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IPA10-BC-151
PROCEEDINGS, INDONESIAN PETROLEUM ASSOCIATION
Thirty-Fourth Annual Convention & Exhibition, May 2010
DOMESTIC – EXPORT GAS SUBSIDY : AN INCENTIVE MECHANISM TO OPTIMIZE
GOVERNMENT AND CONTRACTOR SHARE
Taufik R. Sidik*
ABSTRACT
One of current important issues in Indonesia oil and
gas industry is monetize undeveloped gas reserves.
Many factors influence the gas monetization
process, that are, gas reserves size, gas marketing
target, gas development costs, infrastructure
availability, field economics, development
technology, buyers availability, domestic or export
target and government/contractor share
optimization.
A major issue in Indonesia oil/gas industry is
declining oil production reduce oil government
revenue, but in the other hand, government need
money for national development.
Oil government revenue still play important role to
the state national budget although current oil
reserve is lower than gas reserve.
Government should make any efforts to formulate
national gas policy with the objective to optimize
government revenue from existing gas reserve (both
developed and undeveloped gas). National gas
policy should focus on gas pricing and gas
utilization to optimize potential high government
revenue from existing gas reserves.
National gas policy should also be directed to
balance gas government revenue and benefit to the
country, balancing gas allocation to domestic and
export market which able to optimize government
revenue.
National gas policy framework focus on following
areas:
1. Gas government revenue optimization:
optimize government revenue from existing gas
reserve, and accelerate gas monetization
approval process of undeveloped reserves.
2. Balancing government and contractor
objectives : government and contractor
* PT. Medco E&P Indonesia
objectives alignment, use win – win solution
approach, and ensure contractor investment
return
3. Gas supply : increase national gas supply,
sustainable gas supply, gas production
optimization and accelerate unconventional gas
development.
4. Gas Utilization : portfolio energy efficiency,
energy diversification and energy conservation
5. Gas Allocation : focus on government revenue
optimization, optimize field development
economic, domestic vs export allocation, and
infrastructure availability
6. Gas pricing : gas price based on consumer and
producer agreement, optimum field economic
gas price and attractive to investor.
Government should have a clear and strategic
planning to increase gas sales volume (both export
and domestic sales), defining gas pricing policy,
managing gas allocation to domestic market and
export, managing gas utilization with other energy
sources such as geothermal, coal etc.
Existing fiscal terms review is also needed to
increase government and contractor revenue.
In monetizing undeveloped reserves, field
development economic play an important role. The
contractor will develop gas field project if economic
return target achieved. Gas field development
project postponed until economic return target
achieved. Current gas field development constraint
is low domestic gas price which is caused by
domestic gas buyer ability.
This paper discuss an incentive mechanism between
domestic gas and export gas to optimize gas
government/contractor revenue.
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METHODOLOGY
The main purpose of national gas pricing and gas
allocation is to maximize government and
contractor revenue as well as accelerate
undeveloped gas monetization. Some constraints in
monetizing undeveloped gas reserves are low
domestic gas prices, buyer’s purchasing power,
domestic gas allocation and gas regulation which
result in uneconomic field development, therefore,
gas monetization postponed until economic target
reached.
The gas price of both domestic and export should be
based on buyer and seller agreement instead of
determined by government.
In regard to energy portfolio, government should
consider energy utilization priorities. Energy
utilization based on energy resources nearby and
gas utilization is the last priority due to gas scarcity.
Gas for domestic market also should be valued at
higher price to attract investor to monetize
undeveloped gas fields. Higher domestic gas price
will increase economic indicator target, so that
government determine minimum domestic gas
price. All domestic gas should be sold at least at
minimum domestic gas price. If buyer’s purchasing
power is lower than minimum domestic gas price,
government will give subsidy to domestic gas
producer for the gas price difference.
Domestic – export gas subsidy is a subsidy between
export gas producers to domestic gas producer. Gas
subsidy is given by the export producer to domestic
gas producer with the following mechanism:
1. Gas producer sell the gas to domestic or export
market based on optimum economic return to
government. No government limitation to gas
producers
2. Domestic gas price is based on agreement
between domestic gas producer with the buyers
3. Minimum domestic gas price is $ 5.00/mmbtu
4. If agreed gas price between domestic gas
producer with the buyer is higher than $
5.00/mmbtu so that domestic gas buyer is not
entitle to gas subsidy.
5. If agreed gas price between domestic gas
producer with the buyer is lower than $
5.00/mmbtu so that export gas producer obliged
to give gas subsidy to domestic gas producer for
the price difference.
The gas subsidy mechanism is described in Figure
1.
ANALYSIS
To prove export-domestic gas subsidy, an economic
evaluation and analysis is exercised in a case study
which consist of export gas producer and domestic
gas producer.
The export gas producer has options as follows.
1. sell all the gas to export market only at export
price at $ 10.00/mmbtu
2. sell all the gas to domestic market at domestic
price at $ 3.50/mmbtu
3. sell the gas to 75% export at $ 10.00/mmbtu
and 25% domestic market at $ 3.50/mmbtu.
4. Sell all the gas to export market at export price
at $ 10.00/mmbtu and give subsidy to domestic
gas producer
Meanwhile, domestic gas producer only have an
option to sell gas to domestic market at domestic
gas price. The comparative economic of the above
options are summarized in Figure 2
Based on the economic evaluation and analysis, the
option no 4 is able to give better economic return to
government, export gas producer and domestic gas
producer compared to option 2 and 3.
It means export – domestic gas subsidy mechanism
will give better economic return to gas exporter and
domestic producer.
Benefit of Export – Domestic Gas Subsidy
The benefit of the subsidy are :
Export Gas Producer :
• Optimum government revenue with higher
export price than domestic price
• Fulfill Gas Domestic Market Obligation
• Better option rather than sell gas to domestic
market
Domestic Gas Producer :
• Gas revenue increase accelerate investment
return
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• Better field economic return
• Accelerate monetization of uneconomic
undeveloped gas fields to domestic market
Government :
• Optimum government revenue
• Provide domestic gas to domestic buyer at
reasonable price
• Gas buyers more competitive
• Government will also give subsidy if gas equity
split between export gas producer and domestic
gas producer is different.
• Gas domestic market utilization
CONCLUSION
1. Domestic – export gas subsidy is able to give
optimum economic return to both government
and gas producers.
2. Domestic – export gas subsidy mechanism is
able to monetize uneconomic undeveloped gas
field to domestic market.
3. The domestic – export gas subsidy mechanism
have some benefits and weaknesses both to
government and contractor, Government should
be able to overcome weakness.
4. If the above subsidy mechanism will be
implemented, there are some outstanding issues
to be discussed by stakeholders, such as,
determine criteria for export & domestic gas
producer, total allowable gas subsidies,
relationship between export gas producer and
domestic gas producer, cost recovery control in
domestic gas producer and ring fencing.
REFERENCES
Directorate General of Oil and Gas, 2007, National
Gas Policy.
Directorate General of Oil and Gas, 2008,
Allignment between Migas Law 22/2001 with UU
No 30/2007.
Directorate General of Oil and Gas, 2007, National
Gas Supply Plan.
Directorate General of Oil and Gas, 2005, Long
term National Oil and Gas Plan 2005-2020.
Directorate General of Oil and Gas, 2006, National
Gas Policy.
Energy Charter Secretariat, 2007, International
Pricing Mechanism for Oil and Gas.
Daniel Johnston, International Petroleum Fiscal
Systems and Production Sharing Contract, Pennwell
Publishing Company, 1994.
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Domestic – Export Gas Subsidy Mechanism

US$ Mio
1200
ƒ Gas export producer’ revenue $ 1000M
PSC “A”
ƒ Domestic gas standard price $
1000
5.00/mmbtu with revenue $ 500M

ƒ If domestic gas price $ 3.50/mmbtu

800
with revenue $ 350 M then export gas
Subsidy for price producer obliged to subsidize domestic
difference $ 1.50
gas producer at price difference of $
600 1.50 amounting $ 150M
PSC “B”
ƒ Gas subsidy in domestic gas producer
400 will be shared to government and
contractor based on respective gas
Revenue equity split.
at price
200
$ 5.0
Revenue
At price
$ 3.5
0
Revenue Produsen Gas Ekspor Revenue Produsen Gas Domestik

PSC “A” : export gas producer

PSC “B” : domestic gas producer

Figure 1 - Domestic – export gas subsidy mechanism.

Export Gas Subsidy Mechanism

Economic of Gas Exporter and Domestic Producer
Gas Exporter Domestic Producer

All Gas for All Gas for Gas 75% Export Gas for export Without With
Export Domestic 25% Domestic Subsidy to Domestic Subsidy Subsidy
Option 1 Option 2 Option 3 Option 4 Option 4
REVENUE DISTRIBUTION
Government Share 6,145,342 2,991,769 5,356,949 5,874,630 478,432 749,144
Net Contractor Share 5,027,991 2,447,803 4,382,944 4,882,223 257,617 403,385
Cost Recovery 2,077,350 2,077,350 2,077,350 2,077,350 235,737 235,737
TOTAL SHARE 13,250,682 7,516,922 11,817,242 12,834,203 971,786 1,388,266
- - -
CASH FLOW - - -
Net Contractor Share 5,027,991 2,447,803 4,382,944 4,882,223 257,617 403,385
Cost Recovery 2,077,350 2,077,350 2,077,350 2,077,350 235,737 235,737
Total Contractor Share 7,105,340 4,525,153 6,460,294 6,959,573 493,354 639,122
Opex Participating Interest (1,062,859) (1,062,859) (1,062,859) (1,062,859) (57,857) (57,857)
Capex Participating Interest (1,020,421) (1,020,421) (1,020,421) (1,020,421) (186,075) (186,075)
Net Cashflow PSC 5,022,060 2,441,873 4,377,013 4,876,292 249,422 395,189
- - -
NPV @ 10% 1,221,307 412,746 1,020,174 1,177,875 43,576 87,007
NPV @ 15% 706,633 180,754 576,258 677,182 15,027 44,477
IRR 240.26% 30.92% 191.3% 231% 19.8% 29.5%
POT 1.50 10.10 1.60 1.55 6.39 4.79

Figure 2 - Comparative Export Gas Subsidy Economic of Gas Exporter and Domestic Producer