RECENT ECONOMIC REPORTS

Summary

Prospects for a regional gas pipeline grid appear brighter in the wake of recent supply agreements between Indonesia and neighboring Singapore and Malaysia. ASEAN’s proposal for a "Trans-ASEAN Gas Pipeline" and APEC’s concept of an "Asian Gas Grid" both recognize natural gas’ superior fuel qualities and the logic of linking ASEAN’s natural gas production centers with markets in neighboring countries. Both concepts are designed to catalyze cross-border linkages connecting national gas grids. In reality, though, the establishment of even national gas grids may prove to be a distant goal. End summary.

ASEAN’s Concept

Past Milestones: The ASEAN heads of state adopted ASEAN Vision 2020 at the 2nd ASEAN Informal summit held in Kuala Lumpur on December 15, 1997. The statement called for cooperation to "establish interconnecting arrangements for electricity and natural gas within ASEAN through the ASEAN Power Grid and a Trans-ASEAN Gas Pipeline" (TAGP). In 1998, the Hanoi Plan of Action agreed on the establishment of a policy framework by 2004 to implement a Trans-ASEAN Energy Network comprising the ASEAN Power Grid and the TAGP projects. In 1999, the 17th ASEAN Energy Ministers Meeting approved the TAGP Plan of Action, which was also incorporated into the "ASEAN Plan of Action on Energy Cooperation (1999-2004)."

Future Steps: The TAGP envisions an evolutionary process that builds upon existing national grids and bilateral pipeline connections "to ensure greater security of gas supply at a gas price that is competitive to alternative fuels within Member Countries." The ASEAN Council on Petroleum (ASCOPE) is developing an implementation plan, and has formed into four Export Working Groups to examine various aspects of the project. The groups will examine:

• "the regional energy/gas market, reserves, supply/demand balance" (led by Indonesia’s Pertamina),

• "technical analyses; scheduling; and gas pipeline and power grid routing" (led by Malaysia’s Petronas),

• "economic feasibility and energy/gas pricing" (led by Thailand’s PTT), and

• "institutional, legal, Financial/commercial, technical, HSE (sic) and management framework" (led by Philippines’ PNOC).

The 19th ASEAN Ministers of Energy Meeting agreed to develop a TAGP Memorandum of Understanding on July 5 in Brunei.

The APEC Concept

Going North: APEC, in partnership with the private-sector Pacific Economic Cooperation Council (PECC), completed a year-long "APEC Natural Gas Infrastructure Initiative" which developed policy recommendations for regional energy ministers to accelerate investment in natural gas. APEC’s 18 energy ministers endorsed the initiative’s recommendations at their 3rd ministerial meeting in Okinawa, Japan on October 9-10, 1998. The APEC Business Advisory Council’s (ABAC) Partnership for Equitable Growth (PEG) further recommended that APEC build on the natural gas initiative with the "Asian Gas Grid" (AGG) project. APEC’s AGG proposes the construction of an offshore, large-diameter pipeline connecting the existing and proposed gas networks (such as the TAGP) with major demand centers in China and Taiwan.

The Logic of a Gas Grid

Existing Linkages: ASEAN’s first cross-border pipeline delivers 150 million standard cubic feet per day (scf/d) from Malaysia to Singapore. The Yadana (Burma)-Ratchaburi (Thailand) pipeline, completed in 1999, and the Yetagun (Burma)-Ratchaburi pipeline, completed in September 2000 followed the Malaysia-Singapore pipeline. Indonesia signed or implemented three deals in 2001 to pipe natural gas across national borders: the January delivery of first gas from West Natuna to Singapore’s SembCorp Gas Pte Ltd.; the February signing of a gas sales agreement from South Sumatra gas fields to Singapore’s Gas Supply Pte Ltd.; and the March signing of a contract to deliver gas from West Natuna to Malaysian Petronas’ offshore Duyong facilities. On the horizon are projects to deliver gas to Malaysia and to Thailand from the Malaysia-Thailand Joint Development Area.

Natural Gas Advantages: The existing linkages have developed as Asia has increasingly capitalized on natural gas’ superior qualities as a fuel source:

• Natural gas generates fewer pollutants and carbon dioxide (CO2) emissions than other fossil fuels. It produces 25-33 percent less CO2 than oil, and 40-45 percent less than coal, per unit of energy produced, with essentially no sulfur emissions and significantly lower levels of nitrogen oxide.

• With the right pricing framework, combined cycle gas technology can provide higher electricity output at a lower cost and with less pollution than with most other fuels.

• Increased use of natural gas will reduce ASEAN’s dependence on Persian Gulf sources of crude oil and expand sourcing of fuel from major gas suppliers within the region.

An Obvious Complementarity: ASEAN’s TAGP proposal in the master plans foresees a key role for Indonesia as the main gas supply hub. Despite significant reserves of gas, ASEAN’s analysis concludes that Malaysia will become a net gas importer if there are no significant commercial gas discoveries in the near future. Regional gas demand will increase, driven by the reliance of the Malaysian and Thai power sectors (with natural gas fueling 60 percent of power generation) and demand from Malaysian, Thai, and Singaporean petrochemical industries. ASEAN records the following break down of natural gas reserves among the original ASEAN member countries and Vietnam:

Table: Natural Gas Reserves in ASCOPE Member Countries

(Trillion standard cubic feet – TSCF)

Broad benefits: The ASEAN region, and East Asia generally, under-utilizes natural gas compared to other regions of the world and current pipelines are less extensive than pipeline grids in North American and Europe. The development of a gas transmission backbone will encourage the development of stranded gas fields whose small size do not currently justify production and the utilization of natural gas by industries and businesses which do not now have access to a gas supply. A gas pipeline network will also encourage price competition among suppliers. Finally, a pipeline grid, with its long-term supplier-customer relationships, could encourage greater political stability in the region.

Some Common Hurdles

Despite a gas pipeline network’s obvious advantages, its development faces a number of hurdles. Chief among them are the following problems:

• Cross-border connections require harmonization of national legal and regulatory frameworks, as well gas pricing schedules. Common technical standards for design and construction, operation and maintenance, safety, etc. are also necessary.

• Gas distribution is a monopoly held by state-owned petroleum companies in many ASEAN countries, limiting private sector participation and investment. Indonesia hopes to open up the entire downstream sector with the passage of an oil and gas bill now before Parliament.

• Individual governments must also move toward a market-based pricing system and away from practices, such as price intervention and tax distortions, that lead to inefficient pricing of natural gas and gas-related products and services. Natural gas proponents in Indonesia complain that natural gas cannot compete on price until diesel oil and other fuel subsidies are removed.

The Indonesian Case

Gas Grid Plans: Indonesian state gas company Perusahaan Gas Negara (PGN) has developed a plan, the Integrated Transmission System (ITS), eventually to link the islands of Sumatra, Java, and Kalimantan via a 3,588-kilometer integrated gas pipeline. The four elements of the pipeline system (only one of which is partially complete) are:

• the Grissik/Duri pipeline connecting south Sumatra to parts north,

• the South Sumatra-West Java pipeline, comprising three separate pipelines,

• the Samarinda (East Kalimantan)-Surabaya (East Java) pipeline, the most ambitious at 1,100 kilometers, and

• the East to West Java pipeline.

The status of the Integrated Transmission System is a microcosm of regional pipeline challenges:

• Sumatra’s transmission system is most developed, with the 543-kilometer Grissik/Duri pipeline operational as of October 1998. Phase two, the 330-kilometer Sakernan (Jambi) to Singapore pipeline is being tendered now. PGN, however, has not yet obtained financing for the link between the two pipelines, the 150-kilometer Grissik to Sakernan loop line.

• Analysts agree that the ambitious project to link East Kalimantan fields to Java via the Samarinda-Surabaya pipeline is unlikely to be realized in the near future. The pipelines connecting Sumatra to Java and going across Java still have some prospects of being built. Proponents of the project argue that the pipeline could supplement and eventually replace declining reserves from BP’s Offshore Northwest Java gas fields. International donors and many analysts, however, are skeptical that industrial and power generation growth in West Java justifies the project.

• Piped gas competes with liquefied natural gas (LNG) in two ways. One reason that analysts downplay the possibility of the Samarinda-Surabaya (East Kalimantan-Java) pipeline is that East Kalimantan gas producers prefer the more lucrative returns of LNG sales from the Bontang plant with its long-term contracts, and would prefer not to be dependent on the uncertain domestic market for piped gas. Secondly, LNG sales could displace piped gas opportunities if schemes were developed to supply LNG domestically.

• In general, industry experts argue that development of gas pipelines do not serve initially to broaden the market under current terms of project development. Pipelines are designed for a specific volume based on a long-term contract (generally 20 years) between a single supplier and off-taker. Thus, the pipelines generally do not have extra capacity to allow for additional hook-ups.

Comment -- A Slow Process

As the Indonesian case demonstrates, development of a regional gas pipeline grid will depend on further growth in natural gas demand. In the meantime, development of regional pipeline plans is confounded by the chicken-and-egg problem. Gas pipelines will not be laid until the demand exists, but customers will be slow to invest in projects utilizing gas so long as supplies are uncertain and expensive.

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