Indonesia produces around 5.3 billion SCF of gas daily. Around 68% of its produced gas is sold to domestic users in the form of pipeline gas and LNG.
Currently, around 30% of its produced LNG is sold to domestic users and the rest is exported.
Indonesia wants to increase the use of LNG to provide the gas needed for domestic use. However, the current prices of LNG for the domestic market are considered too high by consumers as they are around $6 per MMBTU higher than the gas delivered via pipeline. The current oil indexation pricing of LNG is also considered unfavorable to consumers as the prices can escalate drastically.
What should be the price of Indonesia’s LNG for domestic sales?
This article provides a thorough analysis of the current gas and LNG prices for sales in Indonesia including the pricing policy, and a suggestion for reducing the price gap between LNG and pipeline gas.
CURRENT PRICES OF GAS AND LNG IN INDONESIA
Figure 1 – LNG and gas prices in Indonesia
Currently, there are big gaps between LNG prices and the downstream gas prices paid by gas consumers in Indonesia. As the country wants to increase the use of LNG to support the gas market, it should find a pricing mechanism to reduce those gaps. Otherwise, all LNG, either from domestic or international sources, will find it hard to find buyers in the Indonesian gas market.
The LNG costs shown in the graph are the landed prices at the receiving terminal plus applicable import duties/taxes of around 17% and regasification costs of around $2.5 per MMBtu. Downstream pipeline transportation fees are note included here.
The downstream gas market in Indonesia has several gas price layers:
- Prices of gas fixed by the government for Household and Prioritized Industries – $5-6 per MMBTU.
- Gas Market served via downstream pipelines by PGN (Perusahaan Gas Negara) – $6-9 per MMBTU.
- Gas from LNG supplied by Nusantara Regas FSRU to PLN power plants in Muara Karang and Tanjung Priok – $9-12 per MMBTU.
LNG PRICES FROM 2017 – 2027
Figure 2 – LNG and gas prices from 2017 – 2027
Figure 2 shows how LNG prices moving along the Indonesian gas prices and their price spread from 2017 to 2027. The period includes the event of Covid-19 when oil prices dropped below $50 per barrel and the Russia-Ukraine conflict when oil prices climbed above $80 per barrel.
As the graph shows big swings in the price spread between domestic LNG and gas due to international events. It reached $10 per MMBTU during the onset of the Russia-Ukraine conflict.
The graph also shows the domestic LNG supply is still the cheapest option for Indonesia while US LNG could bring better prices at times.
A NEW LNG PRICING MECHANISM FOR DOMESTIC USAGE
Figure 3 – LNG cost-pass-through illustration
It will be difficult for LNG to play a big role in supporting the growth of Indonesia’s gas market with the current LNG pricing scheme. As the need for gas will continue to grow, with all existing regasification terminals in Jakarta, Lampung, and Arun as well as future additions, the gas market can double in size if the LNG price is priced correctly.
So, is there a way to change or adjust the LNG pricing mechanism for domestic sales, and at the same time keep sufficient return on investment for all involved parties?
Is it possible to reduce the net cost of gas derived from LNG to consumers to around $6-9 per MMBTU, the price that is within the paying capability of domestic users?
Cost-Pass-Through LNG Pricing
One solution is to apply the concept of a “cost-pass-through pricing mechanism” instead of oil indexation.
To illustrate this concept, the Badak LNG plant in Bontang is used as a study case.
The Badak plant is chosen for discussion because it is fully depreciated as it has been in operation since 1978, and due to its strategic location, it easily covers the entire part of Indonesia within 2,000 nautical miles.
The followings are best-estimate cost component figures used to calculate the Cost-Pass-Through price of LNG for long term or medium-term domestic sales and purchases. All these numbers meet the required project returns of each party.
- Upstream gas cost in the form of a fixed number with an escalation factor subjected to governmental approval. For the case of Badak LNG, as there is no more cheap gas available, the upstream gas is assumed at a fixed cost of USD 4.5/MMBTU
- LNG production cost, covering the operations & maintenance cost is fixed at USD 0.50/MMBTU
- Shipping cost, a fixed cost of USD 0.5/MMBTU based on a fixed Time Charter Rate for long term or medium-term contracts.
- Trading margin at USD 0.40/MMBTU
- Regasification cost, averaging a fixed cost of USD 2.5/MMBTU among existing regassification terminals.
Based on these figures, the total cost of gas derived from LNG applying the cost-pass-through concept is around $8.4 per MMBTU. This is within the price range of $6-9 per MMBTU.
In conclusion, unlike the existing oil-indexed LNG pricing formula for domestic sales, in this “cost-plus-through” scheme all cost components in the LNG pricing are fixed numbers. This is good and fair for Indonesian gas consumers because the supply is sourced within the country and the costs are not affected by any geopolitical risks and fluctuation of international energy references like oil prices.
When the gas derived from LNG produced from big plants like the Badak plant could be delivered below the USD 9/MMBTU level, it will certainly boost the demand for gas in Indonesia especially in its remote areas.
Nisi Setyobudi
July 4, 2023
Good sharing….