Natural Gas

For an updated analysis we refer you to our Energy Research Report

The two largest producers of natural gas (the USA and Russia) together account for almost 40 percent of total global gas production.

Top Natural Gas Producing Countries in 2015:

1. United States	767.3
2. Russia	573.3
3. Iran	192.5
4. Qatar	181.4
5. Canada	163.5
6. China	138.0
7. Norway	117.2
8. Saudi Arabia	106.4
9. Algeria	83.0
10. Indonesia	75.0

^{in billion m³}

Top Natural Gas Consuming Countries in 2015:

1. United States	778.0
2. Russia	391.5
3. China	197.3
4. Iran	191.2
5. Japan	113.4
6. Saudi Arabia	106.4
7. Canada	102.5
8. Mexico	83.2
9. Germany	74.6
26. Indonesia	39.7

^{in billion m³
Source: BP Statistical Review of World Energy 2016}

An important feature of natural gas is that this fossil fuel plays a significant role in most sectors of the world economy (industrial, power generation, commercial and residential). Moreover, due to the fact that there are abundant reserves of natural gas in the world - that can be developed and produced without the need for large investments - the importance of gas is likely to expand in the future as nations want to cut back from reliance on expensive and environment-unfriendly energy sources such as oil. Currently, natural gas accounts for about 23 percent of global primary energy sources.

Natural Gas in Indonesia

Indonesia's Gas Production and Consumption

Indonesia contains large reserves of natural gas. Currently, the country contains the third-largest gas reserves of the Asia Pacific region (after Australia and China), accounting for 1.5 percent of total global gas reserves (BP Statistical Review of World Energy 2015).

Most centers of Indonesian gas production are located offshore. The largest of these are:

1. Arun, Aceh (Sumatra)
2. Bontang (East Kalimantan)
3. Tangguh (Papua)
4. Natuna Island

Indonesia produces around twice as much natural gas as it consumes. This does not mean, however, that domestic production of gas meets domestic demand. In fact, there is a shortage of gas for domestic industries in Indonesia. State-owned gas transportation and distribution company Perusahaan Gas Negara (PGN) has not been able to satisfy domestic demand. This has far-reaching consequences as it causes state electricity company Perusahaan Listrik Negara (PLN), the biggest domestic gas consumer, to have a structural lack of gas supplies and forces PLN to turn to other - more expensive and environment unfriendly - fossil fuels, such as oil, to generate electricity. However, blackouts happen frequently across the country (in particular outside the bigger cities on Java), thus hurting the nation's industries. Moreover, nearly 80 million Indonesians do not yet have access to electricity as is shown by Indonesia's relatively low electrification rate of 84.1 percent in 2014.

The government of Indonesia aims to limit the country's gas exports in an attempt to ensure domestic supplies while encouraging usage of natural gas as a fuel source for industrial and personal consumption.

A large part of Indonesia's gas production is exported as the nation's gas production is dominated by foreign companies that are only willing to invest if allowed to export the commodity. Currently, foreign companies, such as CNOOC Limited, Total E&P Indonesia, Conoco Philips, BP Tangguh, and Exxon Mobil Oil Indonesia, account for about 87 percent of Indonesia's natural gas production. The remaining 13 percent is produced by state-owned company Pertamina. Around half of total gas production is sold domestically.

The table below indicates both production and consumption of gas in Indonesia during the last decade.

Indonesian Gas Production and Consumption 2006-2015:

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Production in billion m³	74.3	71.5	73.7	76.9	85.7	81.5	77.1	72.1	73.4	75.0
Consumption in billion m³	36.6	34.1	39.1	41.5	43.4	42.1	42.2	36.5	38.4	39.7

^{Source: BP Statistical Review of World Energy 2016}

As shown in the table above - and contrary to national oil production - gas production in Indonesia has remained stable, reaching a record high in 2010 due to the start of production of the Tangguh field (located in Papua) in the same year (managed by BP Indonesia) which is an important field in the country's gas industry. After 2010 gas production has dropped due to supply problems.

Although numerous small companies are active in Indonesia's gas sector, most of its domestic production and exploration is in the hands of the six aforementioned large companies, of which only one is Indonesian (state-owned enterprise Pertamina). Together, China's CNOOC Ltd. and Pertamina account for over half of Indonesia's gas production.

Top Gas Consuming Industries in Indonesia:

Industry	2015	2020F
Fertilizer	791.22	1,028.22
Petrochemicals	295.00	708.00
Ceramic	133,95	134.68
Steel	80.00	120.00
Glassware	28.38	28.60
Glass	81.19	81.19
Cement	9.00	10.00
Rubber Gloves	4.67	4.70

^{in million metric standard cubic feet per day (MMscfd)
Source: Forum Industri Pengguna Gas Bumi}

Indonesia's Export of Gas

Throughout its history, Indonesia's gas production has always been directed towards export markets. However, the decline in domestic oil production in combination with a rising international oil price, made the government decide to make efforts to enlarge domestic uses of gas from the mid-2000s onward. In recent years domestic usage of gas has risen robustly at the expense of exports but limited infrastructural facilities in Indonesia's transmission and distribution networks complicate further development of domestic consumption. Limited adequate infrastructure is partly due to the lack of investment but also because of the country's geographical make-up. Distribution by tanker is easier than by pipeline as the key natural gas reserves are located offshore, far away from major gas demand centers.

After Qatar, Malaysia and Australia, Indonesia is currently the world's fourth-largest exporter of liquefied natural gas (LNG). This does not mean - as mentioned above - that domestic demand can be satisfied by domestic production, resulting in the need for Indonesia to import LNG from abroad in order not to disturb export commitments. It is predicted that by 2017 additional supplies from new Indonesian gas fields will be able to replace imports. Indonesia, previously the largest exporter of LNG, is experiencing a declining global LNG market share, partly due to a policy re-orientation of the Indonesian government in the mid-2000s that targets for more gas supplies for the domestic market in the context of increasing usage of gas as a source for energy (at the expense of reliance on oil). But the decline is also due to insufficient long-term investment in both exploration and development of the nation's gas fields. In late 2014, the Indonesian Petroleum Association stated that it expects investment (for exploration) in Indonesia's gas sector to decline by 20 percent in 2015 (particularly given the low energy prices). Also in late 2014 Chevron Pacific Indonesia (subsidiary of US-based oil & gas giant Chevron Corp) delayed its USD $12 billion Indonesia Deepwater Development (IDD) project in the Makassar Strait in East Kalimantan due to permit issues and because it needed more time to revise calculations after the discovery of a new gas reserves.

A number of long-term export contracts that were signed in the early and mid-2000s are priced below market prices, meaning Indonesia misses out on significant amounts of revenue. Instead of linking the contract rates to the fluctuating market price for gas, fixed rates were agreed upon which soon began to be out of date as the market price went up. The Indonesian government has been trying to renegotiate such long-term contracts in order to gain more financial benefit. However, from the perspective of business certainty such intentions to renegotiate contracts are not the best option. The main export destinations of Indonesian LNG are Japan, South Korea and Taiwan.

Future Outlook of Indonesia's Gas Sector

Indonesia's expanding economy in combination with the government's intention to lower reliance on oil as a source for energy supply in industries, power generation and transportation will cause domestic demand for gas to rise in the future. The country contains abundant reserves of gas that can supply Indonesia as well as foreign export markets for many more decades to come. But in order to reach an efficient and productive gas sector, large-scale investments in both exploration and (distributional) infrastructure will be needed. In order to attract more foreign investments, a clear and supportive regulatory system and legal framework is required.

In late-2015 I Gusti Nyoman Wiratmaja, Director General of Oil & Gas at the Ministry of Energy and mineral Resources, said Indonesia needs over USD $32 billion worth of investment (mostly from the private sector) for natural gas refineries, storage facilities, and gas-related infrastructure in order to meet domestic gas demand by 2025 (particularly for power stations and fertilizer plants). Indonesia's gas demand is estimated to rise from 6,102 million standard cubic feet per day (mmscfd) in 2015 to 8,854 mmscfd in 2025 with the bulk of demand originating from Java and Bali. Without providing clear details, Wiratmaja added that incentives are available to the private sector for investment in the domestic gas industry.

Updated on 4 July 2016