Indonesia plans deeper gas price cuts

Posted on 18 August 2016

Source: The Jakarta Post

The government is considering proposing another price cut for natural gas sold to the fertilizer industry after recently providing a similar incentive to the industry.

Last month, the Energy and Mineral Resources Ministry issued a new regulation stating that the minister could lower prices for certain industries by a maximum of US$2 per 1 million British thermal units (mmbtu) if gas prices were higher than $6 per mmbtu.

However, former minister Arcandra Tahar said on Monday the government was planning to lower the margin even further so that the minister could lower prices if they were higher than $4 per mmbtu for the fertilizer industry.

“Our industries need to live. In order to do so, we have to study whether or not it is possible to lower the limit to $4 [per mmbtu], as many other countries have implemented this,” he told reporters following a meeting at the Office of the Coordinating Economic Minister in Central Jakarta.

Later the day, Arcandra was dismissed from his position following public scrutiny about his dual citizenship.

Indonesia’s gas prices are currently about $9 per mmbtu, higher than in most of its ASEAN neighbors. Malaysia, for example, sells it at about $5 per mmbtu.

Data from the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) shows that the prices have even reached $8.01 to $8.05 per mmbtu in East Java and $9.14 to $9.18 per mmbtu in West Java. Furthermore, gas prices in Sumatra have reached $13.90 to $13.94 per mmbtu.

The high prices have forced many factories in North Sumatra to close down and as many as 20,000 workers have been laid off since 2000, data from the Association of Gas-Consuming Companies (Apigas) shows.

The new ministerial regulation is a legal basis to implement Presidential Regulation (Perpres) No. 40/2016 on natural gas pricing, which should have become effective in January. The Perpres was part of the third economic stimulus package launched in October last year.

Cheaper gas prices will boost tax income as a result of improved industry productivity according to the Energy and Mineral Resources Ministry.

For a $1 to $2 drop in gas prices, there will be at least Rp 12 trillion in additional income tax and a potential of Rp 68 trillion to Rp 123 trillion in extra contributions to gross domestic product.

The regulation also dictates that the slashed prices are only applicable for the fertilizer, petrochemical, stainless steel, ceramic, glass, oleochemical and glove industries.

However, the government is also considering allowing other sectors to enjoy the price-cut in order to further develop the manufacturing sector. The government is considering adding pulp and paper, food and beverages, textiles and sock industries to the short list. The addition of the pharmaceutical industry is also under consideration.

“A long list is always better than a short list. We have suggested that the number of industries allowed to receive this price cut be increased to 10,” Industry Minister Airlangga Hartarto said at the same venue.

The government is considering widening its net as gas prices make up to 30 percent of production costs.

“We have to maintain competitiveness in the future. Indonesia has always been dependent on raw materials and this makes us less competitive,” State-Owned Enterprises Minister Rini Soemarno said.

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