Gas Pricing and Financing

PT Pertamina (Persero)Jln. Medan Merdeka Timur No.1A Jakarta 10110

Telp (62-21) 381 5111 Fax (62-21) 384 6865http://www.pertamina.com

Gigih Prakoso– Pertamina

Jakarta, 28 January 2015

Gas will become the main oil substitution to fulfill Indonesia’s growing energy needs

Indonesia’s National Energy Mix (Mboe)2010-2025 shift – Perpres 5/2006

1,138

59%

Oil

Gas

Renewable

2,785

24%

23%

17%

� Energy demand is expected to grow at an increasing rate following Indonesia’s economic growth and population

� Gas consumption will increase due to:

- Diesel and fuel oil substitution on power & industrial sector

Overview of Gas in Indonesia

1

Source: Development Target of Renewable Energy 2025 – Minister of E&MR; Pertamina Analysis

1,138

25%

48%

20%7%

Coal

Oil

2025

36%

24%

2010

- Diesel and gasoline substituted by CNG in transportation sector

- LPG substitution in household and commercials

� As such, Indonesia has set an energy mix target to significantly increase the role of gas and coal – substituting the role of gasoline/diesel

� Government is fully support to accelerate gas infrastructure development

Government Program

� Energy source conversion to gas

� Gas as a main energy source for power plant

� Gas infrastructure development across Indonesia

Energy demand mix evolution is driven by consumer growth and fuel substitution – regulation impacts both dimensions

Consumer Growth

Consumer Growth – Power ExampleIndonesia Power Consumption Forecast, GW � Industrial regulations are key to growth of

consumer segments:

– Facilitation in setting up industry units

– Pricing driving customer acquisition

– Public service obligation etc.

Role of Regulations

0

50

100

2012 2014 2016 2018 2020 2022 2024 2026

+8%

2

Fuel Substitution

Fuel Options for Consumers

Gasoline

Diesel

LPG

Fuel Oil

Jet Fuel

Fertilizer

Refinery

Power

Petrochemical

Steel

Aviation

Industrial

Household

Commercial

Transport

Gas Products End Consumer Oil Products

Natural Gas

CNG

� Fuel pricing regulations impact economic substitution between fuels:

– Price subsidies on gasoline, diesel and natural gas will determine their demand mix

� Mandates may drive substitution of certain fuels:

– Substitution of gasoline and diesel with CNG may be boosted by mandating CNG use in public transport

� Regulatory thrust on alternate energy may drive its adoption over conventional fuels

Source: Pertamina Analysis

However, the lack of infrastructure leads to gas deficits across Indonesia

Indonesia Gas Balance 2010-2025 (in MMscfd)

Aceh

North Sumatera

South Maluku

Central Sulawesi

South Sulawesi

East Kalimantan

Riau Islands

-133

-119

-139

-173

-118

507

-175

-30 -30

-83

600 600

0

-124 -129

2010 2020 2025

3 3

Source: Ministry of E&MR

Central & South Sumatera

West Java Central Java East JavaPapua

Riau Islands-173-226 -226

-580

-668-619

0

-96

-145

-58

-94

-10 -18-635

-1490 -200

9

-166 -159 -195-519

-920 -1064

Existing gas infrastructure is still significantly underserving the current and future demand

4 4

• Transmission pipelines (open access) : 3.795,6 km, Distribution pipelines in Sumatera 707,08 km and in Java: 3.180,17 km• Installed Capacity of LPG : 4,2 MMTPA, LNG : 42,09 MMTPA• Capacity of existing regasification terminal : 1,200 MMSCFD

Source: Ministry of E&MR

The demand growth entails large investments in gas infrastructure

2.500

1.500

2.000

1.000 2.0651.769

Pipeline Cost

Regasification Cost

Estimated Aggregate Investment, $MM

5 5

� Estimated total investment : ~$ 8Bn � Transmission and distribution pipeline cost : $5,9 bn (~70% of total investment)� Regasification cost : $ 2,4 Bn (~30 % of total investment)

391391

243 243 3363333618

680680

233233200 204

500

0

2016 20242014 2025202020152012 20222017 202320182013 2019 2021

69 21 21

1.769

69 120Estimated Aggregate Investment, $MM

Source : Bapennas

International

6.3

0.74.0

1.6

Value distribution of Indonesia gas value chain business

Distribusi value pada mata rantai bisnis gas Internasional1

$/Mmbtu

~16% 11% ~25%

Value distribution of International gas value chain business1

$/Mmbtu• Structure of margin

portion in Indonesia, especially in midstream (transmission) is below compare to international benchmark

• Transmission is the lowest margin contributor for developing end customer price

Margin Portion (%)

End customer price

Distribution/Trading

TransmissionUpstream2

Marginal return causes less attractiveness in midstream sectors investment

~

6

Indonesia

10.0

0.63.4 - 4.4

5.0 – 6.0

1 Business margin in country that had market mechanism such as Europe – UK, Spain, and Germany (2001-03)2 include operation and production cost

Value distribution of Indonesia gas value chain business$/Mmbtu

~16% 5%35-45%

customer price• It can be assumed

that return of transmission is marginal and less attractiveness for investors

Margin Portion (%)

IRR of transmission pipeline is 11-12%, by 90% of utilization

(Regulation by BPH Migas)

End customer price

Distribution/Trading

TransmissionUpstream2

~

Source: Pertamina Analysis

Pertamina as NOC has taken major role by developing gas Infrastructure that covering all regions in Indonesia

Arun

LNG KTI development

Trans Sumatera pipeline

HalmaheraSemberah Bontang

Pipeline, Regasification, and LNG development

Planned pipelineExisting pipeline

Existing FSRU Planned FSRU

LNG KTI development

Gas Upstream development

Gas Field

Offshore

7

source: Pertamina; Litsearch; company reports; company websites

FSRU Cilacap

FSRU Jabar

Trans Java pipeline

Halmahera

Pomalaa

Makassar

Pesanggaran

Batakan

Tanjong Batu

Semberah Bontang

FSRU Jateng

7

• Pertamina has identified a portfolio of pipeline, regasification, LNG and mini-LNG projects across Indonesia

• The most critical projects over the next few years are the Trans-Sumatera and Trans-Jawa pipelines, Arun regas, and LNG KTI

• But all those initiatives from Pertamina was not enough to meet the gas demand across Indonesian regions

Partner(s)

RegasificationStorageSupply

Gas infrastructures can be built and operated through a partnership

Distribution & Marketing

Demand

SOE

Required Capabilities

Partner selection based on capabilities

8

8

Joint Venture (JV) � Investment &

financing

� Technology and

O&M

� Asset

� CommerceMultilateral Agencies/Export Credits Agencies

Commercial Banks

Project Financing

As large investment is the main hurdle to build gas infrastructure, then business model through partnership and project financing is one of the solution.

Source: Pertamina Analysis

Upstream-led model Downstream-led model Standalone model

Typical Business Modelse. g. Regasification Terminal Projects

� LNG regasification is driven by upstream players

� A long term supply agreement and demand certainty along the value chain are required

Definition � LNG regasification is mainly driven by LNG demand on end customers

� Off-take commitment is required

� LNG regasification as standalone chain

� Typically this is applied in: fragmented demand and LNG as important source for the security and diversification of supply

BENCHMARK

Typical business models for gas infrastructure

9

9

Example� South Hook project in UK developed by ExxonMobil and Qatar Petroleum processes LNG supplied by Qatargas.

� Malaysia LNG Variant

� DEPA’s regasification terminal at Revithoussa, the terminals developed by GDF-Suez in France and the investments made by Union Fenosa and Iberdrola in the Segunto and Ferrol regasification terminals in Spain.

and diversification of supply

� Enagas of Spain developed terminals in Barcelona,

� Cartagena and Huelva. Gasuniedeveloped the Gate terminal in Rotterdam

Source: Pertamina Analysis

Key challenges to bring gas to unmet demand centers

Infra-structure

• Construction of new gas pipelines, liquefaction & regasinfrastructure to address geographical dispersion between demand centers (Java and Sumatra) and supply centers (Kalimantan, Papua and Sulawesi)

• More efficient use of existing infrastructure through national gas policy linked to industrial development

• Greater open access to gas markets and pipeline infrastructure

• Address disparity between domestic gas prices and global LNG prices

10

Supply

RegulationPricingIndustrychallenges

Source: Pertamina Analysis

• Favorable government policies and fiscal incentives / contract terms to support development of upstream fields and gas T&Dinfrastructure

• Simplification of land acquisition process for development of gas infrastructure

• Simplify upstream gas supply contract process to improve speed to market

global LNG prices• Addressing fuel

subsidies creating artificial barriers to adoption of gas as fuel

10

Regulatory support is required to effectuate favorable demand mix and infrastructure investments

Key Support required from Regulators

Facilitation of Target Energy Mix

� Regulatory support is required for Indonesia to achieve the target of oil substitution by increase in gas and renewable penetration. Certain steps in this direction could be:

– Facilitating substitution driven by economics through pricing regulations : e.g. Liquid fuel price deregulation and/or subsidies on alternative energy / CNG

– Volume allocation of substitutes to consumers to create certainty of supply : e.g. preferential allocation of gas to city gas distribution, fostering fuel substitution

11

Source: Pertamina analysis

Facilitation of Infrastructure Investments

Facilitation of Supply

Enhancement

– Mandates facilitating substitute adoption : e.g. mandating use of CNG in public transport

� Attracting investment in exploration & production as well as supply infrastructure such as refineries by easing the regulatory regime appropriately

� Attracting global players to provide access to their existing infrastructure or invest in new infrastructure to support Indonesia’s energy demand:

– Facilitating use of assets of global players : e.g. exemption from Cabotage to Oil & Gas shipping activities

– Attracting infrastructure investments : e.g. providing tax breaks to global investors

12

T hank You