A Lessons Learned from the Cirebon-Semarang Transmission

Pipeline Project for a Better Domestic Gas Future

Written by: Faris Habiburrahman®

One of the Government's missions in realizing sustainable national energy security and
equitable development that accompanied by economic growth is by increasing the gas
allocation for domestic use. Since 2013, domestic gas supply overtakes export allocation.
Until the end of 2019, it can reach 64% of the overall national gas supply. This needs to be
improved, considering that Indonesia is rich by gas resources, thus the country should be
able to utilize the gas optimally for the people’s welfare as wide as possible. Domestic gas
allocation is also expected to increase the competitiveness of domestic products globally,
rather than simply selling the gas directly abroad. Therefore, the infrastructure of domestic
gas, especially the transmission and distribution pipeline, needs to be built evenly in order
that the gas can reach the user thoroughly and increase the demand at the end.

However, over time, the Government, in this case BPH Migas, as an independent institution
that regulates the oil and gas business for downstream, encountered several obstacles
related to the construction of transmission pipelines. One of those comes from the Cirebon-
Semarang transmission pipeline project, which had a construction delay for 14 years,
whereas the tender process has been completed since March 21, 2006, and pointed PT.
Rekayasa Industri (Rekind) as the winner. Although the groundbreaking already held on
February 7 this year, but 14 years is not a short time to waiting for the awaited project to be
realized. The reason is that the project is expected to increase the economic growth
throughout the area surrounding it, by growing the number of new industries and increasing
competitiveness for the existing one. The Project in which the majority ownership is owned
by Rekind at 60%, and the remaining 40% by PT. Pertamina Gas (Pertagas), is also
included in Rencana Induk Jaringan Transmisi dan Distribusi Gas Bumi Nasional (in English:
National Natural Gas Transmission and Distribution Network Master Plans) or abbreviated
RIJTGBN, therefore its existence is vital to integrate the transmission line across Indonesia,
especially in Sumatera and Java. The 335-kilometer pipeline project with a design capacity
of 350-500 MMSCFD is planned to be completed in 24 months.

One of the main causes that made the project stagnant is the lack of gas supply, so the
project, economically, still cannot support the owner itself. It is clear we know there are
three main components that forming the gas distribution in a whole process, i.e. demand,
supply, and infrastructure, thereby even if demand and infrastructure already built, but
supply still not exist, the gas distribution will remain not created. Currently, Rekind has
obtained several natural gas supplies that can be used as the project baseline including from
Jambaran Tiung Biru (JTB) and Kris Energy around 20-80 MMSCFD, where actually the JTB
gas production capacity reaches 192 MMSCFD and 2.5 trillion cubic feet (TCF) of reserves
(so it is expected JTB can increase supply allocation to the Cirebon-Semarang transmission
pipeline in the future), and other 20 MMSCFD from Husky CNOOC Madura Limited (HCML)
in the Madura BD field, Madura Strait Block. Another cause is coming from the legal aspect,
Rekind needs some time to review the project contract including toll fees therein. The project
is delayed for 16 years, so definitely there is a change in the value of capital expenditure
(because of the base price changes from 2006 to 2014). In addition, there are also changes
in the pipe design from the planned 24 inches to 28, and other technical matters such as
route changes and operating costs. Market demand is also estimated to be one of the
causes, although Rekind already has a big consumer namely PT. PLN (Persero) for PLTU
Tambak Lorok, but it still not enough to make the pipeline construction economically
feasible. For this reason, in order to increase the list of consumers, since 2016, Rekind has
been trying to meet directly with industries in West and Central Java who are interested in
absorbing their gas from the project.

Need to find a solution to prevent the case as above happens again in the future. First, by
finding out the root cause deeper. Where, if we look at the above explanation, the core of the
causes is not far from supply and demand problems. A view from an expert or businessman
is needed to find the precise and sustainable solutions, where they already have a long and
extensive experience, so their view will be based on the proven sense. In that way, solutions
that are thought to be appropriate to answer the above problems are evaluated and
summarized as stated in the paragraph below.

The first solution, BPH Migas as an independent institution appointed by the Government,
based on UU no. 22 of 2001, where one of its tasks is to regulate and determine the
transmission and distribution of natural gas, need to encourage the gas distributor to pursue
in creating a market in the area around the transmission pipeline is planned before deciding
to build it. One of the ways is by establishing CNG (Compress Natural Gas) stations around
the area where the gas user is planned. CNG has the ability to penetrate the market quickly,
mobile, inexpensive and at a distance that is relatively far from the gas source. With the
existence of CNG, the industries that previously using Diesel, MFO, or coal as their primary
fuel, were expected to slowly switch to using gas. Surely from the user’s industry standpoint,
CNG as fuel will be more profitable, besides of its price which tends to be cheaper, around
US$ 11-15 per MMBTU (depending on distance and demand volume), compared to diesel
that reaches US$ 22-26, and MFO US$ 14-15, CNG is also superior in terms of
environmental sustainability due to spill-free and very low emissions. It needs time for
industries to know and get used to using gas as their main fuel/raw material. Therefore, by
the presence of CNG, when the transmission pipeline is built in their area, they are ready to
replace their fuel/raw materials to become gas fully. Thus, demand will be optimally
developed in the target market area, so that the efficiency of the transmission pipeline will be
going better with lower investment risk.

The Second solution, BPH Migas needs to integrate with SKK Migas related to the planning
of gas supply for transmission pipeline. The RIJTDGBN needs to be reviewed, so there is no
more project delay due to a shortage of gas supply. SKK Migas as a party responsible for
the availability of gas supply needs to examine the planning of transmission pipeline source
of supply and strives its procurement in a faster time. Steps such as terminating the
contracts of gas exportation, accelerating ongoing projects, and the extreme ones likes
importing the gas temporary until domestic supply is fully prepared, of course with careful
consideration, are expected to be pursued by SKK Migas to guarantee of the gas supply.

The last solution is the strategic one which has a long impact. Government, in this case, who
has the authority to regulate the gas price, is expected to reduce the upstream gas price
gradually. Upstream gas prices are a major component in determining downstream gas
prices with a percentage of 60% and other components namely transmission and distribution
costs respectively contribute 22% and 18% (according to energy economics observer from
Universitas Gadjah Mada, Fahmy Radhi). Thus, with the decline in upstream gas prices, it is
expected that downstream gas prices may decrease significantly. This price reduction is
considered as necessary and reasonable. Because the current gas price at US$ 7 tends to
be expensive, compared to gas prices in other countries at the range of US$ 3-4. Whereas
that Indonesia has an abundance of gas reserves. The question is how to reduce the gas
prices that fairly far from the reasonable market price? It takes a lot of effort, but one of the
solutions is that the Government can reduce the share of upstream gas sales profit wisely,
which currently reaches 85%, without significantly reducing the country's revenue. By
decreasing the upstream gas prices, it will certainly grow the gas business as a whole,
ranging from the upstream businesses itself, gas distributors in all layers, infrastructure
operators, to the end-users. Thereby, supply and demand will increase, and automatically
increase the need for the development of infrastructure also as a unit that cannot be
separated: Demand-Supply-Infrastructure.