Gas Development Master PlanScenarios for the GDMP

Capacity Building WorkshopBali, 1-2 July 2013

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Contents1. Why scenario analysis?

2. Setting up scenarios

3. What are Government policies?

4. The proposed policy scenarios

5. Comparing scenarios

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1. WHY SCENARIO ANALYSIS?

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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

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Selecting scenariosThere 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

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2. SETTING UP SCENARIOS

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Major input variablesSUPPLY DEMAND

Production Power sector demand

All years 2013-20 2021+

• Base / Low / High case

• Average PSC take

-- • Income elasticity

Exports Other demand

All years 2013-25 2026+

• 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

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How demand is projectedDemand 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% - 0.4 * 10% = 3.2%

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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

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Setting up policy scenariosDemand• 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

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Modelling example government policiesIncreasing 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

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3. WHAT ARE GOVERNMENT POLICIES?

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Government targets for gas in the energy mixGas 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)

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Role of natural gas in the energy mixSubstitute 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

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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 2000-11 average

• Power sector gas demand from PLN RUPTL (2021)

• Total transport energy demand grows at 2000-11 average

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National gas utilisation policy (MEMR Decree 03/2010)

I. Prioritise gas for domestic needsII. Prioritise new discoveries to meet local needsIII. Prioritise utilitisation of domestic gas

1. Supporting increased oil and gas production2. Meet the needs of fertiiser plants3. Meet the needs of power generation4. Meet other industry needs

Increasing allocation to transport over period to 2025

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Gas pricing policyGas 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

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Questions to considerAre 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

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Competitiveness of gas in transport

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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?

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4. THE PROPOSED POLICY SCENARIOS

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Proposed policy scenarios1. Business-As-Usual (BAU)

2. Accelerated Current Policies

3. Green Growth

4. Domestic Market Growth

5. Export Market Growth

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Business-As-UsualKey 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)

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Accelerated Current PoliciesKey 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)

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Green GrowthKey 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

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Domestic Market GrowthKey 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)

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Export Market GrowthKey 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

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5. COMPARING SCENARIOS

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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

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Comparing scenarios - other considerationsIn 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

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What we can’t compare - employmentUnfortunately, 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