Indonesia’s PLN Appeals Gas Price for DMO US$6.5

President Joko Widodo Inaugurated Sidrap Power Plant with a capacity of 75 Megawatts On July 2 - Photo by MEMR Office

JAKARTA (TheInsiderStories) – Indonesia’s power producer PT Perusahaan Listrik Negara (PLN) appealed to the government gas prices for Domestic Market Obligation (DMO) can be restricted at US$6.5 per million british thermal unit (MBTU) for Java and $ 7/MBTU for outside Java in an effort to reduce electricity prices.

Strategic Procurement Director of PLN, Supangkat Iwan Santoso said last week, the proposal has submitted to the Minister of Energy and Mineral Resources (MEMR) Ignatius Jonan.

Based on the Government Regulation No. 79/2014 there are four primary energy for electricity generation, namely, coal, gas, hydro and geothermal. Where, PLN get specialty treatment on the primary energy.

After introducing its DMO policy for coal on March 12, the government is going forward with its plan to introduce a DMO for gas. Director General of Electricity for MEMR Andy Noorsaman Sommeng said, that the DMO was expected to take effect by the end of this year. Basically, gas prices have been defined in the MEMR No. 45/2017 on Natural Gas Utilization for Power Generation.

Sommeng explained, now the government had considered the impact of the policy on the upstream gas sector. He added, the ideal gas price for power plants should be $7 per MBTU, while the current prices ranged between $10 and $11 per MBTU.

Deputy Minister for Energy and Mineral Resources (MEMR) Arcandra Tahar says the ministry is still searching for the correct formula to bring down the price of the natural gas sold to industry players to a level acceptable for buyers – but at the same time a price point that will not put producers in a disadvantageous position.

“Our ministry is trying to bring down the gas price in the upstream sector. However, if it is set too low, that would kill the gas producers. So, we have to find the right balance,” urged Tahar recently.

He added, one of the efforts being undertaken by the ministry is to tear down the current inefficient gas cost structure, and instead pinpoint cost areas that the government can eliminate.

Recently, some industry players, such as fertilizer, ceramic and petrochemical companies, called on the government to depress the gas price to around $3 per MBTU, in line with the prevailing global market price. However, Tahar said such a demand is ‘unreasonable’ as it could potentially put producers at a loss.

He said one way to bring down gas price is by reducing government revenues, in areas of non-tax and tax revenues from upstream oil and gas companies.

“However, this issue (tax cut) is the responsibility of the Finance Ministry,” he said, adding that the ministry is still in talks with the Finance Ministry on this matter.

Industry players said that the government needs to carefully consider all aspects before slashing the gas price.

“The gas price is determined by an aggregate of cost of production and distribution costs; therefore, when cutting the gas price the government needs a comprehensive policy that could benefit all parties,” said Danny Pradtya, Commercial Director of gas distributor PT Perusahaan Gas Negara Tbk (IDX:PGAS).

Satya Widya Yudha, member of the House of Representatives, told TheInsiderStories that that the energy ministry is constrained in reducing the gas price, as it only focuses on trying to reduce costs in the upstream sector. Specifically, it is yet to touch on the midstream, namely the distribution part.

As we know, the Indonesian government’s drive to depress the price of gas sold to strategic industries, as mandated by Presidential Decree Number 40, 2016, has proven to be a serious challenge.

The decree is yet to be implemented due to a disagreement between the government and industry players (or producers) as well as the complexity of the gas distribution network to end users.

The presidential decree, signed by President Joko Widodo on May 3, 2016, states that the gas price sold to strategic industries is to be determined by the MEMR, based on production-sharing contracts.

The gas price takes into account the commercial viability of the gas field, domestic and international gas prices, the capability of domestic consumers and value added to the industries that rely on the gas price.

If the proposed cut of non-tax state revenues is agreed, that could reduce the government’s non-tax state revenues in the 2018 State Budget. Under the 2018 State Budget, the government targets non-tax state revenues at Rp267.9 trillion. Of this, Rp77.2 trillion will be contributed from the oil and gas sectors.

The Industry Ministry last year proposed 77 companies engaging in strategic industries to benefit from a lower gas price. However, the MEMR then issued a Ministerial Decree last year with only 8 companies that would initially receive a lower gas price.

The eight companies are :

1. PT Kaltim Parna Industri
2. PT Kaltim Methanol Industri
3. PT Pupuk Kalimantan Timur
4. PT Pupuk Kujang Cikampek
5. PT Pupuk Sriwidjaja Palembang
6. PT Pupuk Iskandar Muda
7. PT Petrokimia Gresik
8. PT Krakatau Steel

Other companies to be accorded a lower gas price is yet to be determined.

Energy observers and industry players have stated that pushing down the gas price is not an easy task, given the complexity of the gas distribution network. The well-head gas price could be determined by gas producers; however, the gas distribution price is difficult to reduce as there are numerous players engaging in gas distribution.

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