The economic value of Indonesia's natural gas: a quantitative assessment of three gas policies

Abstract

Natural gas is regarded as the future energy of Indonesia and the natural gas sector has a strategic role to play in national development. This role can be seen in the state revenue and multiplier effect it generates, for example, in the growth of employment levels. Its contribution to the national economy is about to 5.55% of Indonesia’s total GDP (ICAS, 2010). Prior to 2001, gas policy prioritized gas utilization for export in order to maximize state revenue, and infrastructure development went to the Trans ASEAN Gas Pipeline (TAGP) instead of domestic consumption. After the new oil and gas law was introduced in 2001, there were some crucial changes in gas policy. The producers now had a domestic market obligation (DMO) of 25%, and big gas reserves were prioritized for the domestic market. That new policy directive could not easily be implemented because of path dependency. Some parts of the reserves were bound by long-term contracts, limited infrastructure connectivity, and lack of clarity about pricing policy. Most energy policy issues in Indonesia were approached without the benefit of a reliable, integrated energy policy model, one that takes into account the impact of various policies on economic factors (e.g., prices), technologies, environment, lifestyle, GDP, population, and so forth (Muliadireja, 2005). Successive Indonesian governments have implemented a series of policies to mitigate domestic natural gas scarcities. However, both the nature and consequences of these policy measures lacked solid scientific grounding. Gas policy-making in Indonesia should take into account the potential benefits of natural gas, such as energy security, economic growth, household welfare, and income distribution. The important questions to be addressed are: How can decision-makers assess the policy impact on each of these dimensions? Will the policy benefit residents, or affect them negatively? Economic and social variables have complex direct and indirect linkages; therefore we need a tool for quantitative economic analysis that evaluates policy effectiveness and its impact on the economy and welfare (Qin, 2011). The main objective of this thesis is to provide scientific grounding for natural gas policy.