Gas Development Master Plan

Steering Committee Meeting 21 May 2012

David Aron

Managing Director

Petroleum Development Consultants, UK

Contents

• Project

• Project key objectives

• Gas sector key challenges

• Consulting team & consulting staff

• Deliverables

• Work plan

• Diagnostic work

• Consensus building workshop

• Benchmarking study

• Dynamic model

• Key issues

Note: This presentation incorporates comments from the World Bank

Project

• The project is to develop a Gas Development Master Plan (GDMP) that would contribute to the sustainable development of the country’s natural gas resources, national energy supply security, and protection of the environment

• The GDMP will include options for growing the domestic gas market, and for increasing domestic gas supply

• The project provides a good opportunity to develop integrated thinking that includes both upstream and downstream sectors of the oil industry

• Being undertaken as a partnership between Government of Indonesia, AusAID, and the World Bank

• Contract signed 20 April 2012

• Completion of project by 31 May 2013

• An important element for the finalization of TOR is the flexibility to amend the terms of reference during the next month based on Steering Committee, World Bank, AusAID feedback and recommendations on the proposed scope of work

• The project team is seeking to identify and prioritize key deliverables and interventions under the GDMP as proposed by the main stakeholders in the sector

Gas sector key challenges

• Indonesia has potentially plentiful gas reserves but the needs of domestic consumers are not being met. There are a number of major factors

• Gas producers, to make new projects bankable, prefer to export gas to highly creditworthy overseas buyers who pay international prices rather than sell into the lower priced domestic market

• Conventional gas exploration has slowed down and Indonesia’s share of the global and regional markets has declined in absolute terms

• Gas transportation infrastructure has been slow to develop, with many projects having been delayed due to regulatory uncertainty

• Together with the Steering Committee, the project team seeks to understand the underlying causes and propose workable solutions

Key objectives - 1

• Primary objective to prepare a medium and long term Gas Development Master Plan (GDMP)

• GDMP will focus on:

• Gas demand-supply projections

• Optimum gas field development to meet growing demand

• Substitution of export gas with domestic supply

• Optimizing flow patterns from existing fields to demand centres

• Optimizing the expansion of gas supply and transmission infrastructure

• Recommending policy, legal, regulatory and institutional framework

To produce:

A proposed investment timeline through 2025 along with potential projects that need to be financed - including identification of the least cost and most optimal gas-based solutions for Indonesia

• Review existing policy (pricing, consumer rules, regulations) and initiate new policies to expedite private investment

• Build local capacity in policy formulation and gas market planning and development

Key objectives - 2

• Improve business environment by establishing sound rules and regulations for private sector participation in upstream, midstream and downstream gas development and financing

• Review gas utilization options in the domestic gas market based on netback values including:

• Replacing oil consumption with gas in transport (directly or electric vehicles)

• Substitution of diesel and other fuel oils with gas in the power sector, industry and related areas

• Capacity building

• in the key policy areas that need to be addressed to grow the domestic gas market, and to improve its investment climate

• in the quantitative tools developed during the course of the assignment so that these are available on a continuing basis for refining the GDMP and gas planning and development strategy on an ongoing basis

Consulting team

• Petroleum Development Consultants (PDC) – international oil and gas consulting company based in London covering both upstream and downstream aspects of oil and gas industry

• Economic Consulting Associates (ECA) – specialist economics company with particular skills in modelling gas markets

• Ali Budiardjo, Nugroho, Reksodiputro (ABNR) – Jakarta based legal firm with oil and gas experience

Consulting team

• David Aron – Managing Director PDC, chemical engineer and petroleum engineer

• Ray Tomkins, Managing Director, ECA, economist

• William Derbyshire, Director, ECA, Thailand

• John Bowers, PDC, gas transportation expert

• Rita Jolly, PDC, petroleum economist

• Tatiana May Tumenggung, ECA, economist

• Ferry Madian, ABNR, lawyer

• David Braithwaite, Q Energy, local expert

Deliverables

• Identification and Consensus Building Workshop – 21 June 2012

• Inception Report – 27 July 2012

• Interim Report – 30 October 2012

• Draft Final Report – 27 February 2013

• Final Technical Report – 29 March 2013

• Final Policy Notes – 28 April 2013

• Summary Report – 13 May 2013

Work plan – diagnostic

• Review existing work

• Gap identification and analysis

• Strengthening scope of work

• Consensus building workshop

Task A outline

• A1 - benchmarking study regarding development of domestic gas market

• A2 - review current market condition

• A3 - demand scenarios

• A4 - supply situation

• A5 – LNG export contract requirements

• A6 – gas transmission

• A7 – load management

• A8 – technical and financial feasibility

• A9 – project ranking based on technical, economic, and financial feasibility,

• Dynamic model

Task B outline

• B1 – overview of Indonesian gas sector including conventional and potential unconventional gas both for domestic use and export – (natural gas, CBM, etc)

• B2 – identify impediments to development of domestic gas industry including infrastructure issues as well as the legal and regulatory framework and identifying policy gaps

• B3 – review existing PSCs and identify impediments to increasing domestic gas delivery – propose pragmatic gas oriented provisions to facilitate commercialization of gas for domestic uses

• B4 – recommend market based producer and consumer pricing

Task C outline

• C1 – consensus building workshop planned for 21 June in Jakarta

• C2 – capacity building workshops including regulators, policy markers and gas industry

• C3 – on the job training including training in quantitative tools developed during the project, with counterparts to refine the Gas Development Master Plan and strategy on an ongoing basis

Initial meetings

• PDC along with the World Bank has already had substantive one to one discussions with organisations including PGN, PLN and IPA and the following is awaited:

• Collection of latest data on supply and demand

• Feedback on proposed terms of reference

• Prioritization of deliverables

• Identification of main issues (domestic pricing, policy, gas transportation, domestic LNG, gas production sharing agreements, gas for power appears to be mainly considered for peak demand only, CBM, etc)

• PDC is seeking further one to one meetings with key stakeholders represented in the meeting including BP Migas, BPH Migas, DG Oil & Gas, key Government Ministries and agencies, UKP-4, Pertamina and others

• PDC will attend the IPA Annual Conference Wednesday 23 May – Friday 25 May and our priority is to engage key stakeholders in discussion on the proposed scope of work either at the Conference or outside it

Benchmarking study

• To be based on relevant and useful factors for Indonesia such as reserve levels, market potential, gas export levels, domestic gas market penetration, and share of gas in the energy mix

• Countries will be selected on the same bases and be proposed to the Steering Committee for approval

• Will compare current market conditions in Indonesia with selection of oil and gas producing countries in the region and elsewhere

• Will compare Indonesian progress in developing a domestic market with the approach used by these countries, particularly those with similar climate

• Many of Indonesia’s gas sector challenges have been encountered and addressed in other countries

• Countries to be considered: Malaysia, Australia, Algeria, Netherlands, India, Colombia

Dynamic model features

• The GDMP model will integrate the analysis conducted under other tasks to develop the recommended Gas Development Master Plan

• The model will investigate various combinations of feasible projects to meet demand in each region (varying the timing and sequencing as well as the selection of individual projects)

• The financial and economic viability of the individual projects concerned and the overall costs of the combinations will be compared and used for the purposes of project ranking under a dynamic model

Key issues - Indonesia

• Policy notes will be prepared covering various issues which will be selected as the project progresses. At this early stage of the project some of the key issues are seen as follows

• The project team will continue to benefit from their extensive work along with similar gas market assessments undertaken by the World Bank and the donor community on gas market development in other countries as reflected in the terms of reference

• Indonesia is an archipelago and that needs to be taken into consideration when discussing the development of its domestic gas industry

• The team will draw upon lessons learnt elsewhere in world in terms of developing a domestic gas industry related to the legal and regulatory structure, incentives for increases of supply and pricing

• Recent but limited changes to domestic pricing are a positive sign that some reform of the Indonesian gas industry is in progress

Key issues – domestic market

• There is significant potential demand for domestic gas that is not currently being met – the largest of which are in the power and industrial sectors

• While the Government of Indonesia is benefitting from high prices of exporting gas to Japan, at the same time the country is suffering from having to import high-priced petroleum products to meet domestic energy demand

• The infrastructure for the domestic market for both gas pipeline transportation and distribution is very underdeveloped

Key issues - supply

• Exploration for conventional oil and gas in Indonesia has been in decline for a number of years

• CBM exploration has grown but at this stage this is still an industry in its infancy

• There are significant issues that concern the oil industry and reduce its desire to explore and supply the domestic market including the cost recovery mechanism and PSC renewals

• The greater involvement of local companies has not been entirely successful as they have difficulties in arranging finance

• The contracting arrangements for the gas from wellhead to end user are complex and need to be simplified and made more certain and transparent

Key issues - integration

• Development of a domestic gas industry requires parallel development of both upstream and downstream infrastructure

• Regulation in Indonesia is fragmented between upstream and downstream and experience from other countries may be of use in suggesting how integration may be achieved

• An integrated gas market planning, and gas allocation program would also need to be developed

• There appears to be a lack of an integrated vision of how the domestic gas market should be developed

• The Gas Development Master Plan will allow evaluation of alternatives

Key issues - pricing

• There is indication that price revision for gas is underway helped no doubt by the high oil prices

• Increase in price in nine contracts (see Jakarta Post, 9 May 2012):

• Grissik field (ConocoPhillips) increased from US $1.85/MMBTU to US $5.60/MMBTU and US $6.5/ MMBTU in 2013

• Pagardewa field (Pertamina) US $2.2/MMBTU > US $5.5/MMBTU > US $6/MMBTU

• Increase in government revenue from gas sales of US $9.4 billion

• PGN will increase prices for its buyers

• Gas could be considered as a transportation fuel bringing major economic and environmental advantages to urban areas but subsidies on diesel and gasoline make this difficult

Your views…..

• It is suggested that a small group of representatives from the Steering Committee are appointed to liaise directly with the consultants so that the project delivers the product that you need

• We have suggested in this presentation what may be considered the most important issues that face Indonesia in developing its domestic gas industry. However you may disagree with these views and please let us know what you think are the most important issues

• Finally please remember that the international oil industry has competition for its upstream investment capital and it is really important that we bear this in mind – the next slide illustrates today’s perception….

Fraser Institute: Attractiveness to upstream oil and gas investment – 2011 report

Country Position in league

Thailand 64

Brunei 71

Malaysia 79

Vietnam 84

Philippines 86

China 90

Pakistan 107

Myanmar 108

Cambodia 110

Indonesia 114

Comments and suggestions

Together we can identify workable

solutions to address the gas sector challenges. We

welcome your input and ideas