Indonesia: Searching for gas supplies

State-controlled natural gas distributor Perusahaan Gas Negara (PGN) has objected to calls for a potential price increase from its upstream suppliers. At the same time, the distributor, facing rising domestic demand and an irregular supply, is considering new sources of natural gas, including the purchase of blocks in North Sumatra.

PGN posted a net profit of Rp3.35trn ($392.6m) for the first half of 2011 on August 26, a slight rise when compared to Rp3.32trn ($389.1m) for the same period in 2010, local media reported. Revenue for the first six months of 2011 declined to Rp9.41trn ($1.1bn) from Rp9.52trn ($1.12bn) a year earlier, while the cost of generating this revenue increased to Rp3.55trn ($416.1m) from Rp3.48trn ($407.6m).

According to PGN, irregular supply had a deleterious effect on its revenues during the first half of 2011. In short, the distributor simply did not have the product to sell. “The gas supply continued to fluctuate in the first half of this year, but it has become better lately. I hope it will continue through the end of the year,” PGN’s president director, Hendi Prio Santoso, told local media on August 26. The distributor has asked for a government commitment to ensure sustained supply from its producers.

PGN is not alone in its demands on the country’s natural gas supplies. Indonesia is the world’s third-largest exporter of liquefied natural gas (LNG). In 2010 the country exported about half its natural gas production, in part because it lacks sufficient storage and the necessary infrastructure to distribute gas within Indonesia.

However, domestic demand is growing, and PGN has struggled to purchase enough gas to meet local needs, particularly for local power producers. According to PGN’s 2010 annual report, the country’s total gas demand amounted to 4.86bn standard cu feet per day (scfd) in 2010, but the distributor could only supply 824m scfd — around 16% of the total.

Not only are its revenues falling, PGN is also facing a potential increase in the price that it pays for natural gas. PGN currently purchases its supply at an average cost of $1.80 per million British thermal units (mmbtu), but upstream oil and gas regulator BP Migas said in early August that it would like to raise this rate to $5.50 per mmbtu.

According to Raden Priyono, the chairman of BP Migas, the price that PGN pays is far below the market rate, which currently stands at $5 per mmbtu. If PGN were to accept a higher price, it might be easier for the government to negotiate rate increases with other customers. Indeed, in July BP Migas and Petronas Carigali, a subsidiary of Malaysia’s state-owned energy giant Petronas, agreed to a price of nearly $6 per mmbtu.

PGN is resisting the proposed price increases, however, stating that its customers – including state-owned utility company Perusahaan Listrik Negara (PLN) and industrial manufacturers – would need justification and compensation before accepting the hike.

“The first thing is we have to have strong reasons. The second thing is there should be clear regulations from the government and the last thing is compensation, including additional supply,” Wahid Sutopo, PGN’s director of investment, said on August 24.

Meanwhile, PGN is seeking out new sources of natural gas, including blocks that US firm ExxonMobil is selling in North Sumatra. The oil and gas giant announced in early August that it would sell various natural gas assets, including the Arun field and satellite fields, as well as the North Sumatra offshore field, with the latter of particular interest to PGN.

However, Sutopo has said that it is far from a done deal. “This is not a simple purchase. We should take a close look at the details of the asset,” he told local media on August 25. “The company is discussing the possibilities. We haven’t decided anything.’’

In the meantime, BP Migas has offered PGN some 110m scfd in additional gas supply from the Grissik field in South Sumatra, which is operated by US-based ConocoPhillips. PGN has indicated that the firm is interested in this supply, if it comes at the right price. “We want to take the offer, but we have to discuss the price,” said Sutopo on August 26, without offering further details.

Additional sources of natural gas could certainly help ensure PGN’s supply of gas, however, it must come at an economical price if PGN is to remain profitable.