Should the National Energy Policy on Coal be updated?

Should the National Energy Policy on Coal be updated?   (Vol 95)

Introduction.

The General Elucidation of the new mining law number 4 of 2009 includes the statement; “As time passes, the law with centralized contents no longer keeps pace with the current situations and future challenges. In addition, the mines development must adjust itself to both national and international strategic environmental changes”. This statement provides the justification to undertake changes to regulations and policies.

The National Energy policy on coal was prepared based on industry assessments and political outlooks of the 2014 era. In the few years since then, Indonesia’s economic environment has changed considerably, and world opinion about climate change and other factors has further evolved. This article suggests the National Energy Policy should be reviewed and updated from time to time to best meet Indonesia’s changing needs and objectives.

National Energy Policy – Coal.

The National Energy Policy is laid out in Presidential Instruction (Perpres or PP) 22/2017 and refers to the General Plan of National Energy (RUEN) relating to PP 70 of 2014 and the National Energy Committee (KEN). The National Energy Policy covers all forms of energy use for the period 2015 to 2050.  Elements of the Vision, Mission and Aim include – sustainable energy management, emphases on use of domestic sources, maximising national potential of natural resources, management of energy resources etc. The ensuing policies and strategies include elements of – National energy reserves, institutions and funding.

The policy document then outlines the estimated coal reserves at that time (2014?) and a concept to end coal exports. This assumes roughly 4% per year growth in domestic coal consumption up to 2020, and then about a 2% growth per year to 2050. There is a corresponding imposed cap of 400 million ton / year production (starting in 2019), where exports are annually diminished and replaced by domestic consumption, thereby ending coal exports all together in 2046.

The implementation of this policy to cap coal production and eventual end coal exports is to be accompanied with an increase of geological surveys by government agencies for the exploration of coal resources (page 60) and other factors.

An incomplete plan.

Upon release of the National Coal Plan, a number of districts, provinces and Government research institutions and universities applied for funds to conduct exploration. All such fund requests were not approved, based on the outlook that geological exploration for coal and minerals was a risky enterprise best left to the private sector.

The RUEN plan is largely a “top-down” approach to managing the perceived very long-term national coal industry. But in practice it is a “bottom-up” implementation process through approval of each miners’ annual work plan (RKAB). The difficulty for the national RUEN plan is how to limit the coal production (now well above 400 million ton) from each province and district, wherein these local governments want to optimize their income from the mines for larger development budgets.

Changes to the Coal equation.

Since 2014, a number of regulations have been introduced that may contribute to additional exploration and production costs that then may lead to reduced coal reserves, including; – A) changes in the DMO configuration, including subsidized coal for PLN, B) oblige coal exports to use national shipping and insurance C) changes in the use of foreign currency, D) introduction to the less efficient B20 fuel and E) some districts imposing trucking and other restrictive legislation. In the latter part of 2018 the industry was A) encouraged to increase coal exports by 100 million ton (new total target of 585 million ton for domestic and export) to support the national balance of payments, and B) the depreciation of the Rupiah against the US Dollar implies a relatively cheaper domestic costs component that may lead to an increase in reserves.

Changes have also been made to the underlying assumptions, A) of growth in the national energy demand, with PLN cutting back on its plan for coal fired power stations, B) national growth declining from near 7% to around 5% in 2018, and C) shortfalls appearing in domestic oil production that may change the projected energy mix, with more demand for coal energy and exports.

The national exploration plan.

The various Indonesian geological mining professional associations, along with most government agencies recognize the Frazier Institute’s surveys of international CEO’s that Indonesia is blessed with great geological potential to deliver mines, but is critically lacking a suitable investment climate.

For those who already have existing tenements, they must undertake greenfield exploration to convert their tenement status from the short-term Exploration license to the longer-term Production license. Once resources have been defined, then “brownfields” exploration is expected to convert resources to reserves. Many producing companies are undertaking geological exploration programs for reserve expansion. The trend in some coal mines is to conduct reserve expansion programs to the fullest extent of their concession, and then end all further exploration in their tenement.

The Mines Department (ESDM) set out a number of decrees in April 2018 to end the moratorium on the issuance of new coal and mineral exploration blocks, by implementing an auction system on government designated areas. These include; Decree of the Minister of Energy and Mineral Resources (ESDM) No. 1796 of 2018 for setting out the auction system. ESDM Decree 1801sets out the data fee payable to the government under the auction system. ESDM decree 1802 sets out the location of the first 16 blocks offered to the government and private companies. ESDM decrees 1823 and 1825 provide details on border marks and non-tax fees.

ESDM decree 1805 sets out the “data fees” for each of the blocks on offer. These Rupiah based fees vary from around US$ 6 – 30 million, and are to be paid up front. Other up-front fees include an undefined exploration guarantee bond, and an exploration performance guarantee bond. The blocks vary from about 750 – 100,000 Ha. All blocks include forestry restricted areas wherein further permits are to be sought by the incoming party, involving start work delays, plus considerable further fees and operational commitments.

Failure to launch.

Six of the first 16 tenements of coal and minerals were offered to state enterprises, but all but 2 such tenements were passed over. Then all the tenements were to be offered to the public under the auction system. As of the beginning of October 2018, no tenements have been taken up, and some are understood to still be on offer (October 2018). It is understood the Mines Department feels that some of the data is inadequate to attract investors. The feeling among many investors is that the entry fees and commitments are simply too high and too onerous.

The general elucidation of the new mining law number 4 of 2009 states; “Article 33 section (3) of the 1945 Constitution asserts that the land, the waters, and the natural riches contained therein shall be controlled by the state and exploited in the greatest prosperity of the people. Given minerals and coal as natural riches contained in the land are non-renewable natural resources, the management thereof needs to be optimally conducted in efficient, transparent, sustainable, environmentally-sound, and just manners in order to reap the continuous benefits in the greatest prosperity of the people.” Note that this important statement implies that if the governments management of the resources does not result in exploitation to find resources, then it seems the government is not adhering to its Constitution obligations. The earlier system of private parties making simple applications with minimal fees resulted in vast areas of Indonesia being taken up for exploration. We may assume the Mines Departments new and expensive auction system is not being ‘optimally conducted” and so needs revision.

Common misconception.

On the 4^th October 2018 the Tambang magazine and the NGO of Publish What You Pay (PWYP) held a half day seminar on the fiscal and new energy aspects related to the national coal strategy. Each Government & NGO speaker tended to direct their attention to their activity in “consuming” the coal industry, rather than “developing” the industry. A common approach to the coal industry was that each government office and NGO tended to think of the nation’s coal resources and reserves as being a limited commodity. They were unaware that further exploration or improvement in the business fields (ease of government regulations, fees & taxes, improved mining technology etc.) could lead to an increase of the nation’s coal reserves & resources, thereby allowing Indonesia to expand production and simultaneously increase the reserve base.

Victoria – an International Competitor for exploration funds.

Both the state of Victoria (Australia) and Indonesia have a long exploration and mining history that has underwritten much of their development. In each country the exploration sector is competing with other sectors for investment from domestic and international sources. Each government’s policy is now traveling down a very different path towards growth in the exploration sector. There are some striking differences in the Victorian approach that Indonesia may take note of.

The Victorian state government recently issued a policy paper to encourage mineral exploration, titled “State of discovery, Ministerial Foreword, mineral resources strategy 2018-2023”. This opens with the Ministerial Forward that may be seen as a Vision Statement as; “Our state’s minerals are a source of jobs, wealth and opportunity for all Victorians. Mining operations are the backbone of many regional towns, providing employment, opportunity and a sense of community.” The policy ends with a table of strategy targets, including the number of drill meters and exploration budget in new and existing fields (greenfield and brown field) each year, resulting in a target of at least one significant mineral resource discovery by 2028. In comparison the Indonesian Mines Departments 2016 performance report titled “Laporan Kinerja Kementerian ESDM 2016” opens its executive summary with the statement “The ESDM sector is a strategic sector and still remains a mainstay in supporting national development and economy, both through fiscal, monetary and real sectors.” “The performance of the Ministry of Energy and Mineral Resources in general can be assessed from the achievements of the EMR sector performance indicators, which include, among others: the management of energy and mineral resources, state revenues from the ESDM sector etc”. The difference between these outlooks on exploration and mining is striking, with Victoria emphasizing the development of the regional community through exploration, while Indonesia emphasizes the fiscal benefit to a central government through the ensuing mining operations. It would seem that Victoria’s exploration policy includes a quantitative measure of the limited exploration success, whereas Indonesia’s exploration policy is reliant upon its general perception of a high exploration potential.

The Victorian Government has released 11 new large exploration licence areas for tender, for minerals exploration, with up to $500,000 in mineral exploration grants per block available, from the Victorian Government’s $15 million TARGET Minerals Exploration Initiative. The grant program provides up to 50 per cent co-funding for base metals and gold exploration through a range of eligible minerals exploration activities. By contrast the Indonesian tender system is overshadowed by excessive up-front financial burdens (typically US$10-20 million/tenement).

To increase the amount of geoscience data available for industry and the community the Victorian Government will” undertake a selective data acquisition program across large areas, and will require the Governments major construction contracts to collect and make available, geological data and core samples etc”. “The data will be used by GSV to help build a publicly available, digital three-dimensional (3D) geological model to understand and communicate the region’s geological evolution, architecture and potential prospectivity”. In contrast the Indonesian governments have repeatedly denied fund requests for the development of exploration programs to generate data to attract investors, and government held data should to be purchased.

The Victoria government has established the Earth Resources Approvals Coordination Group to act as a clearing house for log jams in the regulatory system. Similarly, the Victorian government is willing to act in discussions between land holders and explorers with regards to access to the surface, and has developed a template for a land access agreement. By contrast it is up to each Indonesian tenement holder to independently approach the forestry, other government agencies for clearances and to approach the land holders on a one-on-one bases, with no guarantee to obtain access rights.

Conclusion.

The direction of todays coal industry appears to be very different to the established national energy policy on coal. The present mineral and coal auction system is simply not yielding sufficient results. Is it time to update the national strategy on coal and to develop a workable approach to promote exploration?  When and how to go about such a review, and implement the review is another issue to be debated, but not simply put in the not-now or too-hard-basket.