysis 11
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