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Status and outlook of natural gas industry

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 Journal of Natural Gas Science and Engineering 29 (2016) 55e65

Contents lists available at ScienceDirect

Journal of Natural Gas Science and Engineering

journal homepage: www.elsevier.com/locate/jngse

Invited Review

Status and outlook of natural gas industry development in Indonesia

Widodo Wahyu Purwanto a, *, Yuswan Muharam a, Yoga Wienda Pratama a,
Djoni Hartono b, Harimanto Soedirman c, Rezki Anindhito c
a
Department of Chemical Engineering, Faculty of Engineering, Universitas Indonesia, Depok 16424, Indonesia
b
Department of Economics, Faculty of Economics and Business, Universitas Indonesia, Depok 16424, Indonesia
c
Perusahaan Gas Negara (PGN), Jakarta 11140, Indonesia

a r t i c l e i n f o a b s t r a c t

Article history: Indonesia has been facing dramatic changes in natural gas industry development, which contributes to
Received 17 September 2015 economic prosperity and reduces reliance on petroleum fuels. This paper reviews the current state of the
Received in revised form natural gas industry in Indonesia, including reserves, supply and demand, infrastructure, pricing and
30 December 2015
regulation; discusses the outlook and path forward for the country's gas sector; and identies the bar-
Accepted 31 December 2015
riers to and regulatory remedies for further development. The government has struggled to balance
Available online 4 January 2016
domestic demand with exports with respect to the country's natural resource management and to
respond to sensitive issues involving changes in oil and gas law that aim to prioritize gas for domestic
Keywords:
Status
usage. Meanwhile, the speed of gas infrastructure development has been slow and gas production is
Outlook declining due to aging gas elds without signicant new gas production. The projection results show that
Natural gas industry the domestic gas demand will increase signicantly, with gas demand in 2025 being approximately
Indonesia double to triple that in 2013. To fulll that demand, Indonesia needs to attract substantive investment for
future gas infrastructure and upstream gas exploration and exploitation of new gas elds. Systematic
support and clear policy guidelines, legal clarity and certainty, good bureaucratic performance, and
effective domestic gas pricing mechanisms are necessary to assure the successful expansion of gas uti-
lization in the country, achieve a cleaner energy mix portfolio and assist in moving away from oil
subsidies.
2016 Elsevier B.V. All rights reserved.

Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2. Current state of the natural gas industry in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.1. Gas reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.2. Gas production, consumption and export . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2.3. Natural gas infrastructures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2.4. Domestic gas market and pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
2.5. Regulatory framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3. Future outlook of Indonesia's gas industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.1. Method of projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.2. Building the scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.3. Gas demand projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.4. Gas supply-demand gap projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.5. Infrastructure and investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.6. CO2 emissions reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
4. Barriers and challenges for gas development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

* Corresponding author.
E-mail address: widodo@che.ui.ac.id (W.W. Purwanto).

http://dx.doi.org/10.1016/j.jngse.2015.12.053
1875-5100/ 2016 Elsevier B.V. All rights reserved.
56 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65

5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

1. Introduction barriers to development, and to discuss an outlook and path for-

ward for the country's gas sector to bring gas to unmet demand
Indonesia's oil and gas industry has a long history of over 100 centers and to support a portfolio with a cleaner energy mix.
years, and the sector is characterized by a relatively well-
understood regulatory framework. In many areas, including the 2. Current state of the natural gas industry in Indonesia
production sharing contract (PSC) model and the commercializa-
tion of LNG, Indonesia has been an international pioneer. Indo- Natural gas has been found in Indonesia since the 18th century;
nesia's oil and gas industry continues to be a vital sector; not only however, the commercialization of natural gas began in the 1970s.
does it contribute to national revenues, including 12% of the state When oil prices soar, countries worldwide look for alternative en-
budget in 2014, but it also boosts national economic growth (PwC, ergy and Indonesia is one of the largest natural gas producers. The
2014). gas pipeline dates from the Dutch colonial era in 1859, with rm I.J.
As a traditional LNG exporting country, Indonesia's natural gas Eindhoven & Co. Gravenhage later taken over by the Dutch gov-
industry has been experiencing dramatic changes. Indonesia has ernment and given the name Nederlandsch Indische Gas Maat-
been one of the world's largest LNG exporters for three decades, schappij (NV. NIGM). After independence, the government
currently ranking 4th (BP, 2014), but the rise in gas consumption in nationalized the company into a state gas company (PGN) and the
the country follows rapid economic growth. The country must state electricity company (PLN) in 1965. Additionally, at the time of
allocate a larger gas production to supply domestic gas usage. In the independence, the gas was produced by Stanvac Indonesia in
next few years, Indonesia is predicted to turn from a net gas Southern Sumatra (which then changed its name to Pertamina).
exporter to a net gas importer country to meet its fast-growing This eld has non-associated gas reserves which were discovered in
domestic demand (PGN, 2014a; MEMR, 2015). However, domestic 1958; three years later, gas production was used for the rst fer-
gas utilization is still struggling because the main gas supply is far tilizer industry in Palembang, South Sumatra. This is an important
away from the central consumer location, and due to the sparse gas moment in the development of the Indonesian natural gas busi-
infrastructure and geographic archipelago of the country, which ness. The natural gas utilization in Indonesia subsequently experi-
means the gas market is fragmented. enced a rapid increase, as 1974 was marked by the construction of
Indonesia's natural gas industry structure is characterized by an gas piping systems from Limau eld to Prabumulih and from Pra-
oligopoly in which there is competition in the upstream gas pro- bumulih to Palembang. In the same year, Pertamina supplied the
ducer, but the midstream and downstream sides are still dominated gas from the Java Sea offshore gas elds and Cirebon to the in-
by two national gas companies (Perusahaan Gas Negara (PGN) and dustrial area in West Java. Furthermore, PGN distributed natural gas
Pertamina Gas (Pertagas)), while the government has adopted open in Jakarta City in 1978 and in Bogor City in 1981 and then expanded
access and unbundled the transmission and distribution of gas to other cities. PGN then operated the Grissik-Batam-Singapore gas
(PGN, 2014a). In the last few years, the domestic gas market has transmission pipeline in 2003 and the transmission pipeline from
experienced dynamic development characterized by a signicant South Sumatra to West Java in 2007 (MEMR, 2015).
increase in the share of the domestic supply allocation of total LNG is one of the important businesses for Indonesia, as the
production and a drop in the percentage of LNG exports due to largest contributor to state revenue, and Indonesia is also the
limited gas production and the opening of three regasication world's largest LNG exporter. The Indonesian LNG business started
terminals. with the discovery of gas reserves in Badak eld in East Kalimantan
In response to the rapid growth of Indonesia's economy, the by Huffco Inc. in the early 1970s, and Arun eld in Aceh by Mobil Oil
government plans to increase domestic natural gas usage as stated in 1971, which then pursued LNG plant construction in both re-
in the 2014 Energy Law, with the target of a 22% share of natural gas gions. In 1977 a rst LNG shipment was sent to Japan from Badak
in the national energy mix in 2025; this share is equivalent to 8300 LNG plant, followed by the rst shipment from Arun LNG plant in
MMSCFD or an additional gas supply of 3000 MMSCFD above the 1977. LNG Tangguh Plant in Papua sent the rst shipment to Fujian,
current domestic supply (MEMR, 2015). The government will face China, in 2009. Those three LNG plants used an integrated PSC
challenges reaching this target, especially the difculties of scheme. The new LNG plant, Donggi-Senoro, began operating in
balancing domestic gas demand with exports and limited gas 2015 using the downstream or non-integrated scheme. To counter
infrastructure (OIES, 2014a,b) and ongoing changes to oil and gas the domestic gas supply shortage and limited pipeline infrastruc-
law (IPA, 2014). Despite those challenges, and after reform energy ture, the rst LNG Terminal located in the Java Sea began operation
subsidies announced in early 2015 which include the removal of in 2012 (MEMR, 2015). A brief history of Indonesian natural gas
subsidies on gasoline and the introduction of a xed subsidy for industry development is shown in Fig. 1.
diesel (IISD, 2015), the government has opportunities to divert the
savings from subsidy expenditures for gas infrastructure spending;
2.1. Gas reserves
in combination with low oil prices, the government also gains
momentum to increase domestic natural gas usage while cutting
Indonesia possesses the fourteenth largest proven gas reserves
the country's reliance on oil in supporting national sustainable
in the world and the third largest in AsiaePacic, or an estimated
energy policy (OIES, 2014a,b).
1.6% of the worldwide proven gas reserves (BP, 2014). In 2013, based
This paper intends to review the current status of natural gas
on data from the Special Task Force for Upstream Oil and Gas
industry development in Indonesia, including reserves, supply and
Business Activities (Migas, 2013), Indonesia held proven reserves of
demand, infrastructure, pricing, governmental regulation and
99.77 TCF and potential reserves of 50.21 TCF. Fig. 2 shows
 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65 57

Fig. 1. History of Indonesia's gas industry (adopted from MEMR, 2015).

Fig. 2. Indonesia's gas reserves (adopted from Migas, 2013).

Fig. 3. Indonesian natural gas demand and production, 2004e2013 (MEMR, 2014a,b).

Indonesia's gas reserves. The majority of gas reserves are located the Southeast Asian Nations (ASEAN), estimated to contain 46 TCF
offshore from Natuna, South Sumatra, East Kalimantan, Masela, and of recoverable reserves with a high carbon dioxide content (71%),
West Papua. The Natuna D-Aplha gas eld is the largest gas eld in which are largely undeveloped.
58 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65

Table 1
Summary of existing and planned LNG plants in Indonesia.

Field Reserve (TCF) LNG plant Capacity (MTPA) Start-up year Status

Arun 19,7 Train 1,2,3 5.1 1978 Stopped

Train 4,5 4.4 1983 Stopped
Train 6 2.5 1986 Stopped
Badak 14 & 26 Train A,B 6.4 1977 4 trains are stopped of 8 trains
Train C,D 4.6 1983
Train E,F 2.5, 2.5 1989,1994
Train G,H 2.9, 3.3 1998,1999
Tangguh 17 Train 1 3.8 2009 Operation
Train 2 3.8 2009 Operation
Train 3 3.8 2019 FEED
Donggi-Senoro 3 Train 1 2 2015 Operation
Abadi, Masela 18 Train 1 2.5 2020 FEED

2.2. Gas production, consumption and export 2.3. Natural gas infrastructures

Indonesia's gas production increased to its production peak in
2010, at 7500 MMSCFD, and declined to 6900 MMSCFD in 2013 due
to natural production declines in Java and Sumatra; no signicant
new reserves have been found (Fig. 3). The state-owned oil and gas
corporation (Pertamina) accounted for less than 13% of natural gas
production in 2013. Multinational corporations such as Total E&P,
Conoco Phillips, BP, Vico and Exxon Mobil hold the largest shares in
the upstream gas sector (Migas, 2013). In 2004, 75% of Indonesia's
gas production was exported, mainly to Japan, South Korea, Taiwan
and China. The export share then decreased while the domestic
demand rose, and since 2013, domestic demand has been greater
than exports (53%). With the decline of conventional gas reserves,
the country continues to be a major exporter of natural gas while
addressing the fast growth of domestic gas demand, resulting in
lower availability of natural gas for export.
The domestic gas utilization, including LPG, increased sharply
from 25% of total production (1437 MMSCD) in 2004e53% (3699
MMSCFD) in 2013 (Fig. 2). This trend shows that domestic demand
has become a priority for gas utilization as a result of national
economic growth. In 2013, the major domestic users of natural gas,
excluding LPG, are the industry sector, including for fertilizer (31%),
followed by the electricity sector (14%), enhanced oil recovery
(EOR) and private use (5%), while the rest is exported (50%). Gas
utilization for transportation and households is still far smaller, at
only approximately 0.04% and 0.01%, respectively.
To secure the national gas supply, the government introduced
Government Regulation No.55/2009 for DMO gas, which states that
25% of natural gas produced from the PSC contract must supply the
domestic gas market. The government then issued Ministry Regu-
lation No.3/2010 to prioritize the domestic gas allocations from
DMO, mainly for EOR, the fertilizer industry, the power generation
sector and other industries. For recent gas projects, the government
has imposed a larger allocation for the domestic gas market of
approximately 25%e40% of the approved gas production (MEMR,
2015).
Indonesia currently has four liquefaction plants (Badak, Arun,
Tangguh and Donggi-Senoro) with a total capacity of 43.7 million
tons per annum (Table 1). After 36 years of LNG production, the
Arun LNG plant closed in 2014 and was converted to a receiving and
regasication terminal. Currently, the largest LNG plant, Badak LNG,
has dramatically decreased production, from eight trains owned to
only four trains still operating, due to a shortage in the gas supply.
Two trains of Tangguh LNG were in operation in 2009, and the
Donggi-Sonoro LNG plant is opening in 2015. The country has plans
to construct new liquefaction plants in the remote regions, with
Tangguh Train 3 in west Papua and Abadi Masela Floating LNG
(FLNG) in the Arafura Sea. Those LNG plants will open in 2019 and
2020, respectively (IGU, 2013).
At present, Indonesia operates three LNG terminals. The rst
oating storage and regasication unit (FSRU) was built in Jakarta
Bay with a capacity of 3.8 MTPA and started receiving LNG cargo in
2012. The Lampung FSRU, located in South Sumatra, began opera-
tion in 2014 with capacity of 1.8 MTPA, and the Arun LNG terminal,
with a capacity of 3 MTPA, opened in 2015 (IGU, 20). As part of
efforts to meet domestic gas demand, the country has planned two
additions to its LNG terminals, located in Banten, West Java, and
Cilacap, Central Java (Table 2).
Indonesia lacks an extensive gas pipeline network because the
major gas reserves are located away from the demand centers. The
Indonesian gas pipeline networks have been developed based on
business projects; thus, they are composed of a number of frag-
mented systems. The developed gas networks are located mostly
near consumer centers. The country's combined pipeline trans-
mission and distribution network has a total length of approxi-
mately 8363 km, which includes 3700 km of distribution networks
and 4336 km of transmission networks. PGN operates the country's
dominant networks. The PGN transmission network covers
Southern Sumatra and Western Java (SSWJ) as well as Northern
Sumatra, and the gas distribution network covers Palembang,
Banten, Jakarta, Bogor, Bekasi, Karawang, Cirebon, Medan, Batam,

Table 2
Existing and planned LNG terminals in Indonesia.

Terminal name Capacity Start-up year Type Status

(MTPA)

Nusantara Regas 3.8 2012 Floating Operation

Lampung LNG 1.8 2014 Floating Operation
Perta Arun Gas 3 2015 Onshore Operation
Cilacap, Central Java 1.5 2018 Floating Planned
Banjarnegara Banten 4 2017 Onshore Planned
 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65 59

Fig. 4. Natural gas ow distribution routes.

Fig. 5. Indonesian retail and export price of natural gas.

Pekanbaru, Surabaya, Sidoarjo and Pasuruan; Pertagas trans- prices.

mission networks also include Southern Sumatra, Western Java,
Banten, Eastern Java, Northern Aceh, Northern Sumatra, and
Eastern Kalimantan. The growth of gas distribution pipeline infra-
structure is very slow, at only 1.5%, possibly due to a lack of coor-
dination among institutions, a mismatch between gas
infrastructure planning and gas allocation, and policy unbundling,
which drives most private investment to trading businesses with
less risk than gas transport businesses (MEMR, 2015).
Gas ow distribution and infrastructure for domestic demand
and export can be seen in Fig. 4.
Fig. 5 shows the comparison between retail gas prices, referred
to as domestic gas prices, and export gas prices. The export gas
prices refer to the prices of LNG Badak and Tangguh. In general, the
export gas prices are higher than the domestic gas prices for all
sectors. The domestic average selling price for industry is close to
Tangguh LNG export prices. The Tangguh gas price was increased
due to a new contract agreement in 2014, from between US$ 4e6
per MMBTU to US$ 14.39 per MMBTU. A large disparity between
the export price and the domestic price creates a disincentive to
supply gas to the domestic market (Butler, 2013; PGN, 2014b).

2.4. Domestic gas market and pricing 2.5. Regulatory framework

The gas industry still shows market development where there is
competition in the gas producer, but the midstream and down-
stream sides are still dominated by PGN and Pertagas. Although
Indonesia's natural gas industry structure has been open access and
the country has unbundled the transmission and distribution of
gas, the domestic gas market is still hampered by uncertain regu-
lation and domestic gas prices which are lower than international
Prior to the production sharing contract (PSC) executed in the
upstream oil and gas business, the country adopted two oil and gas
contract regimes: concession and contract of work. The concession
regime was adopted from the Dutch colonial era until early inde-
pendence and the contract of work regime was adopted since
Indonesia enacted Law No 40/1960 on Oil and Gas Mining. This
regulation provides that oil and resources are state property. In
60 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65
1966, the st PSC scheme was signed between Pertamina and the
Independent Indonesian American Oil Company. This contract is
the rst PSC in the history of the world petroleum industry (Migas,
2014; Twomey & Mahidin, 2008).
In the 1960s, Pertamina was set up to function as both an oil and
gas company and as a state energy regulator. Pertamina both
controlled and supervised oil and gas activities under various
production sharing contracts. In 2001, the country introduced the
law regulating oil and gas activities, No. 22/2001, which reduced
Pertamina's regulatory function. Pertamina acts as a state-owned
oil and gas company focusing only on oil and gas operations. The
regulatory functions were moved into an independent Upstream
Oil and Gas Implementing Agency called BP Migas (Badan Pelak-
sana Minyak dan Gas Bumi). Under this oil and gas law, the Agency
controls upstream activities and manages oil and gas contractors on
behalf of the Government, and downstream activities are
controlled by business licenses issued by the Downstream Oil and
Gas Regulatory Agency, called BPH Migas (Badan Pangatur Hilir
Minyak dan Gas Bumi). The BPH Migas regulatory agency is charged
with assuring sufcient supply of domestic fuel oils and natural gas
and the safe operation of downstream activities (PwC, 2014).
In late 2012, the Indonesian Constitutional Court annulled
several provisions in the Oil and Gas law, No. 22/2001, and dis-
banded BP Migas, arguing that supervision of oil and gas should
reside with the state, not an independent regulatory body. In
response to the Constitutional Court decision, the President issued
multiple Presidential Regulations and the Ministry of Energy and
Mineral Resources delegated the management of upstream oil and
gas activities to SKK Migas (Satuan Kerja Khusus Pelaksana Kegia-
tan Usaha Hulu Minyak dan Gas Bumi, or Special Task Force for
Upstream Oil and Gas Business Activities) in 2013 as a temporary
regulatory agency until the issuance of a new oil and gas law
(Migas, 2014). An amendment to the oil and gas law was drafted by
the Government and is currently being discussed before the Indo-
nesian House of Representatives. The aim of the new draft oil and
gas law is to enhance the state's role in controlling and exploiting
oil and gas resources, satisfying domestic consumption and per-
forming the business licensing and supervision functions of up-
stream oil and gas activities directly through the Ministry of Energy
and Mineral Resources. The new law establishes a state-owned
business entity (Badan Usaha Milik Negara Pelaksana Kerja Sama
Hulu or BUMN-K) which is responsible for the cooperation contract
with a private oil and gas company for exploration and production
of the work area. Pertamina and national private companies have
privileges for business licenses. The new draft law does not change
the regulation of downstream oil and gas activities, and businesses
may still operate under license, but the new draft law creates a
buffering business entity to act as an aggregator (Badan Usaha
Penyangga or BUP) responsible for managing the downstream ac-
tivities by centralizing the compulsory purchase and sale of oil and
gas for the domestic market (MEMR, 2015). The nationalistic spirit
of the new draft of the oil and gas law has the potential to worry
foreign and private investors. The government should assure
smooth transitional provisions and guaranties with respect to
existing investments in Indonesia.
3. Future outlook of Indonesia's gas industry
3.1. Method of projection
The major data and assumptions for this Indonesia Gas Outlook
consist of population growth using BPS data (BPS, 2014) with a
projected average growth rate of 1.2%, and GDP growth and pre-
diction using World Bank data (WB, 2014a,b,c,d,e), Bank Indonesia
(BI, 2014) and JICA (JICA, 2012), with an assumption of average
annual growth of 5.6% for the projection range. Gas supply and
demand are processed from Gas Balance Indonesia for 2013e2028
and 2014e2030 (MEMR, 2013b; MEMR, 2014a,b). Historical gas
sectoral demand and exports are based on the Handbook of Energy
and Economic Statistics 2013 (MEMR, 2013a; 2014a,b and natural
gas reserves are based on SKK Migas data (Migas, 2013). The gas
historical data period is 2004e2013 and the projection period is
2014e2025.
The gas demand model used for projecting future natural gas
needs uses an econometric approach based on demand elasticity
for the gas sectors (electric, industrial, transportation, commercial
and household) to GDP growth (Bhattacharyya and Timilsina,
2009). This model also considers the planning of existing gas ex-
ports and domestic gas allocation policy. The gas supply model uses
the supply-demand gas balance to meet gas demand with supplies
of both domestic and imported gas. The projection of gas supply
also accounts for existing planning and development planning of
national natural gas elds and existing proven and potential re-
serves. LNG imports should be considered based on the potential
supply of LNG from abroad, which may enter domestic markets if
domestic LNG supply is not possible. Several regions with no
existing gas demand data are approached by assuming the oil de-
mand regions will switch to natural gas and existing gas planning.
3.2. Building the scenarios
This outlook (PGN, 2014a) attempts to show the current gas data
and project Indonesia's gas demand and supply outlook to 2025
using two scenarios. The rst scenario is the Business as Usual
(BAU) scenario, which assumes that GDP will grow as currently
predicted (at 5.6%) and that there is no change in future gas policy.
In this scenario, the largest user of domestic gas is the electricity
and industry sector, the development of gas infrastructure is
limited, and there is a gap between domestic and international gas
prices. LNG export policy remains with the Domestic Market
Obligation (DMO) for domestic gas utilization. Second, the High
Growth and Gas scenario (HGG) aims to show a larger gas role
when GDP growth is more optimistic (7%) than the current pre-
dictions. Gas supply would include the DMO, without LNG exports
and optimistic reserves (P2 dan P3). In HGG, it is assumed that the
government could encourage more aggressive development of gas
infrastructure, both transmission and distribution, through the
pipeline, including an LNG plant, LNG receiving terminals and a gas
fueling station, and an effective domestic gas pricing policy. Several
of the main assumptions used for each scenario are shown in
Table 3.
3.3. Gas demand projection
The HGG Scenario aims to determine the effect of higher GDP
growth on natural gas demand and to maximize the role of natural
gas in the energy mix. Fig. 6 shows that in the BAU Scenario, the
natural gas demand in 2025 is projected to reach 7205 MMSCFD,
with an average growth of 5.0%. In the HGG scenario, the average
growth of total natural gas demand is higher, i.e., 7%, resulting in a
demand of 11,880 MMSCFD in 2025. There will be a demand dif-
ference of 4674 MMSCFD between the two scenarios as a conse-
quence of the differences in the GDP growth and the energy sector
mix.
Contracted gas demand will drop from 3829 MMSCFD in 2013 to
336 MMSCFD in 2025 (Fig. 7). The potential gas demand in the BAU
Scenario will reach 6870 MMSCFD in 2025. In the HGG Scenario,
there will be additional potential and planned demand of 3662
MMSCFD and 1013 MMSCFD, respectively, in 2025.
In 2013, the regional gas demand is dominated by Western Java
 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65 61

Table 3
Outlook scenarios.

Assumptions Scenarios

Business as Usual (BAU) High Growth & Gas (HGG)

GDP growth 5.6% 7.0%

Demand Average elasticity of 0.82 from 2014 to 2025. Based on contracted demand. Average elasticity of 0.82 from 2014 to 2025 and switching petroleum fuel
to gas for regions with no gas demand.
Supply Contracted export LNG is still running. New LNG development planning is only Gas supply options are DMO LNG, no LNG exports for new LNG plant
for DMO which is used to support domestic need. development, and optimistic reserves (P2 and P3).
Policy Gas infrastructure development and gas pricing are the same as in the current More aggressive gas infrastructure development policy and effective
state. domestic gas pricing policy.

Fig. 6. Projected gas demand. BAU vs. HGG (PGN, 2014a).

14000
Contracted
12000 Potenal (BAU)
Planned Addion (HGG)
10000
MMSCFD

8000

6000

4000

2000

0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Fig. 7. Projected gas demand by status (PGN, 2014a).

Fig. 8. Projected gas demand by region (PGN, 2014a).

62 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65
Fig. 9. Gas Demand by sector: (a) BAU and (b) HGG (PGN, 2014a).
Fig. 10. Supply-demand gap: (a) BAU and (b) HGG (PGN, 2014a).
(41.9%), followed by Southern Sumatera (20.6%) and Eastern Java &
Bali (18.7%), as shown in Fig. 8. Improved infrastructure in the HGG
Scenario will provide additional gas demand in all regions relative
to the BAU Scenario. In 2025, gas demand in Western Java is 2794
MMSCFD (38.8%), Southern Sumatra is 1336 MMSCFD (18.9%), and
Eastern Java and Bali are 714 MMSCFD (21.5%). These regions
combined will have 79.2% of the national natural gas demand, with
shares similar to those in 2013. The regions with signicantly larger
shares in 202 are Northern Sumatra and Central Java.
In the BAU Scenario (Fig. 9 a), the total natural gas demand in-
creases by 1076 MMSCFD during the outlook period. The total de-
mand is 8208 MMSCFD in 2013 and increases to 9284 MMSCFD in
2025, including exports. Domestic gas demand increases from 3829
MMSCFD in 2013 to 7205 MMSCFD in 2025, or an increase of 5.4%.
Domestic gas demand is dominated by the electricity, industry, and
fertilizer sectors. In 2025, the share of each sector is 41%, 36%, and
21%, respectively. The shares of the transportation and household
sectors are very small. Gas demand for exports declines from 3666
MMSCFD in 2013 to 1845 MMSCFD in 2025. A relatively large
decline in exports, 698 MMSCFD, occurs between 2014 and 2015.
This is because the gas export contract from the corridor block of
South Sumatra to Singapore will expire in 2014 and the Donggi-
Senoro eld will be on-stream. The Donggi-Senoro eld will pro-
duce 2 MTPA of LNG, or 289 MMSCFD of gas, all of which will be
exported.
Fig. 9 (b) shows that in the HGG scenario, the average growth of
total demand is 4.1% per year, and the average growth of domestic
gas demand is 9.9% per year. Domestic gas demand increases from
3829 MMSCFD in 2013 to 11880 MMSCFD in 2025. During the
outlook period, the electricity sector share rises from 34% to 39%,
the industry sector share rises from 30% to 34%, and the fertilizer
sector share rises from 20% to 24%, while the transportation sector
share increases from nearly 0% to 1%. The household sector share in
2025 is still very small, at 0.3%.
3.4. Gas supply-demand gap projection
In the BAU-DMO scenario (Fig. 10 (a)), gas supply after 2019
(existing, planned, and potential) will not be able to meet the gas
demand for both domestic consumption and contracted export.
This condition will require gas imports of 4214 MMSCFD in 2025,
equal to 47.8% of the total demand in that year. This would happen
as the average annual demand grows by 5.4%, while the supply
decreases by 9.8% per year beginning in 2019. The existing gas
supply is equal to 6814 MMSCFD and will decline to 2201 MMSCFD
in 2025. Planned supply will reach a peak in the 2016 to 2019
period with the operation of several projects, such as the IDD
project in East Kalimantan, the Masela FLNG project coming on
stream in 2018, and LNG Tangguh Train 3, which will start pro-
duction in 2019. To meet domestic demand in this scenario, there
should be an addition of large gas reserves to the potential supply,
especially Masela FLNG Train 2 in 2019. This eld is expected to
produce 190 MMSCFD of natural gas for domestic use.
In the HGG scenario shown in Fig. 10 (b), the average gas de-
mand growth is 9.9%, which is 4.6% higher than the demand growth
in the BAU scenario. If the gas supply is equal to that in the BAU
scenario, Indonesia will begin importing gas in 2014, with an
average annual import growth of 19.7% for the 2013 to 2025 period.
It is estimated that imports will reach 8546 MMSCFD in 2025,
equivalent to 65% of the total demand.
In the HGG with DMO, the additional potential supply from
Masela FLNG trains 2 and 3 will be available one year ahead of that
in the BAU-DMO scenario. Trains 1 and 2 will be on stream in 2018,
with a potential domestic supply of only 190 MMSCFD starting in
 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65
2018. In the HGG with no export, domestic supply will receive an
additional 570 MMSCFD of natural gas compared to the supply in
the HGG with DMO scenario. Indonesia will become a gas importer
from 2014 to 2025. A potential additional supply of Masela FLNG
will begin in 2018 and amount to 761 MMSCFD in 2025. In HGG
with no export and optimistic reserves (OpRes), in which the effort
to accelerate potential gas reserves into proven reserves is suc-
cessful, there will be an additional potential gas supply of as much
as 632 MMSCFD. In this scenario, Indonesia still must rely on im-
ported gas because the annual demand is much higher than pro-
duction capability. To prevent reliance on imports, another 15 TCF
potential reserves must be ready to be exploited, producing as
much as 800 MMSCFD in 2020 and reaching maximum throughput
of 2500 MMSCFD in 2022. Another option is acceleration of the East
Natuna gas development. This gas block has approximately 46 TCF
of reserves of natural gas containing more than 70% CO2 and rich in
sulfur. The joint consortium of Pertamina-ExxonMobil-Total-PTTEP
plan to develop this eld, which is expected to begin operation in
2020. However, this development has been constrained by the high
cost of CO2-methane separation and CO2 storage in an aquifer.
For unconventional reserves, the potential gas supply from coal
bed methane (CBM) will not be predicted because the production of
CBM is far from the government's target of 500 MMSCFD; in 2015,
the current Indonesian CBM production is less than 1 MMSCFD. The
main obstacles faced in the development of Indonesian CBM are
policy and bureaucracy. The Production Sharing Contract scheme
applied to CBM operations is unsuitable for the characteristics of
CBM development. CBM operations require a greater degree of
exibility in their exploration activities than those of conventional
gas. The main issues are the complex regulation and lengthy bu-
reaucracy, associated delays in getting permits related to land ac-
cess and exploration from various authorities at different levels of
government, and procurement to prioritize local content despite
having no domestic rigs designed specically for CBM operations.
3.5. Infrastructure and investment
The gas infrastructure requirements of the BAU-DMO scenario
are an 11.3 MTPA LNG plant consisting of one baseload train at LNG
Tangguh (Train 3) and three trains at Masela FLNG (one train in
2015 and two trains in 2016), and a 41 MTPA LNG receiving ter-
minal, including FSRU Lampung (2 MTPA), LNG Receiving Terminal
Arun (3 MTPA), FSRU Banten (3 MTPA), FSRU Cilacap (1.5 MTPA),
and FSRU East Java (3 MTPA). In the HGG-DMO scenario, the re-
quirements are three trains at Masela FLNG (7.5 MTPA) to be built
starting in 2015, and accumulation of 160 CNG fueling stations in
2025. In the HGG-No export scenario, there will be additional LNG
Fig. 11. Investment required for several supplyedemand scenarios (PGN, 2014a).
63
Receiving Terminals beyond those in the HGG-DMO scenario,
required for LNG regasication coming from LNG Masela (3.5
MTPA) and additional LNG imports. For the HGG-No Export sce-
nario, the requirement for new additional infrastructure is mostly
the same as in the HGG-DMO scenario. However, in order to in-
crease capability for utilizing domestic gas supply from Masela, it is
necessary to build a 4 MTPA LNG RT in 2015 for the HGG-No Export
scenario more than is necessary in HGG-DMO. The OpRes scenario
shows relatively less infrastructure for LNG RT than for HGG-DMO
and HGG-No Export because the scenario requires the least LNG
imports (Fig. 11). The investment required for infrastructure
development in the BAU-DMO scenario is shown in Fig. 12: a
pipeline at US$ 2.5 billion, LNG plant at US $ 13 billion, and LNG
Receiving Terminal at US$ 6.2 billion. In the HGG-DMO scenario,
the investments required are a pipeline at US$ 2.5 billion, LNG plant
at US$ 13 billion, LNG Receiving Terminal at US$ 10.5 billion, and
CNG fueling station at US$ 0.3 billion. In the HGG-no export sce-
nario, the same amount of investment is required as in the HGG-
DMO, but the investment for LNG RT must be provided earlier (in
2015) to receive the full LNG supply from Masela in 2018. Compared
to other HGG scenarios, OpRes scenario requires the least LNG RT
investment for importing LNG. It is noted that this investment ex-
cludes the investment for upstream gas exploration and
exploitation.
3.6. CO2 emissions reduction
Fig. 12 reveals the amount of CO2 emitted, which can be reduced
by substitution of petroleum fuels with natural gas. In 2025, a
reduction of up to 64.2 and 105.9 million tons of CO2 emissions
could be achieved for the BAU and the HGG scenarios, respectively.
In general, the industrial sector reduces CO2 emissions the most.
4. Barriers and challenges for gas development
Based on the analysis in the previous section, the projected
domestic gas demand would increase signicantly, up to
7205e11,880 MMSCFD by 2025, or approximately 2- to 3-fold
higher than gas demand in 2013. This huge additional gas demand
will be followed by additional gas infrastructure which connects
the gas production and gas consumer centers, including LNG plants
and gas transportation facilities. This is the greatest challenge for
gas infrastructure development: the western part of Indonesia,
which is characterized by a large potential gas demand (Java-Bali,
Sumatra and East Kalimantan), requires large-scale infrastructure
such as gas pipelines and LNG systems. For western Indonesia, the
main drivers of gas business are the industrial and electricity
64 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65
120.00
100.00
Electricity
Million Ton CO2
80.00
60.00
40.00
20.00
0.00
BAU HGG BAU HGG BAU HGG BAU HGG BAU HGG BAU HGG BAU HGG
2013 2015
Fig. 12. Potential for CO2 emissions reduction (PGN, 2014a).
sectors, while potential untapped gas business exists in the use of
gas for the transport sector and the commercial sector, especially in
large cities. Development of Natural Gas vehicles (NGV) has great
potential to substitute for petroleum fuel vehicles. In the com-
mercial sector, there are business opportunities for the application
of gas-based combined cooling-heating power technology to save
energy. Meanwhile, the eastern part of Indonesia, with low po-
tential gas demand, requires specic gas logistics, such as small LNG
and CNG marine. In the eastern part of Indonesia, the business
potential associated with the development of small-scale gas
infrastructure is to meet fuel demand for small power plants or off-
grid industries. Large-scale infrastructure development, especially
to meet fuel demand for a smelter, is also a possibility.
Despite high potential for additional gas demand, Indonesia
needs to address the acceleration of new of gas infrastructure
development in the country; however, several barriers still hamper
natural gas development and the wide utilization of natural gas to
fuel a sustainable national economy. To overcome these obstacles,
the government should undertake a serious effort to push natural
gas industry development in the country. The major barriers hin-
dering gas development are as follows.
To delay Indonesia becoming a net gas importer country, it
needs to accelerate new gas eld development. There are some
barriers to developing gas elds located in remote locations, far
from demand centers such as Java and Sumatra. All of Indonesia's
LNG plants have remoteness indexes greater than 4 due to
geographical isolation and a lack of well-developed infrastructure
(IGU, 2015a). Those elds present some substantial risk for devel-
opment and require specic gas technology. The East Natuna gas
eld, with 50 TCF of recoverable reserves, produces natural gas
with a high CO2 and sulfur content. The commercial application of
this eld would require a large investment, especially for CO2
separation and sequestration. The Masela block of 15 TCF is located
in the remote Arafura Sea. This eld will develop using specic
technologies (a subsea production system and a oating LNG) that
require a large investment. Other small gas elds are located at
remote islands with small gas markets; monetizing those elds
requires a small LNG and CNG system approach (IGU, 2015b).
Furthermore, the logistics for transporting natural gas over an is-
land country such as Indonesia are another barrier to natural gas
utilization which could cause high transportation costs. A complex
gas supply contracting process can also hinder the pace at which
gas ows from the eld to the market. The government should
attract more investment in upstream gas exploration and exploi-
tation activities by simplifying and improving bureaucratic per-
formance for permitting and approvals and addressing taxation
issues (IPA, 2014).
Industry Ferlizer City Gas
2017 2019 2021 2023 2025
The development of pipeline network infrastructure is almost
stagnant, mainly due to a mismatch between gas allocation for
domestic usage and infrastructure planning, land acquisition issues
and some traders acting as brokers without building infrastructure
(MEMR, 2015). It appears that since deregulation of the down-
stream gas market was introduced in 2001 through the open access
and unbundling scheme, the reform has not been effective
(Hutagalung et al., 2011). Most of the pipeline gas network is not
integrated, so the government should establish an integrated gas
pipeline network earlier and there should be more government
involvement to reduce infrastructure investment risk using a
public-private partnership scheme. The government should also
streamline gas infrastructure planning, domestic gas allocations,
and industrial development.
Indonesia will become a net importer of gas in the near future,
and the gas business in Indonesia will follow the fast change in
domestic gas demand that is inuenced not only by the domestic
gas market but also by the international gas market (IEA, 2011,
2013). These changes should be anticipated by the government,
the industry, and the gas users. The government should address the
disparity between international gas prices and domestic gas prices
and carefully manage an effective policy to avoid productivity los-
ses of domestic gas users, such as by establishing hybrid markets
(Thurber and Chang, 2011).
The nationalistic spirit of the new draft of the oil and gas law,
which creates a new entity called BUMN-K for upstream businesses
and BUP for downstream activities, has the potential to discourage
investors. Thus, the government should nalize this new law soon
and assure smooth transitional provisions and guaranties to respect
the existing private and foreign investment in Indonesia, providing
legal clarity and certainty for the industry.
After reform energy subsidies announced in early 2015, the
government has opportunities to use the savings from subsidy
expenditures for gas infrastructure spending and, in combination
with current low oil prices, the government gains momentum to
increase domestic natural gas usage or to cut the country's reliance
on oil by implementing an effective domestic gas pricing system,
systematic regulatory guidelines, a greater role for government to
support development of integrated gas infrastructure, and industry
readiness; these will determine the success of national gas industry
development, which will ultimately lead to a choice of clean energy
sources with cheaper prices for the public.
5. Conclusion
Indonesia faces the challenge of a rapid increase in domestic gas
consumption driven by rising economic growth, declining gas
 W.W. Purwanto et al. / Journal of Natural Gas Science and Engineering 29 (2016) 55e65
production, and limited gas infrastructure, as well as ongoing
change to the oil and gas law. Domestic gas utilization was iden-
tied as having a vital role in response to the rapid growth of the
Indonesian economy and in achieving a cleaner national energy
mix portfolio.
The projection estimates that domestic gas demand would in-
crease signicantly, to double or triple the current gas demand, and
by continuing current gas production, Indonesia will become a net
gas importer in the near future. To ll the gap, Indonesia needs to
attract a huge investment for gas infrastructure, upstream gas
exploration and exploitation of new gas elds. However, gas
development experiences the following barriers: remote gas elds
far away from demand centers, poor bureaucratic performance and
taxation, a mismatch between gas allocation and gas infrastructure
planning, issues with the land acquisition process, lack of an inte-
grated pipeline network, a price disparity between domestic and
international gas, and the uncertainty of oil and gas law.
Based on the above challenges and a successful petroleum fuels
subsidy reform in early 2015, as well as greater efforts to establish
fundamental, effective policies such as systematic support and
policy guidelines, legal clarity and certainty, good bureaucratic
performance, a greater role of government in mitigating infra-
structure nancing risk, and effective domestic gas pricing,
Indonesia is expected to signicantly expand the domestic natural
gas market to achieve a cleaner national energy mix target and
assist in the move away from oil subsidies.
Acknowledgments
The authors would like to thank Perusahaan Gas Negara (PGN)
for permitting the use of the main results of the Indonesia Gas
Outlook 2014. The nancial support from Hibah Riset Kluster Uni-
versitas Indonesia (Grant No.1877/UN2.R12/HKP.05.00/2015) is
gratefully acknowledged.
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