Contemplating ON LPG’s Replacements
The government designed various options to curb the increasing cost and consumption of subsidized LPG. There is no clear answer yet on what to decide.
THE secretariat-general of the National Energy Council (DEN) is waiting for an invitation from the office of the ministry of state secretariat. The DEN internal team has completed the national energy road map discussion, which now needs to be deliberated immediately with President Joko Widodo as chairman of the institution. The road map design also contains several options to solve the soaring use of household liquefied petroleum gas (LPG), which is a problem. “We already have a final draft of the state’s grand strategy for future energy use,” said DEN Secretary-General Djoko Siswanto on Wednesday, December 9.
The plan is to talk about DEN team’s discussion results at the ministerial level, and then present it to President Jokowi.
The DEN comprises of seven ministers: the finance minister, national development planning minister/head of national development planning agency, transportation minister, industry minister, agriculture minister, research and technology minister, and the environment and forestry minister. With them are eight members from the stakeholder element. The energy and mineral resources minister serves as executive director of DEN.
In accordance with provisions, the DEN is required to hold plenary sessions regularly, at least twice a year, or whenever they are necessary. However, the last time it held a plenary session was in 2017. There has been none since, as DEN had to deal with the arduous process of selecting members from the stakeholder element. In November this year, the House of Representatives (DPR) finally selected new members after holding a fit-and-proper test.
But a new problem has emerged. At the end of last week, President Jokowi still had not inaugurated the eight new members. “The DEN is currently without members, which deems any meeting invalid,” said Djoko. He said that if the new members are appointed this week, a meeting with the President could be held the following week.
The truth is, the formulation of a grand strategy for national energy was a request made by the President. Jokowi wants a replacement for the LPG, which is a product that requires import and is increasing in consumption volume.
For a long time now, Jokowi has been pushing for a program to turn coal products into dimethyl ether (DME). The results of coal gasification can be used as a substitute or a mixture of LPG. That way, LPG imports, which have been the culprit for the oil and gas trade deficit, can be reduced. “DME is very important as a substitute for LPG,” said Jokowi in a cabinet meeting at the Bogor Palace, West Java, on October 23.
Meanwhile, in the national energy grand strategy, the DEN also initiated various alternative solutions. Using an induction cooker, for example, could be a short-term alternative. The initial steps have started through state-owned electricity company PLN. PLN rolled out the ‘one million induction stoves’ for the year to come. To support this option, the government is also considering the possibility of diverting LPG subsidies to procure induction stoves for the public.
Another option is migration from using the LPG to natural gas, which is distributed through gas pipelines, known as the jargas. The government initiated this program in 2009. However, during its 11 years of running, the jargas project has only been able to connect around 600,000 households to the pipeline network—far below the national mid-term development plan’s target of connecting 1.9 million households by 2019. “This [project] requires a large amount of funds. The government will intervene using the state budget,” said Djoko, a former director-general of oil and gas at the energy ministry.
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LPG consumption has been increasing since the government enforced the kerosene-to-gas conversion program in 2007. Simultaneously, the government rolled out a program to subsidize LPG in green 3-kilogram tanks—later known as melon cylinders—mainly for the low-middle class housholds. At the time, the government was faced with a jump in subsidized kerosene consumption, which has burdened the state budget.
But another problem emerged. The increase in LPG consumption was not accompanied by higher domestic production capacity. This year, for example, the domestic consumption of LPG is estimated at 8.8 million tons. At least 6.84 million tons must be imported, as domestic LPG refineries can only produce 1.97 million tons per year—half of the available production capacity. This is why the LPG is blamed as one of the causes of Indonesia’s widening oil and gas trade balance deficit.
New dangers also await. The energy ministry’s strategic plan, signed by Minister Arifin Tasrif on September 18, noted the estimated amount of LPG consumption will continue to increase in the next four years. By 2024, the ministry projects, national LPG consumption will reach 11.98 million tons. Meanwhile, the domestic refineries’ capacity and production levels are expected not to change much.
Not only does it cause a trade balance deficit, the increase in LPG consumption is also eating up the state budget. Most of the LPG consumption is taken by the use of melon cylinders, which also continues to grow. In 2020, the total consumption of melon cylinders LPG is estimated to reach 7.5 million tons, up from 6.84 million tons in 2019. As a result, the allocation of subsidies has soared to around Rp50.6 trillion.
Finance Minister Sri Mulyani Indrawati even asked for an increase of Rp2.5 trillion in the expenditure budget, during the discussion on the draft of 2021 State Budget with the DPR Budget Committee on September 11. Of the proposed amount, Rp2.4 trillion would be allocated to cover the need for LPG subsidies.
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A Study by the energy ministry’s research and development agency in November concluded that migrating from using gas stoves to induction cookers could reduce LPG imports by 11.4 kilograms per month, per household. The value is roughly Rp72,400 per month per household.
However, the study said that this option would be effective in saving the state budget if the migration to induction cookers was implemented in households with power capacities above 900 volt-amperes (VA) only. This is because the electricity bill for this customer group is not subsidized.
On the contrary, migrating from LPG melon cylinders to an induction stove in a household with a power capacity of 450-900 VA would only result in energy subsidy hike for that segment. Therefore, if the plan proceeds, the study recommends implementing a subsidized system for basic tariff block. In this concept, subsidies are limited to a certain amount of power used to control the increase in electricity subsidies.
According to the Director-General of Electricity, Rida Mulyana, the government is reviewing several policy options to make induction stoves more affordable and easy to obtain. “Including calculating the amount of subsidies that can be given,” said Rida on December 11.
In the gas pipeline development option, the state gas company PGN estimated it would take up to Rp12.5 trillion to build 4.7 million household jargas connections by 2025. Construction of jargas will also take up the budget of the oil and gas directorate-general in 2021. In early September this year, the government and the DPR agreed to allocate Rp1.23 trillion for the gas pipeline program. This amount accounts for 61.8 percent of the budget allocated to the oil and gas directorate-general for next year, which is Rp1.99 trillion.
Fanshurullah Asa, chief of the downstream oil and gas regulatory agency, confirmed that the government will accelerate infrastructure development to increase natural gas absorption while reducing dependence on LPG imports. The target is to have one million new household connections per year.
Another option would be coal gasification, which would result in a variety of derivative products—including DME. This is hailed as the best option to replace the LPG, due to Indonesia’s abundant coal resources, which would cover all needs. Today, Indonesia produces over 650 million tons of coal, with around 500 million tons going to the export market.
Djoko Siswanto assessed that the world’s shift towards eco-friendly energy could be an opportunity. This is because Indonesia’s coal export contracts can be ended. Therefore, the government designed its utilization for domestic use. “So, we shall make DME a substitute for LPG,” he said.
In the grand strategy for national energy, the use of DME is projected to kick off in 2024. This could be delayed to 2025 because it takes about four years to build a processing plant. The cooperation between Bukit Asam and Pertamina is being fast-tracked towards this target. The two state-owned companies will collaborate with Air Products, a coal gasification technology patent holder from the United States, to build a factory in Tanjung Enim, Muara Enim Regency, South Sumatra.
The government is targeting the coal gasification industry to produce up to 12 million tons of derivative products, including DME, by 2040. By that time, LPG consumption volume is predicted to be around that much as well.
Among these options, an alternative in the form of building a new refinery is also prepared. The new facilities are expected to increase the processing capacity of various fuel products, such as gasoline, diesel fuel, aviation fuel, and LPG. However, this plan is projected to happen in 2023-2026, with peak production estimated in 2027. This alternative is in line with the idea ofbuilding a mini LPG refinery near gas wells containing propane (C3) and butane (C4) using a cost recovery scheme.
Of the various options, Djoko believes that migrating to induction stoves is the one most likely to be done in the short term. “It is the easiest, the fastest,” he said.
As for the construction of gas pipeline infrastructure, it will take at least a year. Not to mention the funding, which is also taken from the state budget, and the implementation that requires auction. “Nothing has been decided. Everything is still a plan.”
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THE risk of LPG consumption and subsidies is not something that the government did not think about. According to former Pertamina chief executive officer Ari Soemarno, this had been predicted since the kerosene-to-LPG program was launched in 2007.
The problem is, the government still has not raised prices even though the conversion program has been going on for 13 years. The subsidized LPG trade system is also seen as not regulated strictly. As a result, the number of demands jumped. “Of course, everyone wants to use them. If you look around, you can see people selling melon cylinders around Taman Suropati,” said Ari on December 10. “It means that there’s a market over there.” Taman Suropati is an elite area located in Central Jakarta, where residents are considered not eligible to use the subsidized 3-kilogram LPG melon cylinders.
In the early days of the migration program, Ari said, the volume of LPG use was only 2 million tons a year. The rupiah exchange rate at that time was about Rp8,000 per US dollar. Therefore, importing did not weigh on the budget too much. However, at that time, the volume of LPG demand was predicted to increase more than double in the next four to five years. “Once people know this is good, the number or users will explode,” he said.
That is why Ari thinks that the LPG trade system must be regulated extra tightly. The government once initiated to use a card system for subsidized LPG consumers. “But (the plan) came and went,” he said.
DPR Energy Commission member Kardaya Warnika also urged the government to examine this issue comprehensively. Regarding jargas, Kardaya believes that the program would do well. However, he reminded that the government must also ensure the availability of natural gas supplies. “Where are we getting it? We cannot just have a jargas project just for the sake of wanting one,” he said.
Kardaya and Ari shared this sentiment. Domestic gas sources are getting thinner. The manufacturing of LPG, for example, cannot rely on the Tangguh Gas Field in Papua or Donggi Senoro in Central Sulawesi, because the LPG component is dry. “The propane and the butane (contents) are very small,” said Kardaya. “Meanwhile, in Arun it no longer exists.”
Likewise for the gas pipeline project, it needs natural gas containing methane compounds. The best option is the North West Java Offshore Field, where there are few reserves left. On the other hand, gas from the Jambaran Tiung Biru Field in the Cepu Block is considered potential, but the price is expensive. “This is proven from the fact that we are selling it to PLN for US$7 per MMBTU (Metric Million British Thermal Unit),” Ari said. “Moreover, it’s dirty gas, it has a lot of CO2, (about) 30 percent.”
Djoko Siswanto confirmed that the level of production of natural gas containing propane and butane has been depleting from year to year. However, he claimed there is still a potential to add about 500,000 tons of LPG per year from several wells, such as from Pertamina Hulu Energi Jambi Merang in Musi Banyuasin, South Sumatra; the working area of South Jambi B in Tanjung Jabung Barat, Jambi; and the Arbei Offshore Field in Langkat, North Sumatra. “We also have Mandala Energy Lemang in Kuala Tungkal, Jambi, and South West Bukit Barisan in Sijunjung, West Sumatra.”