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May 19,2016 23:38:18
Decree on Industrial Gas Price Cut
The presidential decree for Indonesia Industrial gas price cut is out.
Summary as below:
¨ Government will cap Indonesian upstream gas supply cost that are sold by oil and gas contractor at USD6/MMBtu, for existing gas field that has higher gas cost than USD6/MMBtu, government will lower the end user industrial gas price for these fields.
¨ Method to lower end user industrial gas price is via cutting the gas supply cost from upstream to gas distributor, and gas distributors (PGAS IJ, RAJA IJ) are mandated to lower their selling price by the same amount. The interest of oil and gas contractor is not affected because government will give them a higher share of production to offset the lower supply cost.
¨ Potential beneficiary of lower industrial gas price will be companies operating in fertilizer, petrochemical, oleo chemical, steel, ceramic (ARNA IJ), glasses, and rubber glove sectors. This is subject to recommendation from the ministry of industrialization.
¨ There will be issuance of another decree that determine the gas transmission tariff and gas distribution margin of gas distributors, to be set by ministry of energy.
¨ We have spoken to PGAS's ($PGAS) management for clarification of their distribution margin, it is safe at this juncture because distributors will just pass on the lower gas cost to their customers, lower ASP also helps to stimulate demand, so PGAS and RAJA margin intact but potentially higher gas distribution volume.
¨ For the determination of transmission and distribution margin that is not set is this decree, PGAS remains firm that a dollar margin of at least USD3.0/MMBtu is required for further investment and development of gas pipeline in Indonesia. Furthermore, government has recently approved the transmission tariff of USD2.4 for its new Kalija project.
¨ On a separate note, during our meeting with Sudirman Said, Indonesia minister of energy, about 6 months ago, he did enlighten us to not worry about PGAS's margin because the price reduction will be coming from upstream, as stated in this presidential decree.