As Indonesia seeks quick fix to power woes, gas export curbs loom

Wed Jun 4, 2014 5:00pm EDT

* Small gas-fired power plants provide quick solutions to electricity crunch

* Gas cheaper than oil, eases Indonesia fuel subsidy pressure

* Gas demand growth to accelerate to nearly 7 pct in next 5 yrs-consultant

By Brian Leonal and Florence Tan

SINGAPORE, June 5 (Reuters) - Indonesia is developing more small gas-fired power plants, as Southeast Asia's biggest economy aims to meet soaring electricity demand and cut dependence on oil imports, in a move likely to divert greater quantities of gas away from exports.

Small plants - typically producing 100 megawatts or less - are on course for a two-thirds increase in capacity by 2022. That may force Indonesia to step up imports and limit shipments amid a decline in output from ageing fields.

State utility PT Perusahaan Listrik Negara (PLN), for instance, said in April it hoped gas from the Bontang project will be diverted to it when a liquefied natural gas (LNG) supply contract with a Japanese buyer expires. Indonesia is the world's fifth-largest LNG seller.

"When you look at their domestic demand, you also have to look at their desire to maintain exports. So when you put them together, I think it is quite challenging to meet both," said Zhixin Chong, an analyst at consultancy Wood Mackenzie.

Indonesia's gas demand growth is expected to rev up to near 7 percent annually in 2014-2018 to 4,800 million cubic feet a day (mmcfd) from a 4 percent yearly growth rate seen since 2009, according to Wood Mackenzie. Annual supply growth has lagged at 2 percent since 2009.

The nation is shifting from oil use in the power sector to cut a high fuel subsidy bill that has pushed its current account deep into deficit. On Wednesday, Indonesia reported its second-biggest monthly deficit in five years for April.

With bigger gas- and coal-power projects taking longer to get land clearances and to line up funding, small gas-based power plants that can be built in months will race ahead first, power plant operators said.

"We build those power plants in 2-6 months," said Arno Hendriks, chief executive of Jakarta-based independent power producer MAXpower which operates 15 gas-based plants in Indonesia and is building another four.

The company completed a 35-megawatt plant in Sumatra in just two months, he said. These plants come in modular units which allow operators to add more to meet higher demand or remove them to place on alternate sites in the archipelago if gas supply was not available or in remote areas which lack electricity transmission grids, Hendriks said.

Indonesia's electricity demand is seen doubling by 2022. By then nearly 30 percent of power capacity will be based on gas, of which almost a fifth will come from projects with capacity of 100 megawatts or smaller, data compiled by Reuters shows.

Equipment supplier General Electric Co expects Indonesia's new mining policies to spur power demand as miners have to refine mineral ores before exporting, said Made Wiratma, market development director at GE Distributed Power, ASEAN.

PRICING PROBLEM

Indonesia holds Asia's third-largest proven gas reserves, at more than 100 trillion cubic feet, BP data showed, but their development has been slow.

If Indonesia moves ahead with new developments at gas fields, supply could reach 9,150 mmcfd in the next five years, but if it doesn't, that could decline to 7,000 mmcfd, Wood Mackenzie's Chong said, leading to a combination of greater imports and export cuts.

That could upset its power economics. Electricity generated from domestic gas is the cheapest at about 10 cents per kilowatt hour, close to the local tariff, but Indonesia will have to subsidise power or raise tariffs if it buys LNG in the international spot market, said Fazil Erwin Alfitri, chief executive of utility PT Medco Power Indonesia.

Still, imported LNG will be cheaper than burning diesel, he said. The cost of generating a kilowatt hour of electricity is three times higher for diesel compared with piped gas, operators said.

Indonesia will also be mindful of hurting LNG exports, given the trade deficit.

It diverted 1.5 million tonnes of LNG from exports for domestic use and exported close to 17 million tonnes last year, said Ryan Lawrence, an analyst at consultancy FGE. The diverted volume could increase to 2 million tonnes this year but would still be small compared with exports, he said.

Imports are also being beefed up.

Pertamina announced in December Indonesia's first gas import deal to ship 0.8 million tonnes a year from U.S.-based Cheniere Energy Inc. The state-owned energy firm expects to triple imports by 2025.

"In the short term, as stopping LNG export contracts is not viable, importing gas becomes more of a viable option," said Emil Andi Rahman, a corporate secretary at gas distributor PT Perusahaan Gas Negara Tbk (PGN). (Additional reporting by Wilda Asmarini in JAKARTA; Editing by Muralikumar Anantharaman)