[Discussion Report] PYC International Energy Conference 2017 – Parallel Session for Room 2

The second room of International Energy Conference (IEC) parallel session consists of four paper presenters who discussed about oil and gas. They were reviewed by three professional reviewers; Dr. Evita Herawati Legowo as the Coordinator of Sustainable Energy and Environment and Lecturer at Swiss German University (SGU), Dr. Luky A. Yusgiantoro as a member of the Advisory Board for the Purnomo Yusgiantoro Center (PYC) and also Dr. Elena Reshetova from National University of Singapore (NUS).

The first topic covered was “The Role of the Social Responsibility Program of the Oil and Gas Industry on Sustainable Development in Cirebon Region” by Mr. Suliantara from Lemigas (Research and Development Centre for Oil and Gas Technology). During his presentation, he highlighted the importance of Corporate Social Responsibility (CSR) activity from oil and gas company to improve the local’s life quality with a focus on Pertamina Exploration-Production (EP)’s asset in Cirebon. With the continuous growth of Cirebon as a hub city which connects major cities from West Java to various destinations, as well as its role as a port city, Cirebon is becoming an important city in West Java. With the National Medium Development Plan as its guideline, the local government performs improvement in education, health services, infrastructure, as well as all the points listed in Government Regulation No. 59/2017. As a form of feedback from Pertamina EP to the local community, several CSR activities were held by the company by following the mentioned guideline. For example, restoration of local heritage tourist spots, improvement of road infrastructure as well as funds to improve the local’s sheep ranch. However, since the ultimate goal of the CSR itself is to improve the local’s life quality, a form of evaluation is needed to assess the effectiveness of every CSR program held by the company. Mr. Suliantara mentioned that the evaluation can be divided into 3 main aspects which are economic, social and environment. To perform this evaluation, a grading matrix was created to grade the impact of the CSR activity on the mentioned aspects. The grading method itself was rather qualitative based on interviews with the locals. From the evaluation conducted in 2017, Mr. Suliantara found that the locals are satisfied with the impact of the CSR activities by the company and directly improve their life qualities. But then again a more quantitative approach to evaluate the impact is needed in the future as well as a continuous evaluation conducted every year so the data can be more supportive and reliable. In the end, Mr. Suliantara hoped that the CSR evaluation framework can be implemented in different regions of Indonesia with changes to adapt the evaluation criteria to a case-by-case criteria. By implementing this evaluation framework, hopefully, we can improve the CSRs performed by the company by maximizing its impact to the locals as well as fulfilling the National Medium Development Plan.

The next topic covered during this session was the “Investigation of the Price Linkage between Asian LNG Spot and Far East Asian LNG Prices and its Implications” by Mr. Anas Pradipta. Since switching to gas fuel in 2010, LNG pricing had been an important issue for Indonesia. Spot pricing is the preferred method in the current market as less long-term contracts are signed. However, spot pricing rises several issues as the different pricing mechanism can be found on the market. The presentation focused on finding linkage between these pricing mechanisms and modeling the price fluctuation especially in the Japan, South Korea, and Taiwan market. Using the Johansen co-integration test, Mr. Anas Pradipta tried to examine the existence of a long run relationship between the Asian LNG spot price with the LNG price of the previously mentioned countries. From the analysis, no linkage was found from the Japanese and South Korean market. However, a slight linkage between the spot market price and the LNG price was found from the Taiwan market. The different observation most probably came from the fact that Japan and South Korea LNG prices were still affected by the long-term contract signed by these countries while Taiwan relies solely on the spot market price. While still only proven in the Taiwan market, the method was able to link the Asian spot price to the market price in the country. While this can and had been observed qualitatively, Mr. Anas Pradipta was able to provide a quantitative approach to linking these prices. Using this quantitative method, an even more accurate optimum pricing method can be achieved. Indonesia mostly refers to the spot pricing method whenever additional gas supply is needed. With this method, in the future, Mr. Anas Pradipta hoped that the model can help the government in determining the domestic gas price by observing both the spot and long-term pricing to decide which pricing method will be best used to each month. However, Mr. Anas said that it will be even better for Indonesia to move from fixed pricing to product based pricing in the near future.

While the second presentation focussed on the pricing of energy demand, the third presentation from Mr. Ayatulloh from BPS (the Central of Bureau Statistic) tried to highlight the interaction between energy consumption, income, and energy price using a vector autoregression (VAR) analysis. From the numerical analysis, Mr. Ayatulloh found that there is a clear causality between energy consumption and Consumer Price Index (CPI) energy which affects the national income. The observed trend is that when the rate of energy consumption is going up, then an increase of income is also shown in the model. From the observed trend in the numerical analysis, it is recommended that when the energy consumption rate is going up, the government should not increase the subsidies. On the other hand, to stimulate the growth of income, keeping the subsidies at the same level is the best option observed in the statistical analysis. However, while the Granger method showed a causality between the mentioned variables, the analysis was performed only on data from 2000 until 2016. Using an even larger data set should improve the accuracy as well as the statement of this research. Moreover, further verification by comparing the modeled data with the real observed data will strengthen the statement even further. BPS has a huge data set, so Mr. Ayatulloh hope to be able to process more data and present a better numerical and statistical analysis to give an even better recommendation to the government.

The last session was presented by Mr. Azizurrofi and Ms. Dian from SKK Migas (Special Unit of Upstream Oil and Gas of the Republic of Indonesia). During their presentation, they showed the urgency for Indonesia to increase its energy production. In 2014, the energy consumption increased to 1.6 Billion BOE while the prediction was only 700 million BOE. From this occurrence, Indonesia needs to prepare for the worst case scenario as the nation needs to increase energy production to fulfill its demand. To increase the production rate, it is important to understand the oil and gas contract area in Indonesia. From the Plan Of Development (POD) analysis, Indonesia currently has 85 exploitation areas and 195 exploration areas. While the production rate in Sumatera is the highest compared to Java and Eastern Indonesia area, the commercial value in Sumatera is the lowest. On the other hand, although Eastern Indonesia still very low in activity, has the highest reserves and commercial value. From this analysis, the presenters observe that Eastern Indonesia is the most interesting area to be explored even further as it comes with a high commercial value with low ongoing activity. However, while it is interesting to explore Eastern Indonesia area, the available information of the mentioned area is still very low which makes investors hesitated to channel their investment to explore the area. This is where the contract mechanism can come into its importance and stimulate investors to take part in the exploration. The common ongoing contracts of major oil and gas field in Indonesia is a production sharing agreement which is a cost recovery mechanism. To further attract investors, it is advisable to offer a gross-split contract and further incentive for the company which takes part in the Eastern Indonesia oil exploration and exploitation. With this presentation, both Mr. Azizurrofi and Ms. Dian hoped to be able to show future investors that Eastern Part of Indonesia is still a very attractive area to be explored. Moreover, they hoped that this research will be able to give a recommendation to the government on how to handle exploration contracts for the Eastern Indonesia area to further increase Indonesia’s energy resilience.

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