A difficult time for Indonesian coal & mineral drillers.

Introduction.

The news media often point to lack of drilling as a key indicator of the oil and gas industries ill health. It is the same slow death for the minerals & coal drilling industry, though less well publicized. This article looks upon the outlook of the Indonesian mineral & coal drilling companies, and in so doing reflects upon the wider exploration services industry.

Drill Business.

Drilling is intimately tied to the exploration and mine industry, and thus rises and falls with the fortunes of the exploration industry. During boom growth period’s good profit margins are driven by demand exceeding supply, or investors impatient to develop resources. Drillers wages were good, to attract people to work in remote locations, often with minimal facilities. Drilling is one of the first exploration service industries to be switched off with the start of a commodity downturn. Producing mines may feel a gradual impact from lower prices, but for drilling it is usually “lights out” well before high cost mines start to close. The downturn of drilling is part of the world wide down turn in commodity prices, wherein it is not so easy for drill enterprises to look offshore for further work. The mix of commodities has not changed much with the boom to bust situation, with hard rock drilling dominated by gold targets, and only minor base metals targets. Coal, mineral sands, and laterites have all experienced a significant boom followed by bust. Very little new exploration has been undertaken in Indonesia for the past 3 to 4 years, including gold, reflecting investor disinterest in commodities and Indonesia.

A number of drill companies have reached their limit of lowest contract price, wherein if the profit margin is too little, then the drillers prefer to not undertaken the work – reflecting the business risks to drill equipment, being caught up in local community issues related to the client, or client slow payment. A number of drill companies have suffered significant bad debts – even from some well known mining companies. This makes the drilling companies all the more cautious in taking on certain clients, and particularly first time clients with an unproven record of timely payment. To reduce business risk, drilling companies now require larger down payments before mobilization, and this may be off-putting for investors to restart the exploration investment cycle. Unfortunately the Indonesian tax requirement for drillers to pay VAT on invoice, rather than on actual payment received, has made bad debts more difficult, and restitution of such VAT is highly complex.

Some mining companies may be lured by cheap local drilling companies, wherein there is a risk to the client of poor performance, and the cheapness may reflect upon the lack of technical support. Even these cheap local drilling companies need to be cautious, as they may be selected by clients that feel they are in a strong position to delay payment.

Some drilling companies have adopted a survival business model through broadening their services, and forged bonds with their clients. During this industry downturn, some production blast hole drilling is still strong, particularly as mines look for better use of explosives to improve productivity. A few drilling companies have opened up new drill elements, including horizontal drilling to relieve water pressure behind slopes, pit walls and for rock bolting. A few big mines with adequate margins are the main stay of the drill industry, with drilling to improve their geological model and mine plan.

Typical profile.

The typical profile of a drill company business was provided by one PMA company. The company was established in 2000 to drill coal, laterites and some hard rock, with 2011 being their peak year. In that year the company had 28 drill rigs with 32 drillers and engaged up to 145 staff and around 300 day labor. However, today they have 24 rigs, of which only 2 are working with 2 drillers and retain about 27 people.  They are compliant in having an operational permit from the Mines Department (Izin Usaha Jasa Pertambangan).

Client Responses.

Lowering production costs has been implemented in all branches of mines. Supervision of best practices within mining companies drilling division may be reduced, wherein safety and environment compliance may be less stringent. As miners reduce supervision, then we may hope the Mines Department checks are strengthened. One drilling company mentioned that some large coal mines have sought to reduce production costs by suspending their regular dewatering and geotechnical protection drilling. Such costs savings would seem to increase the miner’s long term risk of massive wall failure or flooding. The professional engineers may hope the Mines Department and public investors will be alerted to such risk behavior.

New opportunities in the civil sector (geotechnical drilling etc) are not attractive to many professional drill companies, as such government contracts go to the lowest bidder, wherein old and possibly unsafe equipment is used – particularly where there is longer time periods to complete such jobs. We have all seen such ancient rigs slowly grinding away on the side of the road. These operations are very different to those at productive mineral and coal exploration drill sites.

The resale value of drill rigs has dropped dramatically. One drilling company mentioned an example where a few years ago a $ 1 mill drill rig in Australia can now be bought for $250,000. Another Indonesian drill company owner recently offered to sell one drill rig, with six others thrown in for free! There are relatively few alternatives for drill rigs to be reconfigured to some other form of equipment. During the boom period there were some moves for mergers and buy outs amongst the drilling industry, but since the industry downturn, there is apparently little interest in this form of consolidation within the drill industry.

The drill industry has numerous multiplier effects across many non exploration businesses. For example the industry downturn may see less interest in continuing public liability insurance, less need to replace logistic support items such as cars and update office support systems etc.

New Competition.

Some Indonesian drill companies are concerned about the new Asian trend in the Indonesian drill business.

Indonesian drilling grew out of a western based business and safety model. The new Asian investors entering the drilling industry have a different business outlook, which some Indonesian drill companies find hard to relate to. Some Asian investors (Taiwan, Singapore, China) have come from a civil works background, where component costs can be rigorously measured, and are wanting Indonesian drill contracts to guarantee costs and performance.  Drilling is about applying the right drill machine, down hole tools and experienced driller to the selected geological formation. Indonesian and western business are more familiar with this combination of variables. Some new Asian investors do not adequately understand the “unknown” variable character associated with the exploration drilling business. It is natural for an incoming investor to want a drill company that they can identify with. In some cases Asian investors have imported drills and drillers from their home company. Some Indonesian drill companies are concerned that Asian drill enterprises may take longer to learn and adapt to the Indonesian safety & environmental compliances. Perhaps it is more difficult for the Indonesian Mines Department inspectors to communicate with some Asian languages, and to read the Asian safety manuals in various languages.

Initially Indonesian drilling companies could out-compete the earlier western drill companies through cheaper wages and overheads, while maintaining competitive levels of performance. However the new influx of Asian expatriate drillers and drill equipment now appears cheaper than some Indonesian drill companies, with some Indonesian drill companies concerned at how they can compete.

Permits and Politics.

Under the ESDM ministry regulation, companies providing services to the exploration and mining sector are to be registered with the Mines Department. In 2015 the regulations were modified wherein the Ministry of Mines and Energy provides a recommendation letter in support of the BKPM issuing the registration, as part of the one stop shop approach to simplifying regulations. The Mines Department receives quarterly reports from the registered service providers, and can then monitor this aspect of the mining industry. Based on these reports, the Director General of Mineral and Coal published (2014) a list of registered service companies for the 2010 to 2013 period. These statistics indicate that 2012 was the peak year for local investment, and declined thereafter. Most drill companies register for several types of similar exploration support services, but may focus on one or two services for most of the time. For example an exploration service company may include management of exploration, topography survey, geological mapping, geophysical survey, underground survey, geotechnic’s, exploration drilling, exploration sampling, general survey, feasibility studies etc. Out of 177 registered exploration service companies, there are 120 companies that include drilling, though some may not be active in providing drill services.

Drill operation permits are tied to companies, and not the managers or drillers. Apparently drill operation permits do not involve a screening process of the capability of the drillers. Responsibility largely lies with the client’s KTT, who is at risk from possible non compliance with a variety of government regulations. This task is made all the more difficult for some KTT staff where drills and drillers are imported from Asia with no Indonesian / English machine plates, and no Indonesian certification process.

The industry downturn has apparently been largely ignored by the Indonesian politicians, or possibly in some cases welcomed as a form of transition from western to national involvement, or seen as a pro-environment lobby to reduce exploration and mining all together.

 

ASPINDO.

Indonesian drilling companies may become members of the Indonesian Mining Services Association (ASPINDO) with website http://aspindo-imsa.or.id/page/aspindo/2 . This is an independent body under the Indonesian Chamber of Commerce and Industry that is to provide an association for exploration & mining service companies as most recently defined by EMR Permen 24/2012. This associations mission is to defend the mining services business aspirations, provide services and advocacy for members, provide input to the government to improve the mining business climate and represent the industry on the national and international level. Aspindo started in 1997 with 11 members and quickly grew to 106 members in 2008, peaking in 2011 with 161 members, but since then gradually declined to the present 122 members. At present about 5% of members provide services to General Survey, and 13% for Exploration. Typically the members list a variety of services wherein about 15 include drilling, however only 6 list drilling as their main activity. Not all drill contractors are members of Aspindo, as reflected in the Petromindo.com book on mining equipment & services (2013) that lists 20 drilling service contractors.

Driller’s development.

There are no formal training courses for mineral & coal drillers, wherein most drillers are of high school level that have received on the job training. Typically starting as an offside and learning the skills through the school-of-hard-knocks. The opportunity to develop further typically comes with joining a larger drill contracting company where the driller can operate different drill machines, different ground conditions and different working environments. An experienced driller may earn Rp 20 -40 million per month during boom periods, but in the current bust market such earnings are about half that. These drillers are truly special people, willing to work long hours in remote parts of Indonesia, often in frontier conditions and need to develop special skills to ensure their machines continue to deliver good results. They take on local labor, and need to quickly teach these young farmers or village men the skills and disciplines of working together as an effective team. Their experience teaches them to be wary of local feuds, theft and many social customs or superstitious beliefs. Good drillers develop a strong sense of company loyalty, and are recognized by their accompanying geologists as a special breed of tough professionals. In a few cases drillers go on to start their own drill company.

Typically each rig would engage 1 driller & 1 assistant driller plus 4 local crew (per shift), plus local security and other support. Typically each drill would be accompanied by 1 geologist & their assistant.

During industry downturn the responsible drill companies try to retain their best drillers by finding other duties (maintenance in drill storage yards) or are on call at home on a very basic wage. However, most drillers and their assistants will eventually leave the industry, perhaps becoming Go Jek drivers or motor mechanics etc. No new drillers are developed during such downturns and the industry is susceptible to loosing such skills. If the industry down turn goes on for too long, then there will be a lag in developing new skilled drillers for the next upswing of the exploration industry. This is part of the bust and boom cycle.

Drill Evolution.

The first coal drills I encountered in Indonesia (1975) were large cumbersome units of conventional drills that were moved from site to site by bulldozer and operated by Australian drillers and geologists for Shell in South Sumatra. A few years later these were replaced by knock down Jarcro style rigs that were moved using helicopters as sky cranes. These new rigs introduced the revolutionary new technology of triple tube wire line coring, along with a world first of slim line down hole geophysical logging. Also a super light weight “winky rig” was trialed for shallow narrow holes to define the limit of oxidation (LOX). This drilling set a solid foundation based on western technology and approach to safety and environment concern, with the hiring of Indonesian off-siders. The gold rush of the 80’s and 90’s saw more western drills and drillers operating all over Indonesia. The end of the gold rush (BreX) saw many western drills and drillers depart Indonesia, and this enabled the nucleus of trained Indonesians to step into the business at the beginning of the great coal rush. Indonesians adapted the drill technology further to suite the remote rough terrain, and pioneered new cheaper tungsten bit designs, knock down man portable rigs etc.  For about 5 years Indonesia even exported drills and drillers to other parts of the world.

My first alluvial drills of the 80’s were slim line manual banka drills using nothing but manpower. These were soon replaced with locally made heavier skid mounted larger diameter mechanical banka drills that were the main stay of the 80’s and 90’s alluvial gold exploration industry. Only recently these alluvial drills have been replaced by western made sonic drills that have amazing performance in soft sands, soils and such.

The new highly competitive trend for Indonesia is cheaper drills and drill bits coming out of Asia (China and Korea). This trend is helping the overall coal and mineral industry achieve lower production costs, particularly reducing the cost of production blast holes. However the new ASEAN free trade is also seeing Asian drillers entering Indonesia. The five Chinese drillers recently detained at Halim are thought to represent a wider industry trend by some Asian investors to import cheaper drillers, while hundreds of Indonesian drillers are seeking work. Several Indonesian drilling companies are concerned that some of the Asian drilling activities are conducted with much lower compliance levels towards safety and environment, compounded by the reduced effectiveness of Mines Department inspections.

It is OK to import & export drill rigs and associated equipment with the appropriate trade license. Second hand rigs can be imported, provided they comply with the appropriate regulations & pay the appropriate import tax.

Importation of drill mud has no issues, however suppliers have a shrinking market, wherein cost of drilling additives is becoming cheaper (supply & demand) and competition amongst suppliers is intense, contributing to lower production costs for miners.

Conclusion

The Indonesian drill industry has been suffering for more than 3 years, with no end in sight. The industry has lost many of it’s of highly skilled operators, and more are likely to leave the industry for good. The government could stimulate the exploration and drill industry in so many ways – it just takes good will.