Bridging the Energy Gap

Indonesia

Economic News

22 Jul 2010
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Shortly after the legislature passed the new energy bill, Indonesia's president travelled to South Korea this week, overseeing the signing of several bilateral deals in the hydrocarbon sector. The clarification of the government's strategic thinking and the new investments come at a ripe time for Indonesia as it addresses its energy gap.



With President Susilo Bambang Yudhoyono in Seoul from July 23 to 25, eight deals worth a total of $8.5bn were signed on July 25, many involving the state-owned hydrocarbons giant Pertamina, covering ventures from coal transport links to exploration rights.



A joint venture agreement was signed between Pertamina, which will have a 66% stake, and E1, a subsidiary of South Korean conglomerate LG, for the construction of a $155m liquefied petroleum gas plant in South Sumatra. Construction of the plant, with a capacity of 350m cu ft per day, will begin in 2008, and commercial production is expected to begin in early 2010.



The centrepiece agreement was for the building of a $5.5bn direct coal liquefaction project in East Kalimantan. While the first $2bn phase is expected to produce 30,000 barrels per day (bpd), the second phase, worth $3.5bn, will bring an additional 70,000 bpd capacity. The project involves Indonesia's PT Nuansa Cipta Coal Investment and South Korea's Kenertec, Posco Engineering and Construction and Samsung Securities.



"This deal will secure a steady supply of coal to South Korea, but the products will be sold all over the world," Suh Dong-hoon, director of overseas coal business at Kenertec, said on July 24.



South Korea's furnace and oven manufacturer Kenertec and Posco also teamed up with PT Kereta Api, Indonesia's state-owned railway company, and Cipta to build a $2bn coal transportation link, also in infrastructure-poor East Kalimantan.



Meanwhile, talks continued on a variety of fronts. Discussions between Korea Electric Power Corp and state power utility PLN continued on the construction of a 400MW coal-fired power plant in South Sumatra. They discussed the building of a 750MW capacity gas-fired power plant in Bojonegara, Banten.



Pertamina signed letters of intent with Korea National Oil Corporation and SK Corp, which are expected to lead to joint exploration work in eastern Indonesia.



These add to the increased investments in Indonesia's upstream energy sector, which have risen by 14% over the first half of 2007 to reach $8bn, according to figures by upstream oil and gas regulator BP Migas.



Although production has stagnated over past years, the hydrocarbons sector accounted for 23% of overall domestic revenue in 2006, totalling $22.5bn.



Investment is much needed in this vital sector. A telling example comes from the natural gas sector. BP Migas reports that as of 2006, Indonesia possesses gas reserves of 2.63trn cu ft, but gas production only rose to 66.6m tons in 2006, from 66.4m tons a year earlier.



Indonesia is also believed to possess the second largest reserves of coal-bed methane (CBM), with total potential reserves of 453trn cu ft. Companies such as oil and gas producer Medco Energi and energy firm Ephindo have started feasibility studies on the exploration and production of CBM, although challenges remain. Additionally, fiscal and technical arrangements with the state remain to be solved.



One attempt at placing a clear strategic vision for the energy industry as a whole was passed by the country's House of Representatives on July 17 in the form of the new energy bill.



The most significant provision of this framework legislation is its aim to increase the share of renewable energies from 5% to 17% of the archipelago's consumption by 2015, while reducing the contribution of oil to 20% of consumption, from its present 52%. This should free up additional oil for export, while mitigating Indonesia's imports of oil.



Meanwhile alternative fossil fuels such as natural gas are expected to contribute 60% to domestic consumption needs. Fiscal incentives have been promised for companies engaging in the development of alternative energies and energy conservation.



Although this is the first legislation Indonesia has ever passed covering the energy industry as a whole, thus demonstrating the government's strategic thinking on the energy sector, industry insiders are awaiting the implementing regulations.



"The energy bill represents an overarching framework for the development of the energy sector, but the concern for us will be the implementing regulations," Peter Coleman, president and general manager of ExxonMobil Oil Indonesia, told OBG. "We hope these will represent steps forward and we are working through the Indonesian Petroleum Association to collaborate with the government in the elaboration of these implementing regulations."



The combination of a clear signal that Indonesia is keen to reduce its reliance on oil and of significant investments in the upstream energy sector this week are evidence the Indonesian government is working to reduce its energy gap.

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