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Impact of Natural Gas on National Food Security

The issue of national food security has become increasingly concerning, with skyrocketing food price inflation amid overall low inflation and a rising amount of rice imports. In response, the government has started many initiatives, including extending fixed prices of natural gas for fertilizer, and increasing the budget for the fertilizer subsidy to strengthen the nation’s food security.

According to Statistics Indonesia (BPS), the year-on-year (yoy) inflation rate for foodstuff reached 8.54 percent in March, 8.01 percent in April, 6.8 percent in May and 5.11 percent in June, while overall inflation was relatively low at 3.05 percent in March, 3 percent in April, 2.84 percent in May and 2.51 percent in June.

BPS data shows that from January to May 2024, the country's rice imports surged 165.27 percent to 2.26 million tonnes valued at US$1.44 billion, from 854,290 tonnes valued at US$446.62 million in the first five months of 2023.

Faced with this sharp inflation and rising rice imports, the government is making every effort to strengthen the nation’s food security. A crucial element of their strategy is providing fertilizer subsidies, as affordable fertilizer significantly impacts agricultural productivity. This is particularly evident in rice production.

For Indonesia, a stabilizing factor in fertilizer manufacturing costs has been the recently extended fixed natural gas (HGBT) policy, which sets the purchase price of natural gas at US$6 per million British thermal units (MMBtu) for certain manufacturing sectors, including fertilizers. The HGBT significantly affects the affordability of fertilizer manufacturing.

The role of the HGBT has become even more crucial after the allocation of subsidized fertilizer was recently doubled from 4.73 million tonnes to 9.55 million tonnes for 2024 through agriculture ministerial decree no. 249/2024 on allocation and retail price of subsidized fertilizers, as disclosed by Agriculture Ministry Food Crop Processing Substance Group Chair Mulyono.

“The government's decision to increase the allocation of subsidized fertilizers to 9.55 million tonnes this year will meet 79 percent of fertilizer needs, and this is expected to help the ministry achieve its target of 53.98 million tonnes of unhusked rice grain production,” Mulyono told a public discussion on food security hosted by Tenggara Strategics and the Centre for Strategic and International Studies (CSIS) on July 16, 2024.

On the other hand, the main concern with the HGBT policy is the declining supply of natural gas. BPS data shows that natural gas production has been continuously declining since 2018. In 2018, annual production was approximately 2.83 million metric standard cubic feet (MMSCF). Since then, production has fallen by over a third, reaching roughly 1.96 million MMSCF in 2022.

Speaking at the same discussion, Energy and Mineral Resources Ministry oil and gas program development director Mirza Mahendra provided further context and assured that the government is hard at work to ensure that the national gas supply remains stable. Since last year, new natural gas sites have entered the exploration phase. Some examples include the Blora working area in Central Java and the Tuna working area in the Riau islands.

Mirza also mentioned that while the new exploration sites can reinforce the supply of natural gas, it might not necessarily affect the market price to a proportional degree. He explained that many of Indonesia’s natural gas blocks are offshore and lack adequate infrastructure for transporting and storing the extracted gas, which inflates the market price.

Nevertheless, Mirza assured that his ministry would continue to give priority to fertilizer manufacturing and to the electricity sector for the exploitation of Indonesia’s natural gas reserves.

“Our ministry guarantees the availability of domestic gas for the fertilizer industry until 2030, while prices will be determined later by the government. Currently, the government has continued the HGBT for fertilizers and several other industries," he said.

State-owned fertilizer producer Pupuk Indonesia of portfolio and business development director Jamsaton Nababan appreciated the government’s decision to continue the HGBT policy as it will give certainty to the cost of fertilizer production and eventually to the subsidy.

Jamsaton explained that natural gas contributes 71 percent to the total production cost of urea fertilizer and 5 percent to NPK fertilizer, two of the most commonly subsidized fertilizers. Therefore, for Pupuk Indonesia, price certainty of natural gas is of utmost importance for production, especially for urea fertilizers.

While fertilizer plays a critical role in agricultural productivity, Universitas Lampung Agricultural Economics Professor Bustanul Arifin has observed poor fertilizing practices in the field. Most commonly, this comes in the form of excess fertilizer use, which can exhaust the soil’s nutrients and thereby accelerate land fatigue.

This can lead to great losses for the farmer as the farmland will need to rest before it can be productive again. If the farmers are not using their subsidized fertilizer effectively, then the impact of the fertilizer subsidies becomes severely limited.

National Fisherman and Farmers Community (KTNA) Cooperation and Advocacy Department Head Sidi Asmono also urged the government to limit exports of natural gas and allocate more for domestic use, especially for downstream industries, including for fertilizer production.

The discussion highlighted the importance of ensuring the supply of natural gas at the right prices to produce enough fertilizers to further improve agricultural productivity, thereby greatly decreasing dependency on food imports and ensuring Indonesia’s food security.

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