Commissioning the Floating FSRU
The Nusantara Regas floating terminal (40% owned by PGN) is in place about 15km offshore of North West Java. The unit has begun commissioning and received its first gas delivery in April 2012 from the Bontang gas field. A second LNG delivery is expected at the end of June 2012. The unit is a LNG vessel modified with a regas unit based on open systems that utilize seawater and propane. It is also a self-sustaining unit using part of the LNG to generate power. Full commercial operation can be expected in the next one or two months. The floating unit is operated under Golar Wihelmenson Management. Although PGN has not made public the gas purchase price, the company should, in principle, charge its customers on a cost plus basis.
Floating terminals to help transport gas
The West Java floating terminal is the first floating terminal project in Indonesia. Going forward, such terminals might be the best solution to ensure the demand for gas is met. This is because most of the gas fields are located in the eastern part of Indonesia (East Kalimantan and Papua) whereas the demand mainly comes from PLN and industries that are located in Java and Sumatra i.e. the western part of Indonesia. Building a pipeline is not feasible due to the vast distances involved and because it would have to cross the sea. Demand is growing and the Ministry of Industry estimates gas demand of 5,300 mmscfd coming from sectors such as electricity generation, metals, fertilizer production, petrochemicals and others.
Confusion on the gas price
It seems the recent gas price hikes are likely to be reviewed due to objections from the industrial gas users. The Minister of Energy and Natural Resources held a meeting with the Minister of Industry, the President Director of PGN and industry associations to discuss the recent gas price hikes of 55%. Although the current gas bill is still based on 55% higher gas prices, it appears that the government is trying to meet the wishes of industrial gas users at the expense of PGN's commercial performance. On the one hand, the government insists that PGN needs to increase the gas purchase price but, on the other hand, PGN is seemingly not allowed to pass on the increase in costs to its customers. Furthermore, the increase in the gas purchase price is not being compensated by any volume guarantees. This has resulted in a lot of confusion in the market and created negative sentiment towards PGN shares. Clarification may come soon, however, as the government has stated its intention to resolve the dispute by the end of June 2012.
HOLD reiterated
We maintain our Target Price of Rp3,575. Our calculations already incorporate 55% higher gas prices and take into account the operations of the West Java floating terminal with a one-third utilization rate. HOLD maintained.
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