From Asia Times http://www.atimes.com/atimes/Southeast_Asia/IC20Ae01.html

Corrupted pipe dreams in Indonesia
By Bill Guerin

JAKARTA -The opening of a new US$1.1 billion gas pipeline would appear to mark a rejuvenation of Indonesia's until now woefully inefficient natural-gas sector and boost the fortunes of publicly listed, majority state-owned gas-distribution company PT Perusahaan Gas Negara (PGN). But enduring regulatory uncertainty and allegations of foul play among PGN's top managers threaten to scupper those prospects.

After a four-month delay, PGN's 375-kilometer pipeline came on-stream on March 11. It represents the first segment of PGN's planned 1,101km South Sumatra West Java (SSWJ) gas-pipeline network. Two big take-or-pay contracts for a total of 3.3 trillion cubic feet of gas, including a 17-year deal with the United States' ConocoPhillips, as well as a 15-year arrangement with state-owned oil-and-gas company Pertamina, provide a guaranteed revenue stream.

The new pipeline is scheduled to carry 30 million cubic feet of natural gas per day (mmcf/d) to Maringgai at the tip of South Sumatra. From there, gas will be piped through a second segment to Cilegon in West Java, where it will feed the blast furnaces of the giant state-owned steel factory PT Krakatau Steel.

By 2010, PGN says it expects to have more 1,600 industrial clients, including big fertilizer, chemical, metal, glass, ceramic and electricity producers. The remaining 661km segment is still under construction and is scheduled to come online early next year, distributing an additional 400mmcf/d of gas from South Sumatra to Muara Bekasi and Rawa Maju in West Java.

The two new pipelines are provisionally expected to boost PGN's revenues and profits. This year, PGN will distribute 555mmcf/d of gas, more than double the 258mmcf/d it distributed in 2003. Its profits rose from Rp504.8 billion (US$54.7 million) in 2003 to Rp862 billion in 2005, and the company says it expects to declare profits of about Rp2 trillion on 338mmcf/d of gas distributed in 2006. By 2008, PGN says it expects its gas volume to reach 919mmcf/d and by 2010 it expects to have some 2 million homes buying gas, compared with the current 78,000 homes.

Those heady projections, however, have come under closer scrutiny since allegations of corruption and insider trading have beset the company. The allegations stem from the government's divestment of a 5.1% holding in PGN through a public offering last December, which was provisionally set to generate Rp3.2 trillion for state coffers but only managed to bring in Rp2 trillion.

Indonesia's most famous independent corruption buster, Teten Masduki of Indonesian Corruption Watch (ICW), claims the lackluster sale was the result of insider trading and market manipulation. The company has denied the allegations. But PGN's shares plummeted by more than 23% in a single day's trading on January 12 when, just weeks after the share sale, the company announced a delay in the pipeline's construction. The announcement triggered a sharp fall in shares of other listed state enterprises that do business or have links with PGN. The Capital Market Supervisory Agency (Bapepam) this week imposed Rp5 billion in fines on four of the company's directors and a commissioner for failing to disclose information to the public. Bapepam found the directors had purposefully delayed announcing problems with the pipeline's construction. Masduki has filed a report with the Corruption Eradication Commission claiming that corruption at PGN has caused the state to lose more than Rp1 trillion.

His group has also speculated that an official investigation into PGN's workings could expose corruption at other state-owned enterprises with links to PGN. The House of Representatives Commission XI, which oversees state-owned enterprises, has since called for a parliamentary investigation into the allegations.

The political furor is complicating PGN's ambitious plans and threatens to hamper the entire gas-distribution industry in Indonesia, which is already failing to meet surging domestic demand. Energy and Mineral Resources Minister Purnomo Yusgiantoro told legislators this month that growing domestic demand and stagnant production had resulted in a deficit of some 300mmcf/d.

Supply shortfalls
National production is about 8,100mmcf/d, while domestic demand has reached 8,400mmcf/d, he said. Indonesia's total gas reserves, including proven and unproven deposits, were estimated at 187.1 trillion cubic feet in 2006, up slightly from the 185.8 trillion cubic feet booked in 2005. The government is working to boost exploration activities through more foreign and local investment to raise the proven gas reserves to 75 trillion cubic feet, according to Yusgiantoro, who also said he targets an increase in gas production to 8.6mmcf/d this year.

While the new gas supply now flowing from South Sumatra to West Java will help ease shortages, it's important for Indonesia's broad economy that PGN's extended pipeline is completed on schedule. Domestic demand has more than tripled in three years, from 6.8 trillion cubic feet in 2003 to 18.1 trillion last year, and is expected by energy analysts to grow at 6% a year until at least 2012.

Encouraged by the gradual removal of fuel-oil subsidies, end users were persuaded to switch to comparatively cheaper natural gas. Tax and production-sharing incentives have been promised for producers, consistent with the 2006 presidential decree on domestic gas utilization. But the government has also said changes will be made to the amount of gas that producers must contribute to the domestic sector.

This will be changed from the current 41.6% for the domestic market to a minimum of 50%, which is exactly double the level assumed in most existing production-sharing contracts. While this will boost domestic supply, it may well negate the value of any incentives given to gas producers for further exploration, especially given the difference between the higher prices achieved in LNG (liquefied natural gas) exports compared with the domestic market.

Gas exports brought in $42 billion in 2006 and domestic sales some $25 billion, according to Ministry of Energy statistics. Still, the government has not set a pricing structure for the domestic gas sector, and such regulatory uncertainties continue to constrain infrastructure development. If the government fails to maintain a stable operating environment and industry structure, PGN could soon be exposed to the risk of non-renewal of its sales contracts on maturity. Decisions on renewals are usually made far in advance of the actual cutoff dates.

Nationalistic signals from prominent politicians, including Vice President Jusuf Kalla, are increasing that policy risk. He recently called for more gas to be used locally rather than exported, by diverting fuel from East Kalimantan, the country's main gas-producing region, to shortage-hit areas in East Java and northern Sumatra. He said the economic logic behind such a move would be to create a multiplier effect, by creating more jobs in the gas sector and providing farmers with cheaper fertilizer to boost agricultural production.

Kalla's prioritization of domestic versus foreign sales has raised eyebrows before. In an interview with a mainstream Singaporean daily last May, he argued: "Up to now, almost all of our [Indonesia's] energy products such as LNG, coal and oil are exported. But if the Japanese, let's say, need these, wouldn't it be more efficient if they were to build a factory in Indonesia?"

Questions over the reliability of supply and political support for the sanctity of contracts have long dampened the investment climate for new energy projects in Indonesia. Now new allegations of foul play at PGN and nationalistic policy signals conspire to suppress the new investment in the sector the country so desperately needs.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.

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