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Interview

with Andy Sommeng, Chairman, BPH Migas

15.06.2012 / Energyboardroom

BPH MIGAS is the institution at the center of the energy industry’s refocusing on supplying the domestic market. How do you see this transformation and the role of the institution?

Indonesia has always faced the challenge of making its oil and gas sector competitive and an attractive destination for foreign investors. Prior to law No. 22 in 2001 concerning the oil and gas industry, the Indonesian oil and gas industry was vertically integrated with Pertamina responsible for almost everything in upstream to downstream as well as regulation. The rationale behind the law of 2001 was to unbundle the industry vertical, liberalizing the sector and minimizing the role of the government in oil and gas. One part of the law saw the duty of downstream regulation being handed over to BPH MIGAS. The purview of BPH MIGAS now concerns all elements of distribution including refining, transportation, purchasing and storage. Over the last decade or reformation, Indonesia has pushed to further liberalize its business models and BPH MIGAS has played its part in facilitating new players to participate in Indonesia’s downstream sector.

In 2012, Indonesia is at a crossroads whereby stakeholders have different opinions on how to interpret Indonesia’s oil and gas laws. Some believe that the law of 2001 was too liberal as it left elements of the supply chain too open to investment from international and non-state players. Others, including myself, think that the law has been highly beneficial in providing separation between upstream and downstream activity. However, as a consequence, I foresee that there is a good chance that this law will be revised in 2012 and new roles in the regulation of the sector may be assigned.

Regarding the direction of government strategy, the promotion of downstream investment is a necessity given the growing demand in the country. Past supply shortages on the Island of Java is driving Pertamina, PLN and PGN to construct FSRUs. Having supply shortages in Indonesia is ironic when you consider that Indonesia is still one of the largest LNG exporters in the world. We need these energy resources to be diverted back to Indonesia.

At the same time, Indonesia must take note that its export markets are changing. 55% of Indonesian gas production is currently exported through long term gas contracts with client states such as Japan, Korea, Taiwan etc. This would not be a problem except for the fact that LNG is becoming a spot market. Singapore is not constructing one of the largest LNG terminals worldwide in recognition of this. Given this export picture, it makes further sense to divert gas to drive the domestic economy.

How will you make the domestic market attractive to investors?

The first step is to provide industry with legal certainty and proper law enforcement. Without these elements, investors will not want to come to Indonesia. The next step is to create an attractive pricing for the domestic market as investors think of the returns they can achieve from supplying the domestic market.

There is no current regulation concerning natural gas pricing, except in the case of LNG where there are 2 or 3 energy prices. In the future, Indonesia will have to find a pricing mechanism which is simultaneously acceptable to the investor and the market. Naturally this is a difficult balance to strike but Indonesia can benchmark certain countries such as France and the UK where there are regulatory bodies like GDF and Ofgem.

Indonesia will need to make sure that households, industry, transpiration and small and medium sized enterprises (SMEs) all have a price which is appropriate for them. Industry should be able to pay the same prices as the global market but households and private transport users cannot pay such prices. Within this pricing mechanism, we should also look to promote gas because it is a cleaner fuel and good for the environment. Gas subsidies should be given to householders and car owners (especially given that transportation is the biggest CO2 emitter).

How difficult is it to convert the market to accept these changes?

This falls firmly under the responsibility of the government which is there to use the tools at its disposal: television, radio, advertising boards etc. to socialize the population into accepting new forms of energy and new pricing. It is also important that Indonesians change their attitude towards ecology. In countries like those in Scandinavia for example, ecological practices are part of everyday living. For example, if they buy batteries then they will bring their old ones in for recycling and replacement. This is the type of socialization required in Indonesia to help the country develop a sustainable energy future.

How do you see investment in Indonesia’s downstream evolving?

I am happy to say that now we are observing an increase in the number of companies involved in Indonesian distribution including storage, transportation and gas stations. At the moment there are 4 companies distributing subsidized fuel: Pertamina is currently responsible for 95% of distribution but Petronas, AKR and SPN are also involved in distributing the remaining 5%. Over the next few years, I predict that the number of investors becoming involved in Indonesian distribution will increase. Indonesia is providing a strong destination for investment particularly since its investment grade has just been increased. Of course, BPH MIGAS’s core role is to secure the distribution of energy to the people of Indonesia and the more companies involved in fuel distribution the better it is for supplying this market. It is therefore a trend we warmly welcome.

Furthermore, new developments in Indonesia’s energy matrix create new opportunities. By 2025 Indonesia’s energy matrix will depend not just on oil and gas but nuclear, coal, geothermal, wind, wave, and solar energy. Indonesia needs as many specialist companies who can provide these new forms of energy to consumers as possible.

The geographical demand profile of Indonesia is also changing. Currently 60% of Indonesia’s energy consumption comes from Java and Bali, with around 30% from Sumatra and only around 10% from the East of Indonesia. However it is these Eastern regions that are experiencing the fastest economic growth and they will need an increasing percentage share of Indonesian energy supply. The tourism industry is growing fast in the East of Indonesia and they are a focus for development. Energy infrastructure investment in these regions is therefore another opportunity particularly in gasoline storage. In West Papua the fuel price is 10 times that of the subsidized price on Java: 25-30,000 rupiah as opposed to 4,500 rupiah per liter. Considering that the Java market is more or less saturated, the key opportunity for revenue growth is in the East.

What would you say were your key projects at the moment?

BPH MIGAS is currently engaged in discussions with MIGAS, BP MIGAS, Pertamina and PGN regarding the implementation of key infrastructure developments under Indonesia’s Master Plan. The Trans-Indonesia pipeline was a project that has been central to gas distribution in Java but the plan is currently being revised to take into account new gas production such as that from the Masela Block and whether this gas will be transported by pipeline or LNG shipment. We also need to divert West Natuna gas to Java at an estimated cost of 77 trillion rupiah of $84 million.

Indonesia also requires better refineries and projects are underway to construct 3 new refineries producing 250,000 barrels per day. It is much better for the government to invest in the construction of refineries than to continue importing fuel because of the value added activity created by refineries if only by providing employment and creating security of supply in Indonesia. It does not matter if these refineries are constructed by state or private companies. In the case of Singapore, it is private companies who have been responsible for the country’s impressive refining capacity. Indonesia also needs fuel storage and depots in the East of Indonesia. Therefore I would say that there are many projects in the pipeline, not just one and in 2012 Indonesia has only just begun to promote investment in this downstream value chain.

You took the position as head of BPH MIGAS a couple of months ago following 8 years of your predecessor. What can the industry expect from your leadership of this organization?

I have a simple vision which is to create energy security for Indonesia and facilitate the growth of the economy. This will require increased investments in many aspects of the value chain and the creation of a strong domestic market which is both attractive for investors and affordable for the population. Within this mission one of the most important tasks will be changing the minds of the people. Many Indonesians still consider the country to be rich in terms of oil and gas. My response to this is to quote Mr. Habibie, the former President of Indonesia who said in 1986, “Indonesians should change their mind-set concerning oil and gas, Indonesia has very limited oil and gas resources when compared with the population of Indonesia. Indonesia must therefore act creatively and be innovative”. What we require now is wisdom in our energy policy.

What would be your final message to international investors?

Indonesia is a beautiful country and the third largest democracy in the world. It is therefore an attractive and stable environment for business and there are many opportunities for investors to assist in Indonesia’s rapid evolution towards becoming a highly developed country.

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