Indonesia Natural Gas in a Nutshell

Indonesia's gas production has encountered significant challenges, with maturing fields and a lack of new reserves discovered over the past two decades. Despite reaching 6,688 MMSCFD in 2023, surpassing targets by 110%, reserves have dwindled to 54.76 Tcf. The industrial sector consumes 43% of this gas, followed by power generation at 33% and hydrocarbons at 23%, with minimal residential use. Addressing oversupply in East Java, SKK Migas plans to reduce peak production by 200 MMSCFD from 2024 to 2026. The forthcoming Cirebon-Semarang Stage II pipeline, projected to be operational by Dec-25, will ease regional imbalances, by transferring excess gas to West Java, supported by LNG facilities. We feel that once the Cirebon-Semarang pipeline is completed, volume should be more stable, with a consequently smaller spread on pricing. We expect the spread on gas prices could go down to USD 1.75/MMBtu in 2025F.
The Government of Indonesia plans to introduce a Domestic Market Obligation (DMO) of 60% for natural gas, alongside extending its Specific Natural Gas Price (HGBT) policy, which fixes gas prices at USD 6/MMBTU for key industrial sectors, in order to enhance cost efficiency. While these measures could initially raise concerns for oil and gas companies, there are potential mitigating factors. Compared with a similar DMO requirement applied to the coal industry since 2019, where actual compliance has in fact only been partial, with only 213 mn tons out of 775 mn. tons enforced in 2023, a flexible implementation approach is suggested. Moreover, historical data, indicating around 60% of domestic gas consumption, aligns with the proposed DMO, potentially minimizing its disruptive impact on the gas sector. Thus, while DMO and HGBT policies pose regulatory challenges, their alignment with historical consumption patterns suggests a moderated impact on industry dynamics.

Re-initiate HOLD call on PGAS

This signals a reinitiate on PGAS, with a HOLD recommendation at a TP of IDR 1,745, based on a 5-year DCF model, with an 11.6% WACC and a risk-free rate of 7.09% (10-yr govt. bonds). We therefore project the ASP to be USD 7.58/MMBtu - not as high as in previous years. Gas distribution volume is expected to reach 941 MMScfd (vs. 923 MMScfd in FY23), and gas transmission is forecasted at 1,487 MMScfd (vs. 1,458 MMScfd in FY23).
Risks to our call:
1. Reduced spread from gas pricing – govt. HGBT regulations
2. Potential new corruption cases impacting operations
3. Increase in other expenses in upcoming quarters - as already witnessed with additional LNG trading expenses in 1Q24

PGAS - Here Goes the Gas

PGAS - Here Goes the Gas

19 July 2024 - 07.00am

PGAS - Here Goes the Gas

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