Alternative Energies

Indonesia

Economic News

22 Jul 2010
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Against the backdrop of high global oil prices and rising domestic energy needs, the Indonesian government is getting serious in its quest for new and alternative energy sources.



On this score, last week saw the minister for energy and mineral resources, Purnomo Yusgiantoro, announce that the government is developing plans for the construction of 11 bio-diesel plants in various parts of the country.



The minister had just arrived back from a cabinet meeting in central Java led by President Susilo Bambang Yudhoyono. There cabinet members had discussed national energy policies and a blueprint for the development of bio-energy.



With this step, Indonesia hopes to cut 10% off its consumption of hydrocarbon-based fuels by 2010.



The announcement follows several initiatives during the last few months by the government. These started with the President signing a decree in May on energy diversification and the promotion of the development of biofuels.



Indonesia is in dire need of energy. Currently, the country is highly dependent on fossil-based fuels like oil and gas for its energy needs. During an interview with OBG recently, President Director Abimanyu Suyoso of PT Indonesia Power estimated that oil alone is used for almost 25% of the energy generated, yet oil's share in the budget is much higher - approaching 65% - due to the high price.



Meanwhile, according to a PricewaterhouseCoopers (PwC) study on Oil and Gas Investments in Indonesia released in September 2005, Indonesia's oil production levels have declined continuously since peaking in 1996.



President Chris Newton of the Indonesian Petroleum Association (IPA) told OBG that much of this could be put down to low investment in exploration.



"The single biggest challenge for Indonesia is competing for exploration investment in an increasingly competitive and globalised market for the exploration investment dollar," he said.



"Exploration investment in Indonesia is at a 30-year low," he continued, while also describing it as "the long term future of our industry... there's no way we're going to see a sustained production turn around unless we can enhance frontier exploration investment."



The PwC study also observed that the production of gas has been declining since 1998, and that significant volumes of undeveloped gas reserves remain in Indonesia.



However, when BP starts production in 2008 of LNG at their Tangguh project in Papua, with a proven reserve of 408bn cu metres, national gas production is expected to significantly increase again. Also the IPA sees reasons for optimism with the current government taking action to improve the investment environment, as expressed in its annual report of 2005.



Now though, the government is diligently looking for alternative ways to generate energy.



State-owned oil and gas company Pertamina took a modest step by revitalising its gas fuel business in Jakarta with an investment of IDR7.5bn ($7.5m).



The government also plans to accelerate the construction of coal-fired power plants totalling 10,000 MW via a special crash programme. This move is aimed to decrease dependency on relatively expensive oil for electricity generation. Indonesia, a member of OPEC, is currently a net importer of oil, while coal is readily available in the country.



The contracts to build the power stations, worth $8bn, are expected to be awarded as early as September, possibly even without open bidding on the projects in order to save valuable time.



The announcement of a comprehensive strategy for biofuels could well be the most ambitious step thus far, taking into account the potential for the development of biofuels in Indonesia. The country has the climatic characteristics needed for biofuel crops, and it has enough affordable manpower available to undertake the labour intensive production of the fuels.



The biggest potential in the short-term lies with bio-diesel, an alternative to fossil-based diesel based on palm oil or castor oil.



Indonesia is already a major palm oil producer, and is slated to become the world's largest palm oil exporter next year. Castor oil, which can be derived from the Jatropha plant, is not yet produced on a large scale in the country, but the advantage of this plant is that it can even be cultivated on dry and unproductive land, thereby limiting any negative impact on the environment.



In May, Pertamina started selling biodiesel based on normal diesel mixed with 5% palm-oil-based biodiesel at selected fuel stations in Jakarta.



"Pertamina is building on this experience to fully prepare the downstream side," Pertamina President Director Ari M. Soemarno recently told OBG. He also said that "Pertamina guarantees to buy all biodiesel in Indonesia, because we can mix up to 15% biodiesel with hydrocarbon-based diesel."



In the meantime, in its editorial of last week, the Jakarta Post warmly welcomed the government's zeal in finding solutions for the challenges it is facing in ensuring sustainable energy supply in the country.



However, the paper also urged the government to "include its biodiesel production plan in an integrated energy development plan, supported with tax incentives, subsidies and regulatory infrastructure". This would be necessary to ensure enough long-term investment in the sector, and to mitigate possible negative effects of market volatility in oil and gas prices.

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