Indonesia to Limit Natural Gas Exports

Rising economic nationalism claims another industry

In another example of Indonesia’s growing protection of its natural resources, a government official announced on July 4 that Jakarta is considering a moratorium on the signing of new contracts for natural gas exports.

Evita Legowo, director general for oil and gas with the Energy and Mineral Resources Ministry, told reporters that while gas exports generate income, using it directly for domestic purposes would have “multiplier effects” that boost local industries and the national economy.

“We do have a plan to do that, but we still have to pay attention to the economic aspects of the development of this plan in the field,” Legowo said in a text message to the news portal bisnis.com.

At the moment, according to the U S Energy Information Agency, Indonesia possesses abundant natural gas and uses less than half of its annual production of 2,917 billion cubic feet domestically. With reserves of 106 trillion cu ft, the country ranks 13th in the world in stocks.

Only 1,460 billion cubic feet of gas is currently being used domestically. And, while plans to use more natural gas at home may sound attractive, implementation of those plans will probably be far from easy because they involve major changes in the country’s infrastructure as well as in vehicles to modify them for natural gas use rather than the current diesel and petroleum.

The decision to impose a moratorium would also run at cross purposes against intensive efforts by Association of Southeast Asia nations to foster energy cooperation among the members, as laid out in the ASEAN Plan of Action for Energy Cooperation 2010 – 2015, which envisions enhancing energy security and sustainability via the ASEAN Power Grid, the Trans-ASEAN Gas Pipeline and other policies.

The latest move to curtail exports represents a sharp turn away from the country’s previous export-oriented philosophy. Indonesia is the world’s largest exporter of thermal coal, one of the largest producers of tin, third biggest of copper and exports significant amounts of bauxite and nickel. It is also the world’s largest exporter of palm oil. The province of Papua boasts the world’s biggest gold mine, operated by a foreign company.

However, over the past year the government has been steadily moving away from its orientation towards exports, particularly in extractive resources, growing more protectionist and nationalistic.

With a booming domestic consumer economy, the feeling among government leaders and some members of Kadin, the Indonesian Chamber of Commerce – although there are sharp splits in philosophy – is that the country can go it alone rather than become more closely interlocked with the world’s trading economy. Indonesia’s gross domestic product might fall somewhat because of the lack of export earnings, the thinking goes, with growth slipping to perhaps 4 percent, but domestic suppliers would end up owning the means of production.

In particular, the government recently enacted a presidential decree dictating that foreign mining concerns must divest 51 percent of their shares to Indonesian entities, so that within 10 years of the commencement of commercial production, the foreign operator would become a minority shareholder.

A more problematical issue is that export ban on unprocessed ores would not only reduce forex earns, but it is questionable whether the added value from processed and refined mineral exports will materialize. The smelters have to be built first, and they have to be efficient enough to compete on the world market. Indonesia tried this tack in the 1980s with a ban on unprocessed timber that went into full effect by 1985. The initial consequence was chaos. The government implemented a log export tax in 1979, and began phasing in a ban on raw timber exports in the early 1980s. By 1985, the export of unprocessed timber was banned entirely. The number of wood processing factories has increased tenfold from 16 in 1977. The country by 2006 had become the world’s ninth-largest producer of pulp and paper, although the ownership and the profits migrated into the.bank vaults of timber tycoons close to then-strongman Suharto. It is hard to believe that won't happen again.

There are also plans afoot to limit foreign ownership in national banks. Exports of raw rattan were banned in January, There is rising sentiment for trade barriers in cars, textiles and electronics to protect domestic industries from competition.

The call for the moratorium appears to have originated with the Golkar Party, headed by Presidential candidate Aburizal Bakrie, one of the country’s richest men and whose Bakrie family of companies is one of the biggest producers of thermal coal and other natural resources.

“We from the Golkar Party faction ask the government to immediately announce a moratorium on gas exports, so that we can use the gas for domestic needs,” Golkar lawmaker Zainudin Amali told reporters recently.

Another Golkar lawmaker, Dito Ganinduto, insisted the moratorium is necessary to support the government’s recently relaunched campaign to use alternative gas-based fuel rather than petroleum and diesel for vehicles.

The country began exporting natural gas via pipeline in 2001 via a 400-mile subsea conduit from its West Natuna field to Singapore. A second pipeline was opened in 2006 to deliver natural gas to the island republic over a 20-year period. Jakarta has played a leading role in discussions of a proposed “Trans-ASEAN Gas Pipeline” that envisions the establishment of a transnational pipeline network linking the major natural gas producers and consumers across Southeast Asia. It remains to be seen, given the current mood in Jakarta whether that The TAGP concept was initially proposed in 1997 as part of ASEAN’s “Vision 2020” initiative. In July 2002, energy ministers from the ASEAN countries signed a memorandum of understanding to study the viability of the project, although much work remains to be completed to fully realize the project’s goals (for more information, see ASEAN’s Plan of Action for Energy Cooperation, 2004-2009).

Antara, the Indonesian state-owned press service, said recently that four new large-scale gas fields are expected to begin operating in the coming years, including a Chevron Indonesia offshore field, the Inpex Corporation-run Masela block, the British Petroleum-run Tangguh project, and Pertamina-run East Natuna block.

In the meantime, Shell is asking the government for permission to accelerate development of its Indonesian operations, including building a LNG floating plant that is expected to produce 6 million tonnes per day. The Floating Storage and Receiving Terminal (FSRT) for extraction and storage of LNG is expected to commence construction in 2013 and be completed in 2019.

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