Indonesia power sector: New regulation on utilisation of natural gas for power generation

Indonesia power sector: New regulation on utilisation of natural gas for
power generation

The Ministry of Energy and Mineral Resources of the Republic of Indonesia
(MEMR) recently issued MEMR Regulation No. 11 of 2017 on the Utilisation of
Natural Gas for Power Generation (Regulation 11/2017).

Key points:

Regulation 11/2017 governs the utilisation of natural gas for power plants
owned by either PT Perusahaan Listrik Negara (Persero) (PLN) or Power
Generation Business Entities (IPPs), including the allocation of natural gas
and certain key terms of the natural gas supply arrangements for power
generation, the development of natural gas wellhead power generation and
benchmark prices for the import of LNG.

The new rules are intended to maximise the procurement of natural gas for
gas-fired power plants from domestic sources while also trying to lower the
price of domestic gas to be used for power generation.

The new rules incentivise the development of wellhead power developments,
provided that they are close to gas fields and to existing transmission
lines and consumers.

1. Allocation and utilisation of natural gas for power generation

Regulation 11/2017 provides that allocation of natural gas for power
generation can be made directly to PLN or IPPs.

Although Regulation 11/2017 does not define the term "allocation of natural
gas", in our view and as confirmed by officials at MEMR, Regulation 11/2017
should be read in conjunction with other oil and gas regulations,
particularly MEMR Regulation No. 6 of 2016 on Guidelines and Procedures to
Designate Allocation and Utilisation as well as the Price of Natural Gas
(Regulation 6/2016) which is referred to in the recitals of Regulation
11/2017. Under Regulation 6/2016, "allocation of natural gas" means a
specific volume of natural gas (produced by upstream gas contractors or PSC
Contractors) that must first be supplied to fulfil domestic needs and/or
export for a specific timeframe. Regulation 6/2016 provides that PSC
Contractors may request for the allocation of natural gas that they have
produced and that MEMR will determine the allocation of such natural gas.

Pursuant to Regulation 11/2017, MEMR will allocate certain volumes of
natural gas produced by PSC Contractors for purchase by PLN or IPPs. In
addition to the natural gas allocation from MEMR, PLN and IPPs can also
purchase natural gas from business entities holding a gas trading licence
(Gas Trading Entities) that have obtained a natural gas allocation, provided
that such relevant Gas Trading Entities have appropriate natural gas
facilities and infrastructure to supply natural gas to the relevant power
project.

2. Alternative supply sources

Regulation 11/2017 provides that when procuring natural gas for a power
generation project, PLN or IPPs must ensure that they have enough natural
gas supply for 20 years and must prioritise supply of natural gas from PSC
Contractors. If the supply of natural gas (including through allocation)
from PSC Contractors is not sufficient for 20 years (which period would
cover the term of a typical natural gas-fired power project power purchase
agreement in Indonesia), then PLN or the IPPs may procure the shortfall of
natural gas from other sources.

We understand from MEMR officials that if natural gas is not available to be
allocated and/or procured directly from PSC Contractors for a given project,
then PLN or the IPP can either purchase Liquefied Natural Gas (LNG) from a
Gas Trading Entity, or directly import LNG but subject to the "Maximum LNG
Price" which we will explain below.

3. Benchmark price

MEMR will determine the price of natural gas for power generation based on
the following criteria: (i) the economics of the gas field, (ii) national
and international gas price, (iii) payment ability of domestic gas consumers
and (iv) additional value of the local use of natural gas.

For power plants not located at a natural gas wellhead, PLN and IPPs may
purchase natural gas at a maximum price of 11.5% of the Indonesia Crude
Price per Million British Thermal Units (ICP/MMBTU).

PLN or IPPs may also utilise LNG for power generation, but subject to the
following conditions:

if the price of natural gas exceeds 11.5% of ICP/MMBTU;

if the price of domestic LNG exceeds 11.5% of ICP/ MMBTU (parity to oil)
free on board (FOB), PLN or IPPs may import LNG at a maximum price of 11.5%
of ICP/MMBTU at the purchaser's regasification terminal (landed price)
(Maximum LNG Price); and

if the price of imported LNG exceeds the Maximum LNG Price, PLN and IPPs can
purchase pipeline gas or domestic LNG at a price higher that 11.5% of ICP/
MMBTU (parity to oil) (FOB in the case of LNG).

As a result of the above principles, the maximum price that PLN or IPPs can
pay for LNG (domestic and imported) is the Maximum LNG Price. We understand
from MEMR officials that these principles are not meant to restrict Gas
Trading Entities from importing LNG to be sold to PLN or IPPs but this will
eventually depend on whether or not PLN or IPPs have received sufficient
natural gas allocation.

4. Development of wellhead gas fired power plants

Regulation 11/2017 also contains provisions relating to the development of
power plants located at a natural gas wellhead (Wellhead Power Plants). The
procurement of a Wellhead Power Plants can be carried out through: (i)
direct appointment or (ii) public tender.

The procurement of Wellhead Power Plants through direct appointment may be
carried out pursuant to the following principles: (i) the price of natural
gas must not be in excess of 8% of ICP/MMBTU at the power plant gate; (ii)
there must be a guarantee on sufficient allocation/supply of natural gas
during the period of the natural gas sales and purchase agreement; (iii)
calculation of the investment cost of the Wellhead Power Plant is to be
depreciated for at least 20 years; and (vi) the efficiency of the Wellhead
Power Plant with specific fuel consumption (SPC) is equal to high speed
diesel (HSD) amounting to 0.25 liter/kWh. Procurement of Wellhead Power
Plants may be carried out through public tender, in the event the price of
natural gas exceeds 8% of the ICP/MMBTU. Regulation 11/2017 also provides
that the power interconnection point for Wellhead Power Plants must be
located at the nearest main station.

5. Guarantee of gas supply and payments

Gas Trading Entities supplying natural gas to power plants must guarantee
the reliability of (i) natural gas allocation and supply and (ii) natural
gas transportation, while PLN and IPPs must be able to guarantee that
payments for the purchase of natural gas will be carried out in a timely
manner.

6. Gas Supply Agreements

Regulation 11/2017 provides that a natural gas sales and purchase agreement
for the supply of natural gas for power generation must contain at least the
following provisions and principles; (i) description of the supply sources,
(ii) volume and specifications of the natural gas, (iii) gas price, (iv)
term of the contract, (v) price review mechanism, (vi) details of
transportation of the natural gas to the plant, and (vii) rights and
obligations of the buyer and seller of natural gas.

7. Transitional provisions

Regulation 11/2017 provides that the allocation and price of natural gas for
power plants which have been determined or agreed prior to its enactment on
30 January 2017 will remain valid until the end of the term of the
determination or when the natural gas supply agreement ends. Further,
applications for the allocation of natural gas which have been submitted
prior to the enactment of Regulation 11/2017 will continue to be processed
based on pre-existing principles and will not be subject to the principles
set out in Regulation 11/2017.

Commentary

Regulation 11/2017 is clearly intended to maximise the procurement of
natural gas for gas-fired power plants from domestic sources while also
trying to lower the price of domestic gas to be used for power generation.
While these objectives are commendable, Regulation 11/2017 remains pragmatic
in its approach allowing for the supply of imported LNG if domestic sources
of supply are insufficient to guarantee supply over the term of the PPA for
a given power project or if the price of domestic supply is too high.

Regulation 11/2017 also aims to incentivize the development of Wellhead
Power Plants on the basis that such plants will simplify the allocation of
natural gas for power generation and minimise overall costs, especially
transportation costs given their proximity to the relevant wellhead.
However, the viability of this goal will also be determined largely by the
proximity of the relevant gas fields and/or wellheads to existing
transmission lines and consumers.

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

Link to Original Article:
http://www.jdsupra.com/legalnews/indonesia-power-sector-new-regulation-94622
/

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com