Indonesia’s gas crunch strains domestic industries, may shake trust in exports

[JAKARTA] Indonesia’s growing gas shortage is forcing the government to prioritise domestic industries – a decision which analysts said could undermine its credibility as an exporter and push long-standing partners such as Singapore to look elsewhere.

The supply crunch will also have a “severe impact” on Indonesia’s gas-reliant manufacturers – from those in fertilisers and petrochemicals to ceramics and steel – as they face operational strain, threatening a fallout in investments and jobs.

Already, the tight conditions have led the authorities to ask overseas gas customers to accept shipment delays and to urge exporters to defer cargoes well into 2026, a decision which holds significant implications for importers.

Pang Lu Ming, senior analyst at Rystad Energy, said that while sellers and buyers cannot reallocate volumes on short notice, frequent reallocations could prompt Singapore to seek alternative gas sources.

“It would likely require a multi-month or even year-long process, with makeup volumes supplied from elsewhere. If such reallocations are not specified in the contract, both Indonesia and Singapore are bound to honour the original terms, meaning the committed molecules must continue to flow,” he said.

“But if Indonesia does continue to prioritise domestic demand over exports, it would push Singapore to seek other gas and energy sources.”

Responding to queries from The Business Times, the Energy Market Authority (EMA) said Singapore’s natural gas supply remains stable.

“EMA will continue to closely monitor developments and work with industry partners to ensure Singapore’s energy security and price stability,” it added.

To safeguard against potential disruptions, Singapore sources natural gas from a diverse range of suppliers, including liquefied natural gas (LNG) from around the world and piped natural gas from Malaysia.

Indonesia has been a pillar of South-east Asia’s gas trade, supplying Singapore through pipelines and shipping LNG cargoes to buyers across Asia and beyond for decades.

Now, with the gas crunch on, Indonesian factories and other industrial users are demanding more fuel just as production is slowing, making it a challenge for the country to both satisfy local needs and honour export commitments.

BMI, a unit of Fitch Solutions, said that despite growth prospects for Indonesia LNG production, exports are unlikely to rise significantly in the near term as the government prioritises domestic consumption.

In the first half of this year, Indonesia’s total gas consumption hit 5,598 billion British thermal units (BTU) per day, with nearly 70 per cent consumed domestically, and the remainder exported, underscoring the ongoing balancing act between meeting local demand and overseas commitments.

The Ministry of Energy and Mineral Resources projects Indonesia’s natural gas demand to exceed 6,000 billion BTU per day between 2025 and 2030, driven by rising industrial consumption and the government’s energy-mix programme.

Swap deal

A multiparty gas swap was launched by SKK Migas, Indonesia’s upstream regulator, on Aug 22 to ease immediate domestic shortages while maintaining existing export contracts.

The arrangement redirects 27 billion BTU a day from the West Natuna Supply Group, which includes Medco E&P Natuna, Premier Oil Natuna Sea and Star Energy (Kakap), to state-owned gas distributor Perusahaan Gas Negara (PGN) for domestic delivery.

Physical volumes are transported through pipelines operated by Medco E&P Grissik and PetroChina International Jabung in South Sumatra, which channel natural gas from Indonesia to Singapore. The deal involves key upstream contractors and buyers, including state-owned Pertamina and overseas buyers such as Singapore’s Sembcorp Gas.

In March, Sembcorp announced that it had terminated the gas sales agreement its unit had signed to import piped natural gas from Indonesia’s Mako gas fields, citing regulatory hurdles.

BT reached out to Sembcorp for comment on how the swap could affect gas prices in Singapore, but received no response.

Pang from Rystad Energy said swaps occur only under long-term agreements, where the characteristics of the gas molecules are clearly defined.

“This is usually possible in regions with well-integrated pipeline networks.”

Natural gas powers more than 92 per cent of Singapore’s electricity, sourced mainly through pipelines from Malaysia and Indonesia. The rest is imported as LNG.

Gas crisis hit industries

Under President Prabowo Subianto, Indonesia is racing to boost industrialisation and achieve 8 per cent growth, but the recent gas crisis shows that the country is caught between a rock and a hard place, balancing rising domestic demand with declining output.

In an information disclosure report released on Aug 15, PGN said gas distribution from upstream oil and gas contractors fell in August, temporarily disrupting deliveries to several customers in West Java and parts of Sumatra.

PGN attributed the disruption to an unplanned shutdown at existing gas suppliers and delays in finalising additional supplies, which affected both required volumes and distribution stability in the affected areas.

Manufacturers then raised the alarm.

Seven manufacturing sub-sectors currently benefit from the government’s subsidised gas price programme, locally known as HGBT: fertiliser, petrochemicals, oleochemicals, steel, ceramics, glassware and rubber gloves. But recent cuts in allocations have led to operational strain.

Indonesian media reported that two tableware factories in Tangerang halted production and laid off around 700 workers earlier this month, citing gas supply restrictions.

The Ministry of Industry confirmed the pressure on manufacturers, with spokesperson Febri Hendri Antoni Arief warning that the shortage is hitting economic activity across sectors. “This crisis is having a severe impact on the manufacturing industry,” he said in a statement.

“It affects not only manufacturers, but also investment sentiment, production processes and job creation.”

Industry groups warned that the situation could worsen. Indonesia’s Olefin, Aromatic and Plastic Industry Association has criticised the government’s handling of the crisis, saying prolonged shortages could trigger mass layoffs.

Jakarta-based fatty acid manufacturer Sumi Asih reported that since Aug 13, it has been receiving less than half of its contracted gas volumes, which were initially capped at 48 per cent of the agreed quota and gradually lifted to around 70 per cent. This has left the company struggling to meet commitments to buyers in China and Europe.

In response to queries from BT, PGN said the situation has been resolved, with industrial customers under the HGBT programme now receiving supplies based on the government’s reallocation scheme.

Temporary relief

However, industry experts cautioned that the respite may be short-lived without deeper structural reforms.

Prateek Pandey, senior vice-president at Rystad Energy, said the swap could help secure additional volumes for the domestic market in the near term, likely through the end of this year and into next.

“But over the longer horizon, Indonesia will need to either secure new long-term import contracts or accelerate the development of its substantial domestic resources,” he said.

Indonesia’s LNG exports fell gradually from 17 million tonnes per annum (mtpa) in 2015 to 10 mtpa in 2023, largely due to declining output from the Tangguh and Bontang LNG plants and the government’s decision to prioritise domestic consumption.

Production in South Sumatra, home to key blocks such as Pertamina EP, the Corridor Block and Jambi Merang, has been steadily falling for five years.

Few new supply projects have come online to offset the declines, forcing regulators to redirect existing supplies to fertiliser plants, power stations and industrial users. New demand is also emerging, most notably from a power plant in Batam.

Upcoming projects such as the Abadi LNG project, Indonesia Deepwater Development and exploration in the Andaman Sea could theoretically meet both domestic and export demand, but delays remain a major risk.

“Indonesia has enough potential to meet domestic demand while continuing exports,” Pandey said. “The real risk is delays in development, which could affect investor sentiment.”

Indonesia is not alone in facing gas supply challenges. Malaysia may redirect more Sarawak output to domestic use, while Australia has long struggled to balance exports with local demand.

Pandey said the broader lesson is that governments should focus on expanding supply rather than merely curbing exports.

“Developing pipeline resources already in the works and improving connectivity is critical,” he said. “Many pipelines require both investment and investor attention.”