1. Gas Development Master Plan Steering Committee Meeting – 28 March 2013 Draft Policy Note 4 : Policy Support for the Development of Domestic Gas Markets

2. 2 Coverage of the Policy Note Developing the domestic gas market requires large upstream, midstream and downstream investments Financing these requires committed, long-term, reliable demand from downsteam ‘anchor’ customers as well as increases in domestic gas prices We have reviewed the impacts of current government policies on the ability to finance the necessary investments – Allocation of gas supplies – PLN as an anchor customer – Promoting natural gas use by transport – Transportation third party access (TPA)

3. 3 Allocation of gas supplies The current priority allocation to fertiliser and power generation creates disincentives for upstream developers – increasing gas prices to these uses pushes up subsidy requirements – therefore, we expect pressures to keep gas prices low for sales to fertiliser production and power generation – in turn, this reduces the attractiveness to upstream developers of sales to the domestic market The allocation policy also appears to be ineffective – both PT Pupuk Indonesia and PLN complain of a lack of reliable gas supplies Our initial analysis suggests that additional revenues from increased domestic gas prices would offset increased subsidies (for fertilisers at least)

4. 4 Gas prices and fertiliser subsidies

5. 5 PLN as an anchor customer PLN’s current plans are for little new base-load gas generation, in response to concerns over the lack of reliability of supply – “gas supply to PLNs existing power plants is not secured, and getting more critical in the longer-term“ (PLN, IndoGAS 2013) – of 6.7GW of planned gas-fired capacity in the RUPTL, 4.3GW is in the form of gas turbines using LNG and CNG to provide peaking capacity and serve isolated networks New power generation, therefore, seems unlikely to provide significant anchor load There is potential anchor demand from switching existing GTs and CCGTs from diesel and fuel oil to gas (~550 mmscfd)

6. 6 Planned PLN gas demand (RUPTL)

7. 7 Promoting natural gas use in transport Current pricing differentials appear insufficient to encourage switching to CNG Increasing these differentials requires either increasing Premium prices (but this removes much of the rationale for promoting switching), or reducing CNG prices The implication is that there will be further pressure to reduce gas prices for sales to the domestic market, and as a result lower incentives for upstream development

8. 8 Fuel switching incentives compared

9. 9 Transportation third party access Current regulations appear to work reasonably well, with multiple users of many pipelines There is a lack of clarity over how utilisation is measured and whether ‘use-it-or-lose-it’ requirements apply Current tariffs reduce with pipeline use. The result is to create a perverse incentive for third parties to access the most heavily-used pipelines

10. 10 Recommendations Government should consider dropping the existing priority allocation for domestic gas supplies and allow price to dictate allocation (after a transitional period) A review of the consistency of PLN’s planning policies against policy for the domestic gas market is desirable We question whether current pricing can support a market for gas in transport. We recommend this policy is further reviewed and the wider implications for the gas industry considered in more detail We have minor recommendations for enhancements to the TPA regime. These include introducing use-it-or-lose- it provisions and amending the tariff methodology