Publications

Gas pricing issue continues to become a sensitive matter for decision makers in developing countries, including Indonesia, where the government’s subsidy is still in place. In pricing the energy, the government has been reluctant to determine the gas price that reflects the economically necessary cost to make gas available from below the ground to the market, because of its concern on the adverse effects on the electricity pricing, industrial competitiveness and household capability that may cause social and political unrest. However, the low gas prices which do not reflect the economic value of each gas fields as the result of a regulated market have discouraged the upstream business players to invest in exoploring and developing new gas resources and facilities, which are required not only to replace the reserves decline but also to increase growth in gas production. As the cost to explore, develop and operate upstream facilities is inflated, in parallel with the increase of the upstream materials and services costs, the presence of gas pricing policy that ignores the economic gas price may result in the scarcity of gas supply availability. At one tipping point, decreasing gas supply will not be able to match increasing gas demand, resulting in either importing LNG or fuel oil imports. Such condition will lead to higher energy spending which will increase the electricity prices, reducing industrial competitiveness and household capability. This situation will trigger an economic inflation, which may lead into social and political repercussions in the longer term. More and more countries are targeting to increase gas ratio in their targeted energy mix policy, as the gas demand will keep growing. In the context of Indonesia, the government sets a target to use 22% gas for its total primary energy consumption by 2025 (from 21% in 2013) and then further increament up to 24% in 2050. The steady growth of gas demand, the natural decline of gas production rate, and the inflated cost of producing domestic gas are the main dilemmas that any increase in gas price will serve as a huge relief to the upstream business to maintain a sustainable gas production to fulfill the gas demand. This paper addresses the need to ensure a sustainable supply of gas at a reasonable price by establishing a business to business approach to determine gas price that supports the economics for both parties which will nurture a fair business environment that attracts significantly adequate investment in the upstream gas business.