Indonesia power sector: New regulation on utilisation of natural gas for power generation
Managing Partner, Ginting & Reksodiputro in association with Allen & Overy
Foreign Legal Consultant (partner level), Ginting & Reksodiputro in association with Allen & Overy
Senior Associate, Ginting & Reksodiputro in association with Allen & Overy
02 March 2017
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).
- 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.
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.