1. Gas Development Master Plan
Steering Committee Meeting – 28 March 2013
Draft Policy Note 4 : Policy Support for the Development of
Domestic Gas Markets

2. 2
Coverage of the Policy Note
• Developing the domestic gas market requires large
upstream, midstream and downstream investments
• Financing these requires committed, long-term, reliable
demand from downsteam ‘anchor’ customers as well as
increases in domestic gas prices
• We have reviewed the impacts of current government
policies on the ability to finance the necessary
investments
– Allocation of gas supplies
– PLN as an anchor customer
– Promoting natural gas use by transport
– Transportation third party access (TPA)

3. 3
Allocation of gas supplies
• The current priority allocation to fertiliser and power
generation creates disincentives for upstream developers
– increasing gas prices to these uses pushes up subsidy
requirements
– therefore, we expect pressures to keep gas prices low for sales to
fertiliser production and power generation
– in turn, this reduces the attractiveness to upstream developers of
sales to the domestic market
• The allocation policy also appears to be ineffective
– both PT Pupuk Indonesia and PLN complain of a lack of reliable
gas supplies
• Our initial analysis suggests that additional revenues
from increased domestic gas prices would offset
increased subsidies (for fertilisers at least)

4. 4
Gas prices and fertiliser subsidies
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
0.00 1.00 2.00 3.00 4.00 5.00
Rs bnRs/kg
Increase in domestic gas price (US$/mmbtu)
Fertiliser subsidy
Increase in government PSC revenues
Urea market price
Urea break-even cost
Urea HRP

5. 5
PLN as an anchor customer
• PLN’s current plans are for little new base-load gas
generation, in response to concerns over the lack of
reliability of supply
– “gas supply to PLNs existing power plants is not secured, and
getting more critical in the longer-term“ (PLN, IndoGAS 2013)
– of 6.7GW of planned gas-fired capacity in the RUPTL, 4.3GW is in
the form of gas turbines using LNG and CNG to provide peaking
capacity and serve isolated networks
• New power generation, therefore, seems unlikely to
provide significant anchor load
• There is potential anchor demand from switching existing
GTs and CCGTs from diesel and fuel oil to gas (~550
mmscfd)

6. 6
Planned PLN gas demand (RUPTL)
2,706 3,021
10,279
12,079
414
322
943
1,291
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2013 2021 2013 2021
MW MMSCFD
Gas demand
(MMSCFD)
Capacity (MW)
Jawa-Bali
Indonesia Barat

7. 7
Promoting natural gas use in transport
• Current pricing differentials appear insufficient to
encourage switching to CNG
• Increasing these differentials requires either increasing
Premium prices (but this removes much of the rationale
for promoting switching), or reducing CNG prices
• The implication is that there will be further pressure to
reduce gas prices for sales to the domestic market, and
as a result lower incentives for upstream development

8. 8
Fuel switching incentives compared
3,100
2,245
4,500
12,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
CNG Gasoline CNG Gasoline
Indonesia Thailand
Rs/LSP
c
c
Conversion cost of Rs 13 million
Pay-back
9,285 litres
125,000 km (@13.5km/litre)
>6 years (@20,000km/year)
Pay-back
<1 year
Rs 1,400/LSP
Rs 9,285/LSP

9. 9
Transportation third party access
• Current regulations appear to work reasonably well, with
multiple users of many pipelines
• There is a lack of clarity over how utilisation is measured
and whether ‘use-it-or-lose-it’ requirements apply
• Current tariffs reduce with pipeline use. The result is to
create a perverse incentive for third parties to access the
most heavily-used pipelines
Segment Diameter
(inch)
Length
(km)
Capacity
(mmscfd)
Utilisation
(mmscfd)
Tariff (US$/
MSCF)
Comparison 1
Simpang Y –
PURSI
12 28.6 40 2 (5%) 0.24
14 28.6 60 35 (58%) 0.17
Comparison 2
KM53 – SKG
Bontang
16 13 200 100 (50%) 0.05
20 13 250 0 (0%) 0.11
Source: BPH Migas (2012)

10. 10
Recommendations
• Government should consider dropping the existing
priority allocation for domestic gas supplies and allow
price to dictate allocation (after a transitional period)
• A review of the consistency of PLN’s planning policies
against policy for the domestic gas market is desirable
• We question whether current pricing can support a
market for gas in transport. We recommend this policy is
further reviewed and the wider implications for the gas
industry considered in more detail
• We have minor recommendations for enhancements to
the TPA regime. These include introducing use-it-or-lose-
it provisions and amending the tariff methodology