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Commodities 2022: Indonesia to divert more LNG for domestic use, introduce carbon tax

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Commodities 2022: Indonesia to divert more LNG for domestic use, introduce carbon tax

Highlights

More LNG diverted to combat power shortages in 2022

Diversions could impact LNG export commitments

First phase of carbon tax to target coal-fired power plants

The Indonesian government is expected to divert more LNG cargoes from national oil company Pertamina for domestic use to combat energy shortages in 2022 and launch a carbon tax for its coal-fired power sector in April.

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The Southeast Asian country is struggling with coal and LNG shortages, having imposed a short-lived ban on coal exports in early 2022, even as millions of consumers in Java, Madura, Bali and other islands suffered from power outages.

While President Joko Widodo has ordered Pertamina and private LNG producers to prioritize domestic needs, the country continues to see declining gas production at mature fields and falling investment in its oil and gas upstream sector, which caused supply issues to customers like Singapore in 2021.

Indonesia is now expected to strike a balance between energy security concerns as the world's fourth-largest country by population, its competitiveness as one of Asia's largest fossil fuel exporters and growing climate change concerns.

Its capital Jakarta is one of the world's fastest sinking cities due to rising sea levels, putting the country at the crossroads of global warming and fossil fuel exports, while the government has made pledges towards net zero emissions by 2060 at COP26 last year, which will make 2022 a year of reckoning for policymakers.

LNG exports

Indonesia's upstream regulator SKK Migas has allocated 58 LNG cargoes for state-owned power utility PT PLN (Persero) to generate electricity this year. The cargoes will come from the flagship Tangguh and Bontang LNG plants.

SKK said this compares to an official allocation of 58 LNG cargoes to PLN in 2019 for power generation, 40 cargoes in 2020 and 54 cargoes in 2021. PLN did not absorb the full amount of LNG cargoes that were contractually allocated in previous years, amounting to 13 unused cargoes in 2020 and 11 cargoes in 2021.

Growing energy shortages have increased the likelihood of more cargoes being diverted for domestic use in 2022, which could impact export commitments and the need for Pertamina and overseas LNG buyers to enter LNG cargo swaps, officials said.

"Currently, all related parties are ensuring the availability of energy for electricity, especially in the first quarter of 2022," Deputy for Finance and Monetization of SKK Migas Arief Setiawan Handoko said in a statement in early January.

Energy and Mines Minister Arifin Tasrif confirmed at a press conference in January that the ministry had secured LNG supply, which was previously allocated for exports but would now be diverted to the domestic market. He did not provide further details. Pertamina and SKK Migas declined to comment.

SKK Migas' Handoko said that the country's plan to use more LNG for electricity generation is expected to improve "to ensure stable supply for buyers and sustainable production for sellers."

Indonesia's upstream oil and gas sector began supplying LNG for domestic use in 2012 with just 14 cargoes for sectors including power, industries and city gas. This number rose to as much as 60.6 LNG cargoes in 2019, but fell to 44.9 LNG cargoes in 2020 due to the pandemic and a decline in economic activity and energy demand, according to the regulator.

In 2021, energy consumption rebounded with a total of 56 LNG cargoes for domestic use, of which 54 LNG cargoes were allocated for electricity generation, with the remaining used by industrial sectors. More than 95% percent of LNG supply for domestic use is now being consumed by the electricity sector.

Explore this topic: Commodities 2022

Carbon tax

At COP26, Indonesia laid out decarbonization strategies under "Visi Indonesia 2045" and the "Long-Term Strategy on Low Carbon and Climate Resilient Development 2050" in its Nationally Determined Contributions, or NDCs.

It set a target of reducing greenhouse gas emissions by 29% on its own and 41% with international support by 2030. In order to meet these goals it passed a Presidential Regulation on the Economic Value of Carbon that serves to put a price on carbon.

Jakarta is expected to implement carbon taxes in phases, with the first one on coal-fired power plants as early as April 2022, which will be further expanded to other fuels and industries after 2025.

The initial carbon tax will be limited to Rupiah 30,000/mt CO2 equivalent ($2.10) and the plan is to produce a more detailed roadmap for carbon pricing and the setting up of carbon exchanges.

The exact manner of implementation of the carbon tax across coal, gas and other resources sectors is yet to be determined, and the impact on domestic and global supply chains is also uncertain.

Pertamina has been called upon to be the pillar of the country's decarbonization and the NOC has laid out its own Long Term Plan 2020-2024 to cut emissions. While there is significant scope to build a carbon market with early movers like Australia and Singapore, the future roadmap is still uncertain.