Indonesian Coal Examines its Options

Cecilia Quiambao, Associate Editor, Platts International Coal Report

Concerns about the potential for conflict between energy sales to local and overseas consumers are increasing at a time of rapidly growing demand and tight supply in the international coal and energy markets. Indonesian energy officials have been on a charm offensive, seeking to convince international buyers and investors that the country's coal industry can meet their needs.

INDONESIA IS THE LEADING GLOBAL exporter of thermal coal, the type of coal used for power generation, cement manufacture and other industrial applications that do not require coking coal. Already a key supplier of thermal coal to many Asian and other countries, the country is planning to expand its export sales both in existing and new markets.

This is in spite of a projected massive increase in domestic coal demand resulting from the government's fast-track electric power development program. That has caused some overseas concern not least because, in the natural gas sector, Jakarta has said it will favor local users over international buyers.

Government officials have, however, sought to assuage concerns on the coal front by saying that both local and overseas markets can be satisfied. High heating value coal will be reserved mainly for the export market while lower quality material will be used in the domestic market.

For instance Indonesia's energy minister, Purnomo Yusgiantoro, told an international audience at Asia's largest coal conference, Coaltrans Asia, held in Bali in June 2007, that: "If we can use more low rank coals, we can reserve the better quality coal for export."

A similar message was given by Bambang Gatot Ariano, the deputy director of Indonesia's Directorate of Program Supervision. He told the ASEAN Forum on Coal (AFOC), held in Chiang Mai, Thailand in July, that: "We will continue to increase export coal in order to increase our country income. However, we will also increase domestic utilization of coal." ASEAN, or the Association of South East Asian Nations, groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

The projected increase in domestic coal consumption is mainly a result of the government's ambitious plans to accelerate the development of new generation plants to help avert worsening electricity shortages. Indonesian electricity demand already exceeds supply in some areas, while the reserve margin in the dominant Java-Bali system is less than 5%, and demand overall is growing at about 7% a year.

The accelerated program centers on the construction of 10,000 megawatts (MW) of predominantly coal-fired capacity by the state power utility, PT Perusahaan Listrik Negara (PLN), with operation of the plants planned from 2009 or 2010. On top of that, independent power producer (IPP) developers are expected to build a large amount of coal-fired capacity in the near to medium term.

PLN official Eden Napitupulu told a coal conference held in Singapore earlier this year that the 10,000-MW program alone would require a 33 million mt a year increase in coal consumption, based on a coal heating value of 4,500 kcal/kg gross air dried.

Napitupulu explained that coal had been selected as the fuel of choice for the accelerated program because it is abundant and relatively inexpensive compared to oil, while there are lingering uncertainties about future supplies of natural gas. Oil currently accounts for about 40% of Indonesian electricity productionway above the Asian average.

Napitupulu said domestic oil prices started spiraling after early 2006 when the price of PLN oil purchases from state oil company Pertamina increased to 6,300 rupiah ($0.69) per liter from 1,600 rupiah per liter in early 2004. This followed deep cuts in government subsidies to oil users.

Despite the high fuel cost, PLN was unable to increase its electricity tariffs. As a result, Jakarta's subsidy to PLN had ballooned to 27.25 trillion rupiah in 2006 from 3.3 trillion rupiah in 2004, Napitupulu said, giving impetus to the accelerated coal program.

Apart from the 10,000-MW PLN program, more than 11,000 MW of capacity could be built under various independent power producer programs, including expansion projects at existing IPP plants, projects offered at several infrastructure summits held since 2005, and joint venture projects. A minimum of 4,000 MW of the capacity will be coal-fired, although the figure could be much higher, and there are thus as yet no official estimates on how much additional coal will be required to fuel the plants.

The emphasis on coal-fired IPPs is unsurprising since Indonesia's existing IPP plants are dominated by coal-fired capacity. The 5,080 MW of existing IPP capacity includes four large coal-fired facilities at Paiton, Cilacap and Tanjung Jati with 4,370 MW of total capacity. The other IPPs installed between 1997 and 2006 include a mix of mainly small geothermal, diesel and natural gas-fired facilities.

Napitupulu noted that proposed IPP projects "should maximize utilization" of locally available energy sources, including coal and natural gas, although Jakarta has also said that it wants to promote IPP projects based on the use of renewable energy resources.

How much of the planned PLN and IPP plants will actually be built remains to be seen, given the limited capital available and the very short timeframe. "How realistic is it to expect 20,000 MW of capacity to be installed in three to four years?" asked James Booker, vice president for operations and project development at the PT Paiton Energy Company, which operates a 1,230-MW coal-fired IPP.

Booker went on to ask if the government could "afford $10 billion for plants it plans to build? And is there $10 billion of IPP finance waiting in the wings?"

As for the coal needed to fuel the plants, Yusgiantoro told the Coaltrans Asia conference that most of the power plants would run on lignite, or low rank coal. He noted that 30% of Indonesia's coal reserves found in Sumatra, East Kalimantan and South Kalimantan have been classified as "low rank coal with less calorific value and higher moisture content." They are hence "non-exportable," he said.

The percentage may be even higher in terms of usable coal, with another energy department official having said that Indonesia's low rank coals constitute 50% of total mineable reserves. The department has said that Indonesia has 61.3 billion mt of coal resources, of which 6.7 billion mt are mineable.

Yusgiantoro was clear on how much effort would be involved. The use of low rank coal for power generation "will be a big challenge for all of us in order to meet global and domestic demand," the energy minister said. He added that low rank coals could also be upgraded through various methods and converted into fuel "equivalent to oil or natural gas."

In this context he said that Indonesia and Japan's Ministry for Economy, Trade and Industry had finalized an agreement to initiate a brown coal upgrading project. He urged other investors to become involved in similar projects in the future.

Meanwhile Simon Sembiring, general director of the minerals, coal and geothermal division of the Department of Energy and Mineral Resources, has said there is a financial incentive for Indonesia to continue exporting its higher grade coal. Sembiring said Indonesia had benefited from the rise in coal prices in the last two years, with its revenues from tax and non-tax collections having risen to $3.2 billion in 2006 from $1.95 billion in 2005.

He added that investments in the minerals and coal mining sectors increased to $1.12 billion in 2006, up from $880 million in 2005.

From the industry side Jeffrey Mulyono, chairman of the Indonesian Coal Mining Association, has projected that Indonesian thermal coal demand will rise to 94 million mt in 2010 from an estimated 47 million mt in 2007, mainly as a result of the accelerated program. At the same time exports in 2010 were projected at 170 million mt compared with the 149 million mt estimated for 2007, he said.

But Mulyono's projections came with a caveat: "It can be estimated that the export volume in 2007 will be 149 million mt per year. However, its prospect beyond 2007 will depend mainly on the extent to which rapid growth of production target can be achieved and domestic need can be met by lower rank coal which is [of] non-exportable quality. If this lower rank coal can be used to meet domestic need in electricity generation, Indonesia will likely be able to increase further export of higher quality coal," Mulyono said.

1. Indonesian Bituminous Coal Exports in Million Metric Tons. Source: BTS Ltd. data cited in Platts ICR Statistics Monthly

PLN President Director Eddie Widiono Suwondo pointed out to Coaltrans Asia delegates that not all domestic coal-fired generation plants will henceforth use low rank coals. He noted that, while these coals will be used for new power plants, "medium rank" coal will still be burned at existing power plants.

He also highlighted another potential issue facing low rank coal use when he said that PLN had made proposals to the government about the regulations governing the use of low rank coal for domestic consumption. This could be an important factor in determining the success of the program, given the slow pace at which such regulations are sometimes implemented in Indonesia.

On the same point Ariano told the AFOC meeting in Thailand that Jakarta is formulating regulations providing incentives for the exploration and mining of low rank coal "so as to allow competition with higher rank coal." He said "the government will determine the charge of the government portion of the low rank coal," alluding to lower royalties for low rank coal.

Looking ahead, Yusgiantoro said that Mining Law No. 11/1967 was being revised in parliament to encourage investment in the mining sector to stimulate coal exploration, development and production. He told Coaltrans Asia delegates in June that "all the major and most important subjects [related to the proposed new mining law] are in the final stages in parliament."

"The old law is no longer suited to the current political and business environment," Yusgiantoro said. "I hope the fine-tuning can be completed in the near future and you can have the new mining law some time this year," he said, adding that the new legislation "will give more certainty" to future investments in the mining industry.

Yusgiantoro said one of the new provisions governing coal in the proposed mining law stipulates that "mining contracts can be included in the authority of the central government." On the same point Sembiring said that some of the key objectives of the proposed mining law pertained to the clarification of central government, provincial and district authority.

He explained that Law No. 32/2004 on regional autonomy is one of the contentious issues being addressed in the proposed mining law because coal licensing is currently being handled by different government entities. "The central government has the main concern to establish effective regional mining systems through capacity building of regional institutions," Sembiring said.

But while Indonesia is seeking to woo investors in its mining industry, Jakarta has yet to finally resolve a dispute involving mining and forestry taxation.

Yusgiantoro said the office of Vice President Jusuf Jalla, who wields strong political influence, is already involved in resolving the dispute. "What we need now is a formula [as] to how the mining [industry] can compensate the damage because of the mining operations," the energy minister said.

The Indonesian mining industry has petitioned the Supreme Court to rescind a forestry department ruling that ultimately allows the finance department to collect a 1% tax on their revenues. The Indonesian Coal Mining Association and the Indonesian Mining Association have petitioned the court to nullify the forestry ministry decree, which affects operations of all mining companies in the country.

An energy department official said in October 2006 that the forestry decree requires all mining companies to surrender a "clean and clear" parcel of land located within a miner's concession area whose size is equivalent to a separate area within the concession that the miner is planning to mine or is already mining. The surety is required for mining operations in forest areas, he said.

Mining companies which are unable to surrender land for surety will have to pay a tax of 1% computed from its gross revenues, energy department officials said. Since the decree was promulgated in 2005, the 1% fee has not yet been collected because of the mining industry's opposition to the forestry department ruling, they added.

Despite these difficulties, Indonesian coal producers have enjoyed unprecedented increases in export prices following China's retreat from the international market to use most of its coal output to fuel the country's burgeoning economy.

Premium quality Indonesian coals have recently commanded free-on-board prices on par with coal from Australia, coal industry sources said. And one Australian coal producer told Platts that thermal prices are expected to remain firm between 2008 and 2012 as new power stations are built across Asia and Europe.

"In the next two to five years, demand will be higher than supply," the coal producer said. He added that power companies in Indonesia, South Korea, Taiwan, Vietnam, India, the Philippines, and Thailand were currently building or planning to build new coal-fired plants.

The producer said that, as "evidence that demand will overtake supply, a lot of power companies have bought or are trying to buy equity stake in mines in Australia and Indonesia. Buyers see that supply is going to be extremely tight," he said.

Of note is the purchase of a 30% equity stake in Bumi Resources by India's Tata Power. Bumi Resources controls the leading Indonesian coal producers Kaltim Prima and Arutmin. Part of the deal is a fuel offtake agreement which guarantees sale of 10 million mt/year of coal for 12 years to Tata, which is expanding its power generation capacity.

Tata Power is among several Asian coal buyers who have bought minority equity stakes in Australian and Indonesian coal operations, sealing agreements that assure a certain portion of coal mine production for their own use.