I wrote this paper based on literature study, interaction with stakeholders in the industry and online questionnaire. This presentation material was extracted from paper and was presented in IAEE conference in Perth Australia in November 2008.

1. GAS UPSTREAM INDUSTRY IN INDONESIA : ANALYSIS USING PORTER’S FIVE FORCES MODEL OF COMPETITION by Joi Surya Dharma Presented at IAEE - 2nd Asian Conference Perth, 5-7 November 2008 183 3.5 8.4 17.5 52.5 101.6 0.8 3.6 80.4 0.5 2.0

4. Porter’s Five Forces Model of Competition Chemicals Supply Demand Other Industries New Entrants Rivalry

5. Rivalry Chemicals With the increasing numbers of gas players in Indonesia, the rivalry is intensifying therefore it’s a strong force resulting a less attractiveness of the industry for other firms in this industry. This result was also supported by the questionnaire response from 34 respondents even though respondents consider moderate rivalry intensity in this industry. No Factors Issues 1 Numbers of companies The players are considerably many. In 2000, there were 31 gas producing companies, but in 2008, the number is almost double to 57 companies with total operated blocks are 223. 2 Existence of worldclass companies The rivalry is inte n sifying with the presence of the seven sisters and new seven sisters. For Shell, they are currently not operating in Indonesia. Shell is currently seeking to become one of partners of Pertamina for the giant Natuna D Alpha block development .

6. New Entrants Chemicals Despite the growing demand of gas for domestic and export, but due to the existence of the above barriers, the threat of new entrant is considered moderate therefore it is a moderate force resulting a moderate attractiveness of the industry. The many new entrants are reflected in the recent 22 exploration blocks awarded by GOI, in which some are new players. No Barriers Issues 1 Land acquisition In most cases for projects in Sumatra and Java , it could be a lengthy process and hamper the overall project schedule and committment to 3rd party. 2 Capital investment High infrastructure cost i.e. pipeline, road access in fields, land acquisition. The prospective area for giant gas discovery is located in the eastern part of the country that even require more investment cost for drilling and field development 3 Commercialization of gas Low gas price in Indonesia. The recent gas price agreed in the gas sales agreement compare to previous years agreement is higher even though it is still much lower than the market price. 4 Availability of human resources The scarcity of subsurface engineers i.e reservoir engineer and geologyst and geophysyst (G&G) 5 Risks Nature of this industry especially for the risk of exploration. There is also risk for company t o secure the contract committment from buyer .

7. Demand Chemicals The increasing gas demand for both domestic and international, resulting the demand force has a low bargaining power. The government is building infrastructure both pipeline and LNG to link between gas fields and consumers. These situations are resulting a high attractiveness of the industry. This result was also supported by the questionnaire response from 34 respondents even though most respondents consider moderate bargaining power of demand. No Factors Issues 1 Gas utilization Government of Indonesia is targeting to increase the utilization of gas for its energy consumption from 23% in 2005 to 40% in 2020 in the country’s energy mix 2 Domestic m arket Demand of gas for domestic is increasing in recent years. In the past, gas was not considered for the economic growth. Therefore most of gas was being exported in the form of LNG. In 2006, export accounted for 55.41% of the total produced gas, with the remaining is for domestic, but in 2007 the export was reduced to 51.72% thus domestic was increased to 48.28%. 3 Gas infrastructure M ost of the infrastructure investment in the past ha d been in LNG facilities. Sumatra has been the focus of significant gas pipeline development in recent years. To link the gas fields in Sumatra and growing demand in Java, PGN built a total 1025 km , 32-inch pipeline from South Sumatra to West Java . There are plans to construct a total 51 0 km pipeline linking Cirebon in West Java to Gresik in East Java . To link gas field in Kalimantan with Java, there is plan to connect these two. 4 Gas Price The price of using gas is very competitive for power plant as the cost of gas as feedstock is only around 9.8% of that using oil. This government will also set the gas price formula for domestic to be more attractive for the gas supplier.

8. Gas Infrastructure Chemicals Source: Ministry of Energy and Mineral Resource of Indonesia

9. Supply Chemicals Despite the increasing gas production, but due to issues of scarcity of some professions and the rig availability therefore the supply has a moderate bargaining power. It is resulting a moderate attractiveness of the industry. This result was also supported by the questionnaire response from 34 respondents that consider moderate bargaining power of supply. No Factors Issues 1 Gas reserve Indonesia has abundant gas reserve. It is forecasted with the current production rate, the reserve could last for 60 years. 2 The presence of Coal Bed Methane (CBM) Additional gas supply from the unconventional gas. The country has potential CBM resource of 450 TCF. 3 Gas production Gas production is in positive trendline. Some fields are producing since 1970s . Currently the main gas producers are Total from Tunu, Peciko and SisiNubi fields at 2,491 MMSCFD production , Pertamina at 957 MMSCFD, Conoco from Grissik and Belanak fields at 820 MMSCFD, Exxon at 757 MMSCFD and Vico from Nilam, Badak and Mutiara fields at 479 MMSCFD. 4 Human resources availability Availability of trained and high skilled workforce, eventhough there is an issue on the brain drain to other countries for professionals in reservoir, geologist and geophysics (G&G) due to more competitive remuneration package. 5 Rig availability The robust exploration and development drilling activities are resulting in rig scarcity. Rig availability for the offshore deepwater is getting difficult to find. This situation is hampering the country ’s target to develop deepwater areas in eastern part of the country e.g.some deepwater fields in Makassar strait, east Kalimantan encountered this problem for the drilling of its exploration wells.

10. Gas production is in upward trendline Source: WoodMackenzie Source: Ministry of Energy and Mineral Resource of Indonesia Liquids Production (1996 - 2015) Gas Production (1996 - 2015) Forecast Forecast Forecast INDONESIAN GAS RESERVES IN TSCF PROVEN POTENTIAL TOTAL

11. Other Industries Chemicals With fuel price for oil is still subsidized by the government, the widely use of gas for transportation vehicle is still low. There is also high switching cost to gas. For private and independent power plant are using more gas due to its lower price compared to oil. Therefore the other industry is considered a low force to the industry and is resulting high attractiveness. This result was also supported by the questionnaire response from 34 respondents even though most respondents consider moderate of the threat of substitute products. No Substitute Products Issues 1 Alternative energy Other alternative energy such as geothermal, hydropower development is progressing very slow. At the moment, despite the the country has abundant resource for alternate energy but it is only utilizing 2% and 8% for geothermal and hydropower, respectively. 2 Fossil energy For power generation, the utilization of coal and oil are still very high. Currently t h e consumption of coal, oil and gas are 4 4 %, 24 and 21 % of total energy mix, respectively. 3 Biofuel There is no mandatory yet by the government to use biofuel such as biodiesel and bioethanol for public yet. As the other countries had started to enforce the use of biofuel for the transportation vehicle, such as in Thailan d , the government of Indonesia in end of September this year issued an enforcement regulation to use biofuel but this regulation only comes into effect for industry.

12. Energy Mix by Type of Generation 2006-2016 Chemicals Source: Indonesia Power/ PLN

14. Thank You Terima Kasih