Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
Financing natural gas infrastructure (downstream) projects
in Indonesia*
Hanan Nugroho
Abstract-. Law No. 22 Year 2001 concerning Oil and Gas states explicitly the
priority for using more natural gas in domestic market. Once the master plan for
national gas transmission and distribution issued by the government, there will be a great
demand to develop natural gas infrastructure projects, including pipeline transmission
and distribution as well as LNG receiving terminal and gas storage facilities in
Indonesia. Due to the characteristic of large investment costs, long construction period
and lack experience in building such kind of huge gas projects, however, there will be
critical challenges in project development and how to finance the projects.
This paper presents our experiences, as a government agency, in financing
natural gas project, especially that of pipeline transmission and distribution. The paper
describes issues of government development budget, bilateral/multilateral loans in gas
development projects, lesson we learn from the experiences, and financing option for the
future.
*
Presented for INDOGAS 2005, the 2nd International Conference & Exhibition, 17-20 January
2005, Jakarta Convention Center, Indonesia.

Sr. Energy Planner/Economist, (BAPPENAS), Jakarta 10310, INDONESIA. E-mail:
nugrohohn@bappenas.go.id
1
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
1
Introduction
Indonesia is one among the most advanced countries in developing liquefied natural
gas (LNG) for exports. The exports of gas have for a quite long time made significant
contributions to the country’s export earnings and its government revenues as well.
However, the development of natural gas industry in Indonesia’s domestic markets is still
in the early stage. While domestic demand for natural gas is considerable and the
potential of natural gas to reduce the heavy dependency on oil in Indonesia’s energy mix
is quite great, there is big constraint due mostly to the availability of natural gas
infrastructures. Natural gas demand is centered around the populous-energy greedy of
Java, while most of gas fields are scattered far from the demand centers.
Law No. 22 Year 2001 Concerning Oil and Gas states explicitly the priority for using
the country’s natural gas for domestic usages. The Law has brought a new spirit to the
natural gas business in Indonesia, expecting that the domestic business will be growing
considerably in the near future.
The Law establishes the BPH MIGAS (a new
Regulatory Body to deal with oil and natural gas downstream industry), un-bundling the
structure of oil and gas industry (mainly in the downstream), liberalizes them and opens
them for more players. The issuance of new Oil & Gas Law has also driven growing
concerns on many aspects and prospects of natural gas industry in Indonesia, including
natural gas infrastructure projects development and their financing schemes.
Currently, the government is preparing a master plan for national natural gas
transmission and distribution networks. It is anticipated that, as the legitimate master
plan is published by the government, and guidelines for public/private companies
participation in natural gas project development is prepared by the BPH MIGAS, the
natural gas infrastructure development projects will be growing significantly in Indonesia.
In the near future, (i) do we have adequate sources to finance the growing natural gas
infrastructure projects, (ii) what schemes of financing for public and private sector
participation in natural gas infrastructure development would be available/developed (iii)
how might the government/BPH MIGAS provides incentives to increase the
attractiveness of natural gas infrastructures development in domestic market? These type
of questions are being asked by business people, policy makers and regulators deal with
natural gas business in Indonesia.
This paper addresses project financing issues for natural gas infrastructure projects in
Indonesia, by describing our experiences in financing natural transmission and
distribution projects, analyzing to gain lesson from the experiences, and proposing a new
scheme for natural gas infrastructure financing for the future.
2
Overview of Indonesia’s natural gas industry structure and
infrastructure
2.1 General industry structure
Indonesian owns natural gas reserves of about 92.5 trillion cubic feet, ranks the 10th
of the world largest gas reserves (2003). The reserves are scattered around the
archipelago, with considerable of them can be found in East Kalimantan, North Sumatra
(Aceh), West Papua, and China Sea areas. The amount Indonesian natural gas reserves is
2
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
quite larger than those of oil. Indonesian natural gas production is relatively flat, from
8,674 MMSCFD in 1997 to 8,427 MMSCFD in 2003.
Gas exploration and production are carried out by PERTAMINA (the state oil and
gas company) and about 30 Production Sharing Contractors. Those activities are
generally managed by BP MIGAS - The Executing Body for Upstream Oil and Gas
Business. ExxonMobil, ConocoPhillips, Unocal, TotalFinaElf are among the PSC
companies working for natural gas exploration and production in Indonesia. Their
production activities are located in South Sumatra/Jambi, Aceh (Arun), East Kalimantan
(Badak, Bontang), Sulawesi (Sengkang, Donggi) and Papua (Tangguh). TotalFinaElf is
currently the largest gas producer in Indonesia with its production activities located in
East Kalimantan. ExxonMobil was a dominant producer, but its production is decreasing
naturally, for instance that in Aceh.
In the early stage of Indonesia’s natural gas development (1970s), the gas was
directed for export, as LNG. Indeed, Indonesia is still the largest LNG exporting country,
shipping the LNG using LNG tankers to Japan, South Korea and Taiwan, while the
Government is planning to ship the same natural gas commodity to China and USA in
near future. In addition to shipping LNG, the country also exports natural gas through
pipeline to its neighbors Singapore and Malaysia.
As Indonesia’s economy and demand for energy grow, however, the domestic
consumption for natural gas is increasing fast. The largest gas consumer in domestic
market currently is fertilizer and petrochemicals (9%, 2003). Electricity generation is
growing to be the largest consumer of natural gas in Indonesia. Substitution of natural
gas to oil in domestic market is actually very substantial in reducing Indonesia’s heavy
dependency on oil in its domestic energy mix.
In domestic market, the players for Indonesian gas industry comprise three major
groups: (a) gas producers, which are mainly the PSC companies, (b) gas consumers:
industry, fertilizer / petrochemical, electricity generations, etc., and (c) gas transporters.
Transportation to consumer areas, for a large part, is still being carried out by the gas
producers. PT PGN (the state-own gas company) is currently the major gas transporter
(transmission) and also serves as the dominant local distribution company (LDC) for
natural gas in Indonesia.
The natural gas industry in Indonesia is still dominated by PERTAMINA, who
operates an vertically integrated business in the oil and gas industry. PERTAMINA
operates LNG and LPG plants in Bontang and Arun and several other LPG plants in
Indonesia (in the same location with oil refining). The LNG and LPG transportation and
storages in domestic is also owned/managed by PERTAMINA. For quite a long time,
PERTAMINA also operates natural gas tranmisison pipelines.
Nevertheless, the PT PGN (the State Gas Company) PT PGN) has developed a
leading role in natural gas transmission and distribution activities, owns the longest
transmission and distribution pipelines in Indonesia.
Table 1 presents the structure, infrastructure and players in Indonesia’s natural gas
industry.
3
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
Table 1. Indonesia’s natural gas & LPG industry:
structure, infrastructure and player
Industry
Structure
Upstream
Production
Player(s)
PSC Companies,
Pertamina
Product/capacity/unit
Share
%
8,000 – 9,000 MMSCFD
PSC Companies
dominate production
activities
Downstream
production
Gas Processing
LNG
LPG
Transmission
& Distribution
Pipeline
Pertamina
Pertamina
30,1 million ton/year
105 million ton/year
Pertamina
PGN
480 km
800 km (transmission) + 2547 km
(distribution)
Pipe Pagerungan-Jatim
?
BP
PT Igas
Storage
LPG
Trade
Pertamina
Pertamina
PGN
Other players:
LPG Agent
LPG Tube Plant
SPBG (CNG)
SPBG (LPG)
SPBE
6 LPG depos
8 marketing units (UPMS)
8 branch, 1 aid branch, 1
transmission company
423 unit
5
28
18
44
Note
100
100
Plan:
- LNG Tangguh (BP)
and LNG Matindok
(Pertamina).
- LPG in Cilacap
Plan:
Gas transmission:
Sumatra – Java,
Trans Java, East
Kalimantan – Java.
100
Agents, filling
stations, tube plants
are mostly owned by
private companies,
cooperatives and
yayasan (foundation).
Source: compiled from Ditjen Migas, PGN & Pertamina, 2004.
2.2 Gas Pipeline Network
As a general rule, natural gas transportation requires higher technical standard and
thus higher costs than that of crude oil, oil products and coal. This fact due the natural
characteristic of gas, which in the gas phase is very difficult to transport. Gas needs to be
compressed to cryogenic temperature to increase its density, before transporting them in
LNG form. Gas must be compressed before transporting them using CNG ship/vehicle.
Gas can also be transported using pipelines and sent to storage before delivering them to
the end users. The existence of pipeline networks is very essential for transporting natural
gas from its sources to consumer centers.
Pipeline networks for natural gas transmission in Indonesia have been developed on
project per project basis and are not integrated yet. The total length of the existing
transmission pipeline is about 1,280 km. It is quite small compared to that of UK (18,400
4
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
km), the USA (about 450,000 km) or many other industrial countries. The networks can
be grouped into gathering lines (serve the flow of gas from gas fields/block stations to
gas processing plants / booster compressions) and sales lines (from gas processing plants
to gas consumers).
The gathering lines has been developed in line with the finding of gas fields, spread
out in Aceh, South Sumatra, East Kalimantan, Natuna and Java-Bali islands. The
diameter for these gathering lines ranges between 16” and 42”, with the approximate
length for each pipeline segments about 10-109 km and their capacities between 200 to
2000 MMSCFD. The gathering lines were developed in Java and Aceh areas since the
early 1
The developed sales lines are: Java Sea-Tanjung Priok/Muara Karang, CilamayaCilegon, Pagerungan-Gresik, Prabumulih-Palembang, Grissik-Duri, Natuna-Singapore,
Grissik-Sakernan, and Sakernan-Batam-Singapore. The PGN is currently developing
transmission pipelines from South Sumatra to West Java, and conducting a feasibility
study on a transmission pipeline connecting East Kalimantan, Central Java and West
Java. The development of gas transmission pipelines in Indonesia has been carried out
mainly by PERTAMINA, PSC Companies (for gathering lines), and either PERTAMINA
or PGN for sales lines. Table 2 shows the national natural gas transmission pipelines
networks.
3
Financing natural gas development projects
While upstream projects are financed by PSC companies, we in BAPPENAS deal
basically with downstream natural gas infrastructure projects. Our experiences in
financing natural gas projects can be categorized as follow:
(i) budget evaluation/allocation for policy studies, feasibility study, research, monitoring
and evaluation of gas projects. The activities are usually carried out by Ministry of
Energy (DG Oil & Gas and LEMIGAS in particular)
(ii) provide local budget for foreign sources funding in natural gas related projects (for
capacity building, feasibility, joint research, and natural gas transmission and distribution
projects). The main executing agencies for these activities are PT PGN and LEMIGAS.
(iii) active in seeking for (foreign) financing agencies to finance natural gas infrastructure
projects, especially transmission and distribution. The agency we serve so far is PT PGN.
Government of Indonesia’s budget allocated to natural gas projects since the first
REPELITA (1970s), as shown in its yearly DIP documents is quite small compared to
that of, for instance, rural electrification projects. 1 We may think that this due to low
priority given to gas projects development in domestic market during the 1970s-1990s
period.
1
DIP (Daftar Isian Proyek): a government of Indonesia’s document that shows list of
project activities and their budget, as a result of evaluation by executing agencies,
Ministry of Finance and BAPPENAS. BAPPENAS recently does not involve in
budgeting detail items of projects.
5
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
Table 2. Indonesia Natural Gas Pipeline
No
.
Pipe Name
Capacity
Diameter Length
(MMSCFD Location
(inch)
(km)
)
Remark
Gathering Line
1. Offshore-L. Seumawe
30
109
1,000
16 - 42
42
20 - 36
16 - 26
16 - 26
30 - 34
57
10 - 70
20 - 70
13 - 50
200 - 2,000
2,000
300 - 1,500
200 - 600
200 - 600
LNG Plant
LNG Plant/
Aceh
Industry
Kalimantan LNG Plant
Kalimantan Gas processing
West Java Proc. Platform
S. Sumatra To Sales Line
7. Muara Karang
8. Cilamaya-Cilegon
16 - 26
24
10 - 55
220
200 - 600
500
N. Java
W. Java
9. Pagerungan-Gresik
24 - 28
3 - 370
500 - 700
10. Prabumulih-Palembang 20 - 28
15 - 50
300 - 500
11. Grissik-Duri
28
550
700
12. Natuna-Singapore
13. Grissik-Sakernan
16 – 28
28
10 - 470
135
200 - 700
700
28
335
700
2.
3.
4.
5.
6.
OnshoreL. Seumawe/Arun
Badak-Bontang
Field-Badak-Bontang
Offshore-W. Java
Grissik Fields
Aceh
Sales Line
Offshore - T. Priok/
Sakernan-Batam-
14. Singapore
Power Plant
Industries
Power Plant/
E. Java
Industry
Power Plant/
S. Sumatra Industry
Duri Steam
Sumatra
Flood
Export/Power
S.China Sea Plant
C. Sumatra Transmission
Riau
Export/Power
Sumatra
Plant
Source: DG Oil & Gas
In the early 1990s there was a project to develop PGN capacity in managing natural
gas business, funded largely by the World Bank loans. This project was done in the same
line with natural gas distribution projects, located in several cities (Bandung, Medan,
Surabaya, Bogor, etc). Then, using our “pure Rupiah” 2 we allocate some budgets for
natural gas distribution projects, to expand the distribution networks. But the amount
was not significant enough. So far, PT PGN distribution network is only about 2,500 km,
scattered in several cities, serves only a few household costumers.
Our relation with PT PGN in these financing cases is as a mediator to seek for low
cost financing sources, using Government facility.
We usually deal with
multilateral/bilateral financing agencies such as The World Bank, Asian Development
Bank, European Investment Bank, and Japan Bank for International Cooperation (JBIC).
These agencies provide relatively low costs of money to Government backed-up projects.
2
Pure Rupiah: budget that comes from the Government of Indonesia revenues, without
any foreign sources (loan/grant).
6
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
PT PGN itself has to compensate for this Government service through the SLA
(subsidiary loan agreement) scheme.
The first natural gas project we consider as “big” is the Grissik-Duri transmission
project, that flow natural gas from fields in Grissik area to an enhance oil recovery (steam
flood) project in Duri, Sumatera. The project was the first transmission one owned by
PT PGN. The cost of the project was US$ 310 million. The lenders for the project were
ADB and EIB. After involving in Grissik-Duri projects, we move on other projects
financing such as Grissik-Batam and Batam-Singapore.
Table 3 provides a summary of natural gas transmission and distribution projects and
financial terms we involve.
We learn that, from our experiences, a strong proposal will be very important in
succeeding a project. Natural gas project proposals have to be competed with other
proposals come from other sectors. Lending agencies have their priorities in projects
financing, so that a merely good proposal sometime also not enough. Therefore, a
combination of good proposal (that show strong economic feasibility of the project and
“good opportunity” to submit the proposal) will be important in succeeding our natural
gas projects. Our experience in building capacity for natural gas infrastructure projects,
including to develop a sound natural gas projects proposal has been growing quite well
since we started to focus on downstream projects development about 15 years ago.
We are working to convince lending agencies that it is better to finance “a bundle” of
natural gas projects proposals than only a specific segment like we did so far. This
approach will give flexibility for parties, especially since we expect that the number of
natural gas downstream projects will be growing in volume in the near future.
4
Financing natural gas projects to come
It is anticipated that, as the master plan and regulation for downstream natural gas
development issued by the Government, demand for natural gas infrastructure projects
will be growing substantially. Then there is question who will develop such transmission,
distribution, or receiving terminal project? How to finance the projects and do we have
adequate financing sources domestically? The PGN itself will no longer a dominant
player. Even, as the company changed its status as a public company, the PGN will no
longer eligible for facilities as Government backed-up project.
Our study in BAPPENAS estimates that to 2010 there will be a demand of about 4 to
4.5 billion US$ for natural gas downstream projects, mainly for transmission lines. Due
to the characteristic of large investment costs, long construction period and lack
experience in building such kind of huge gas projects, however, there will be critical
challenges in project development and how to finance the projects.
7
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
Table 3. Natural gas (downstream) projects finance
No.
Name of Project
Year
1
W. Java Transmission
System
1978
2
Gas Distribution (Jakarta,
Bogor,
1986
L
(km)
200+
D
(inch)
$MM
Funding
Owner
28
120
Pertamina
Pertamina
34
IBRD
PGN
Medan)
3
Gas Distribution (Surabaya)
Loan Condition
i = 12 %, grace period: 5
years,
loan period: 15 years
1990
86
IBRD
PGN
i = 13 %, grace period: 5
years,
loan period: 15 years
4
Grissik-Duri Pipeline
1995
544
28
310
ADB, EIB
PGN
I = 15 %, grace period: 4
years
loan period: 20 years
5
Grissik-Singapore Pipeline
2001
478
28
415
ADB, EIB
PGN
I = 15 %, grace period: 4
years
loan period: 20 years
6
S.Sumatra-W.Java Pipeline
2004
520
28, 32
440
JBIC,
PGN
PGN
I = 0.95 % and 0.75 %;
grace period: 10 years,
loan period: 40 years
7
W. Java Trans & Distr
Expansion
8
E. Kalimantan - West Java
Pipeline
2005
120
PGN
Source: Bappenas, 2004.
Our study also shows that there are actually domestic resources of funding, come
from government budget, state company budget, banks and non-bank sources. These
funds can be complemented with bilateral/multilateral sources of funding.
The
government budget to be allocated to natural gas infrastructure projects is presently very
limited, since the government has to spend its budget to many other various projects. The
national banking fund allocated to infrastructure projects is also limited, but there is an
indicator that those fund will be growing. The potential non-bank sources are domestic
pension fund, insurances, and mutual fund. Maturity mismatch is still a problem we have
to solve in order for such sources of finance to be used for natural gas infrastructures
projects.
Another financing option for is by creating an infrastructure projects fund. The
government is now working on the creation/preparation for such kind of infrastructure
fund, although the first priority is not to be given to natural gas transmission/distribution
projects, but to other infrastructure projects such as toll road and housing. Although the
top priority is not for natural gas development projects, we are convincing that natural
gas infrastructure projects should be in a first batch of projects to be financed by such
8
Hanan Nugroho
INDOGAS 2005, the 2nd International Conference & Exhibition, Jakarta 17-20 January 2005
infrastructure fund. The reason is not only that company and traditional foreign sources
are limited, but also because the development of natural gas infrastructure will be very
beneficial to support Indonesia’s energy diversification policy. So far, the country
energy mix is very heavy dependent on oil, which is backed up by very expensive
government subsidy.
The proposal for giving high priority for natural gas infrastructure projects
(downstream) is mentioned in the Government Infrastructure Summit held
concurrently with this INDOGAS 2005 Conference.
References:
Nugroho, Hanan. 2004. Increasing the share of natural gas in national industry and
energy consumption: infrastructure development plan? Jakarta: Perencanaan
Pembangunan IX/3/2004, h. 20-33.
Nugroho, Hanan. 2004. Pengembangan industri hilir gas bumi Indonesia: tantangan dan
gagasan. Jakarta: Perencanaan Pembangunan IX/4/2004, h. 32-52.
Nugroho, Hanan, et all. 2004. Gas energy pricing in Indonesia for promoting the
sustainable economic growth. Proceeding: The 19th World Energy Congress &
Exhibition, Sydney, 5-9 September 2004.
Nugroho, Hanan. 2004. Percepat infrastruktur untuk mendongkrak pemakaian gas bumi.
Koran Tempo, 30 November 2004.
9