Friday, April 18, 2008

Malaysian Liquid Natural Gas Exports to Japan

Last month, the government agreed to extend its exports of liquefied natural gas (LNG) to Japan beyond the original contract expiry date of 2010/2011. The new contracts are for 3 million tons of LNG per year (mtpy) over the first five years and 2 mtpy over the following five years.

Indonesia itself is facing a serious energy crisis. This is indicated by long queues for kerosene, LPG shortages, power supply interruptions and huge energy subsidies. Power generators and manufacturers are protesting about the shortage of gas. At the same time, the country is still recognized as one of the world's largest exporters of LNG and coal.

Do we really need to extend our exports of LNG to Japan, while the country is having such problems in providing its own energy security?

The upsurge in oil prices is worrying the government and parliament, who have had to make adjustments to the 2008 fiscal budget. They are also getting anxious about the 2009 budget, having projected energy subsidies for more than Rp 200 trillion. The government needs to respond to public concerns openly and honestly.

The root cause of the huge energy subsidies and energy crisis is our excessive dependence on oil. The government has introduced energy diversification projects, such as 10-gigawatt coal-fired plants, conversion from kerosene to LPG and biofuel promotion. However, these efforts have not been able to reduce the share of oil in our energy mix, because -- apart from projects begun recently -- our oil consumption has not been managed properly.

Natural gas is an ideal substitute for oil because it is cheaper and more efficient and produces fewer emissions than oil. Over the past two to three decades, natural gas has become widely used across the world, mainly in power generators. Indonesia -- with more natural gas reserves than oil -- implemented a crash program to build combined cycle gas turbines in Java during the 1990s, but those power generators (Tanjung Priok, Muara Karang, Muara Tawar, Tambak Lorok and Gresik, with a capacity of more than 5,000 megawatts) have to burn expensive oil, making them the largest beneficiaries of the energy subsidy.

Power generators and manufacturers were complaining about gas shortages long before the recent energy crisis hit consumers. The crises have been occurring for some time, but the government is still choosing to stick to its longtime policy of exporting natural gas while importing oil and selling it cheaper in the domestic market, instead of speeding up the supply of natural gas to mitigate our energy crises.

For businesses (state-owned companies), exporting LNG/natural gas to Japan, Korea, Taiwan, Singapore and Malaysia while at the same time importing oil (crude and products) for domestic consumption means profits.

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