Indonesia: Fuelling up

Indonesia’s energy industry is looking to ramp up investments at home and abroad to boost output and help meet the growing demand from the domestic market while maintaining its position as a leading natural gas exporter.

In late January, state energy firm Pertamina announced it was embarking on a large-scale expansion programme, with plans to spend up to $1bn on acquisitions. According to Frederick Siahaan, Pertamina’s investment planning and risk management director, the company was casting its net wide when looking at possible acquisitions, with up to 20 assets across Asia and Africa in its sights.

“Many oil and gas blocks in Africa and the Caspian Sea are being offered to investors,” he said while taking part in a trade convention in Jakarta on January 25. “Several blocks with huge oil reserves in Kazakhstan are also on the list. We’re still evaluating the possibility of going ahead with overseas acquisitions.”

Along with a number of overseas fields that the company was hoping to buy in the coming year, Pertamina was also planning to acquire several domestic blocks, Siahaan said, part of a longer-term scheme to increase production to 1m barrels of oil equivalent per day (boepd) by 2015 from the present rate of 420,000 boepd.

While there was no guarantee that Pertamina would win any or all of the bids for the overseas blocks, Frederick said that it was important for the firm to take part in the process and be more aggressive in expanding its business.

To fund this spending, Pertamina is planning to tap into capital markets, issuing up to $2bn worth of bonds and staging an initial public offering for a 20-30% stake in its insurance subsidiary, Tugu Pratama, with both set to take place in the first half of the year.

Pertamina is not the only player showing a renewed interest in the domestic hydrocarbons sector, with overseas firms also getting in on the act. On January 24th, Japan’s Mitsubishi Corporation announced it was entering into a joint venture with the Korea Gas Corporation (Kogas), the world’s largest buyer of natural gas, to set up Sulawesi LNG Development, which would in turn be the largest stakeholder in Donggi-Senoro LNG. Donggi-Senoro is set to develop a $2.8bn liquid natural gas (LNG) facility in central Sulawesi in partnership with Pertamina and Medco LNG Indonesia.

Between them Mitsubishi and Kogas will hold 60% of Donggi-Senoro LNG’s shares, with the South Korean firm and Japanese clients set to take most of the plant’s 2m-tonne annual output when it comes on-line in 2014. Feedstock for the Donggi-Senoro facility will come from the Matindok fields and Senoro-Toili field. On January 31st, Mitsubishi issued a statement saying it had just spent $260m to buy a 20% stake in the later field from Medco, a move that positions the Japanese corporation at the core of the Donggi-Senoro operation, giving it a role in all up- and downstream activities.

The final agreement for the Donggi-Senoro plant had been delayed due to prolonged discussions between the joint venture partners and the government over the share of gas that would be made available for domestic use. Though a leading exporter of gas, Indonesia increasingly needs to meet growing local demand, with this prompting a scaling back of overseas gas sales, at least until production can be boosted. In mid-January, industry regulator BPMIGAS issued a statement saying that Indonesia would ship only 362 cargoes of LNG this year, down from the 427 in 2010.

The growth in the Indonesian economy has seen domestic demand for fuel and gas rise sharply, with this increasing demand coinciding with a spike in prices, which has seen the cost of imports climb. Imports were up by 22% in January, with Pertamina bringing in 13.4m barrels of oil products in the first month of 2011, with some categories up by 100% or more. Fuel oil imports rose from 170,000 barrels in December to 510,000, while the flow of overseas diesel jumped to 5.2m barrels, up from the 2.6m the month before.

While some of this increase was offset by falls in import levels of certain top-grade products such as jet fuel and high-octane gasoline, in part linked to the government’s decision to reduce fuel subsidies, overall Indonesia’s oil bill is set to rise further as demand builds.

The growing need for natural gas has prompted ExxonMobil to unveil plans to convert the Arun LNG plant into a LNG receiving terminal, with two units at the facility to be changed into a re-gasification plant that would be used to supply local consumers in Sumatra.

With the Arun field in Aceh set to halt exports by 2014 as reserves fall, the plant will be used to process gas from other Indonesian fields or from abroad, with the initial conversion work and a distribution pipeline set to be completed before the end of 2012.

Such moves to guarantee supplies will be welcomed by many, especially the country’s industrialists, who have been voicing concerns that shortages could slow economic growth. According to Achmad Widjaya, the secretary-general of the Forum for Natural Gas Using Industries (FIPGB), the government and the state gas distributor, Perusahaan Gas Negara (PGN), had yet to set the exact allocation of gas for industrial purposes for 2011. Shortages and uncertainty over supply have already prompted some heavily gas-reliant industries, such as ceramic producers and cement manufacturers, to cut back on work hours, and continued shortfalls could cause foreign investors to move their operations to other countries, Achmad warned on January 18.

Though Indonesia has ample gas reserves, its long-time focus on exports has meant it has been slow to put in place sufficient infrastructure to process and distribute supplies to the local market. The challenge facing Jakarta will be to step up investments needed for the domestic economy while ensuring that enough gas is reserved for the export market, with this in turn essential for generating the revenue to fund infrastructure developments at home.