Gas Development Master Plan Scenarios for the GDMP Capacity Building Workshop Bali, 1-2 July 2013

2 Contents 1.Why scenario analysis? 2.Setting up scenarios 3.What are Government policies? 4.The proposed policy scenarios 5.Comparing scenarios

3 1. WHY SCENARIO ANALYSIS?

4 Why scenario analysis? We are using DASS-TIM to identify the optimal gas transportation infrastructure investment plan assess the impacts of alternative policies on gas market growth, government revenues and economic benefits to Indonesia To do so, we need to be able to test the robustness of the infrastructure investment plan to changes in demand-supply conditions test how different policies impact on the gas market Scenario analysis is the tool we use for this purpose

5 Selecting scenarios There are potentially thousands of different scenarios that we could analyse This would clearly be excessive Instead, we want to identify 4-6 plausible policy scenarios that we can investigate using DASS-TIM This session looks at possible scenarios, as a basis for discussion

6 2. SETTING UP SCENARIOS

7 Major input variables SUPPLYDEMAND ProductionPower sector demand All years Base / Low / High case Average PSC take -- Income elasticity ExportsOther demand All years Existing commitments New commitments World market gas prices DMO (export or domestic priority) Base / Low / High case Income elasticity Price elasticity Domestic gas price growth

8 How demand is projected Demand growth =income elasticity x GDP growth + price elasticity x domestic price gowth For example, assume income elasticity = 1.2 price elasticity = -0.4 GDP growth = 6% domestic price growth = 10% Demand growth = 1.2 x 6% * 10% = 3.2%

9 Historic elasticities in Indonesia But, these are not necessarily a good guide to the future! Historically, supply constraints mean demand cannot be met We are modelling unconstrained demand

10 Setting up policy scenarios Demand Select base / low / high cases for non-power demand to 2025 Input income elasticity by sector Input domestic price growth Supply Select whether priority to exports or domestic demand Input any new export commitments Input export prices and DMO price Input government PSC take

11 Modelling example government policies Increasing the use of gas in transport select high demand case (to 2025) input a higher income elasticity (after 2025) Applying the Domestic Market Obligation select priority to meeting domestic demand reduce future export commitments input DMO price and any resulting changes to domestic price growth Encouraging development of marginal fields select high production case reduce government PSC take to represent incentives

12 3. WHAT ARE GOVERNMENT POLICIES?

13 Government targets for gas in the energy mix Gas to be 19.7% of the energy mix by 2025 (draft National Energy Policy) down from 20.1% in 2011 previous target was 30% (Government Regulation 05/2006) the reduction reflects the switch from gas to coal for future planned generation capacity on the Java-Bali grid Implies increase in gas market from 3,120 mmscfd to 7,620 mmscfd (6.6% annually)

14 Role of natural gas in the energy mix Substitute natural gas for diesel and fuel oil in power generation reduce electricity subsidies conversion of existing dual-fuel plants natural gas (LNG and CNG) seen as particularly suitable for smaller-scale generation in Eastern Indonesia Substitute natural gas for petroleum products in transportation and residential use reduce fuel subsidies CNG and mini-LNG for transport, piped gas for residential

15 Gas demand based on energy mix targets? By 2025 transport demand represents one-third of all gas demand gas is 26% of total transport energy demand (~560,000 vehicles) Industrial gas demand grows at average Power sector gas demand from PLN RUPTL (2021) Total transport energy demand grows at average

16 National gas utilisation policy (MEMR Decree 03/2010) I.Prioritise gas for domestic needs II.Prioritise new discoveries to meet local needs III.Prioritise utilitisation of domestic gas 1.Supporting increased oil and gas production 2.Meet the needs of fertiiser plants 3.Meet the needs of power generation 4.Meet other industry needs Increasing allocation to transport over period to 2025

17 Gas pricing policy Gas prices being increased towards parity with LNG imports (power, fertiliser) and alternative fuels (industry) makes supplying the domestic market more attractive for producers reduces the potential price shock if large-scale LNG imports start

18 Questions to consider Are incentives for producers consistent with growing the domestic market? increasing domestic prices makes the market attractive but what are the implications for the market’s size? Is natural gas competitive with petroleum products? if not, then growing the transport and residential markets requires lower prices or new subsidies

19 Competitiveness of gas in transport

20 And, of course……. Export or import? Is it better to maximise export revenues and use these to promote domestic economic and social development? Or to use gas domestically and use this to promote the development of value-added industries?

21 4. THE PROPOSED POLICY SCENARIOS

22 Proposed policy scenarios 1.Business-As-Usual (BAU) 2.Accelerated Current Policies 3.Green Growth 4.Domestic Market Growth 5.Export Market Growth

23 Business-As-Usual Key features Existing policies continue unchanged Push to increase gas use in transportation Gas in power sector largely used to supply smaller grids in East Indonesia (little growth in demand post-2021) Gas prices continue to increase over time Model inputs Priority to domestic market supply High growth in transportation market (high income elasticity) Other non-power income elasticity based on historic values Low income elasticity in power sector demand post-2021 Gas prices increase to LNG import parity by 2023 (10 years)

24 Accelerated Current Policies Key features Speed-up of current policies Major push to increase gas use in transportation and residential uses Rapid increase in gas prices to import parity levels Model inputs Priority to domestic market supply Very high growth in transportation market (very high income elasticity) Gas prices increase to LNG import parity by 2018 (5 years)

25 Green Growth Key features Emphasis on the use of gas to reduce emissions Major push to increase gas use in transportation and residential uses Gas becomes favoured technology for new power generation post-2021 Model inputs Priority to domestic market supply Very high growth in transportation and residential markets (very high income elasticity) High income elasticity for power sector demand Gas prices increase to LNG import parity by 2023

26 Domestic Market Growth Key features Emphasis on increasing the domestic market for gas Primary focus is industrial demand Construction of distribution infrastructure and slower price increases Model inputs Priority to domestic market supply Very high growth in transportation and residential markets (very high income elasticity) High income elasticity for power sector demand Gas prices rise to LNG import parity by 2033 (20 years)

27 Export Market Growth Key features Emphasis on maximising exports Reduced emphasis on domestic market growth Incentives to gas producers to increase supply Model inputs Priority to export market supply High production case and lower fiscal take BAU elasticities for domestic market Gas prices rise to LNG import parity by 2018

28 5. COMPARING SCENARIOS

29 Comparing scenarios – DASS-TIM outputs Gas infrastructure investment costs (processing and transportation) Government revenues from PSCs Economic benefits of gas displacing other fuels (difference between fuel cost and gas cost) Carbon emissions

30 Comparing scenarios - other considerations In comparing scenarios, the following will also need to be considered Changes in subsidies reductions in subsidies for petroleum products may be offset by need for subsidies for use of gas in transportation and fertiliser Costs of developing gas distribution infrastructure (DASS- TIM only looks at transmission between regions) required for promotion of industrial, residential and transportation demand

31 What we can’t compare - employment Unfortunately, we can’t model employment generation in the wider economy. Doing so requires a full Input – Output model of Indonesia But we shouldn’t automatically assume that developing the domestic market will increase net employment raising gas prices to make the domestic market attractive also raises domestic industry costs, reducing demand for their products government spending from increased export revenues will generate employment through higher incomes and demand for goods and services