ASEAN on coal and minerals.

ASEAN on coal and minerals. (Vol.80)

ASEAN is one of those near forgotten agencies of good will that sit in the background of our society.  ASEAN comprises 10 countries that work together through mutual agreements, academia and discussion. Any decision has to be unanimous, and the outcome is typically further discussions within each member country. Any research activity needs to find its own funding. This model of cooperation on regional development grew out a recognition that large regional groupings, such as the European Union, could achieve more than standing alone in the competitive world for development and peace. So, what is the relevance of ASEAN for the Indonesian coal and mineral industry?

Ministerial Meetings on Minerals.

Ministerial meetings are the highest levels of ASEAN meetings where policy and action plans are formulated.

In 2005 ASEAN agreed to cooperate with the Republic of Korea in areas of developing joint ventures and less formal general cooperation in the energy and mineral sectors, in areas such as technology, trade, mining policy, training and seminars etc. In 2013 the fourth ASEAN ministerial meeting on Minerals (AMMin) recognized the role of minerals “to boost economic growth through the provision of employment, export revenues and investment in infrastructure and human capital”. “the Ministers placed a strong emphasis on facilitating the private sector as the primary source of investment as well as fostering a more active participation of the private sector in the policy and regulatory discussion and participation”. In this meeting, the ministers acknowledged various successful capacity building programs, and launched the ASEAN Mineral Database Information System (AMDIS). They also proposed the development of an ASEAN Mineral Trust Fund (AMTF) to be used for special ASEAN approved projects. In 2015 the ministers reviewed the 2011- 2015 ASEAN minerals cooperation action plan that included capacity building, policy mechanisms for mineral mining licenses in ASEAN, geological mapping and a study on low grade bauxite ore, etc. A significant outcome was the development of the 2016-2020 action plan. This “aims to further enhance the ASEAN mineral sector dynamism with revitalized strategies and new initiatives towards boosting trade and investment, closer cooperation, and strengthening capacity in sustainable mineral development for a more prosperous and integrated ASEAN.” The ministers also confirmed further research cooperation with China, Japan and Korea and to increase public – private sector collaboration. The Action Plan (AMCAP-111) includes the encouragement of exploration to discover vast new discoveries.

These are wonderful and inspiring objectives, that are usually accompanied through very limited action plans of one seminar here, and one meeting there type of activity.

Some areas not yet working well.

Within the exploration and mining sector, the early ASEAN programs to develop the ASEAN Mineral Database Information System (AMDIS), being a digital “one-map” for each countries mineral and coal resources has fizzled. The ESDM carries the one map for coal and another for minerals, and has complied with the ASDEAN work program to conducted socialization and training seminars. ASEAN developed a detail manual in compiling and recording the geological data. But the contents of these maps seem to reflect the initial training data input only, and detail for each site is also lacking or not accessible. See the ASEAN coal data base and information system (ACDIS) for public users at http://webgis.psdg.bgl.esdm.go.id/dbafoc/.

In another field ASEAN has developed a “Handbook of liberalization of professional services through mutual recognition in ASEAN”. This policy is to enhanced and liberalize the movement of professional service providers between ASEAN members. We have seen initial support for this policy, but it would appear this has been overtaken by various forms of National Protection that place administrative obstacles to implement such a professional movement policy. The handbook also proposes that there could be a special category of ASEAN firms (having a high percentage of ASEAN citizens) compared to Non-ASEAN firms.

Boosting trade (mineral & coal) seems to have flunked in Indonesia. The “Investing in ASEAN” 2017 handbook reports the “UN Conference on Trade and Development (UNCTAD), the value of Indonesia’s mineral exports fell from US$15 billion in 2013, to US$ 9.4 billion in 2014, reflecting a halt to copper ore exports…”. The halt to raw ore exports (particularly bauxite and nickel) have made further significant reductions in export income, increased unemployment, reduced regional GDP, and terminated a number of other mineral projects that cannot economically justify local smelters. However Indonesian tax income from the mining sector (minerals & coal) has risen from Rp 4.3 trillion in 2013 to Rp 10.2 trillion in 2016, thanks largely to the price increase of coal. “Boosting investment” in the mineral sector may be reflected in the new smelter program, with success in the nickel industry. However there have also been failures in the iron sector, and the partial relaxation of the bauxite and nickel ores reflects the sensitivity of such refineries to the market. Independent studies are required to assess the nett progress of the mineral industry.

The ASEAN concept of cooperation in the mineral sector does not seem to have been applied in the recent “nickel” plays. As Indonesia closed of raw nickel ores in 2014, the Philippines rushed to open nickel laterite mines to replace the Indonesian exports to China. This new supply helped keep low international prices of nickel, wherein the expected price of Indonesian refined nickel products was subdued, and thus less profitable for all. Similarly, Malaysia’s bauxite export industry spiked after Indonesia banned such ore exports. ASEAN did not take the opportunity to work together in the mineral sector to rationalize ASEAN output, but the Indonesian raw ore export ban was the driver of a new mining boom in the Philippines and Malaysia. This indicates free enterprise competition is a stronger driver of the economy, than government lead cooperation pacts.

Coal & Energy.

In 2015 the ASEAN Plan of Action for Energy Cooperation (APAEC) sought to develop a series of guiding policy documents to implement energy cooperation and integration. It was further noted that there is a widening gap between energy supply and demand between ASEAN members, wherein APAEC’s 2016-2020 plan is to drive a regional energy policy. This would include accelerating the ASEAN Power Grid (APG), Trans ASEAN Gas Pipe line (TAGP), LNG terminals, and promoting clean coal technology, and enhance capacity building. Action plans include conducting studies, establishing standards and manuals, as well as exchanging policies, best practices and knowledge, holding meetings, publish energy reviews, conducting workshops etc. One such publication, the 4^th ASEAN Energy Outlook (2015), contains lots on nice concepts, including the liberalization of the energy market, competitive power prices over ASEAN, emphases on Renewable Energy (RE), environment, nuclear power etc. Other studies with lots of graphs and figures show that ASEAN urbanization, growth in industries, transport and well-being is also driving growth in energy demand. Coal is one of the principal sources of power, particularly for Indonesia, and its neighbours. Indonesia’s adoption of recent international climate policies (COP21) emphases clean coal technology using High Energy Low Emission (HELE) technology – principally supercritical coal power plants. Such plants are already being built in Thailand, Philippines, Vietnam and Indonesia.

The ASEAN Centre for Energy (ACE) held a seminar in conjunction with the World Coal Association (WCA) in Jakarta in May 2017 to launch their policy booklet “ASEAN’s Energy Equation”. Their call for action includes further public campaigns to win over the governments popular opinion in favour of clean coal, and to influence banks to return to funding clean coal power. The seminar provided many facts and figures, but also an interesting window into a possible future; –

1. Indonesia will limit tonnage of coal available for export; The Indonesian government made it quite clear their intention to limit coal production to 400 million ton per year starting from 2019. Indonesian domestic consumption would grow and be prioritized, leaving a diminishing balance for export. Within Indonesia the allocation of coal mining would be divided amongst the various coal producing districts, thus coal quality and reliability of supply will be based on producers, not on market demand.

This must be disturbing for ASEAN and other traditional users of Indonesian coals. Many of the new coal power stations are designed to import Indonesian lower quality coals. Switching to an alternative coal supplier may change the efficiencies and economics of such power stations. The impending restrictions on coal supply may encourage some ASEAN members to exclude coal power from their development plans altogether, and ultimately this will mean less demand for Indonesian coal. A scenario where the Indonesian restrictive coal policy may unintentionally backfire on the Indonesian coal export industry, and economy.

2. Energy Swaps; There was one suggestion that ASEAN countries seeking assured coal supplies from Indonesia may do so through an energy swapping mechanism. The idea is that the ASEAN country would build a renewable energy power plant (hydro, solar, geothermal) in Indonesia to deliver clean energy. In return, the investing country / entity would have a long term annual quota to import coal from Indonesia.
3. ASEAN power grid; Malaysia is entering into a showcase agreement to buy 100MW of hydro powered electricity from Laos on the ASEAN grid. It is expected that such an international grid system will grow and become a stronger, and a more flexible competitive system than the various present National grids. The ASEAN grid is an alternative to being held to ransom from Indonesia’s restrictive coal exports. The Indonesian power growth plans are very much inward focussed, with coal fired power plants in Sumatra and S&E Kalimantan. It will be interesting to see how PLN merges with and responds to the ASEAN power grid. I have yet to see Indonesian national planning to target mine mouth coal power stations aimed at exporting electricity to Malaysia and the ASEAN grid. There have been some suggestions of importing power from Sarawak to W. Kalimantan.
4. Carbon Tax; Singapore is introducing a carbon tax, wherein other ASEAN countries are observing how this tax performs. The ACE seminar suggested this carbon tax may be a way to raise funds to support the development of the expensive supercritical coal fired power stations. The Supercritical clean coal fired power stations are more capital intensive, and sourcing finance is difficult for some countries, including Indonesia. Raising the effective price of electricity is not consistent with the Indonesian government policy, where low and subsidized electricity prices are necessary for an element of political stability, and for industry to be competitive.

The ACE seminar also highlighted the difficulty of attracting finance to build the supercritical power stations. Such coal fired power stations can have a useful life of between 20 to 50 years, with various finance options typically looking at pay back in 12 – 15 years, though Malaysian self-financed plants (Suku bonds) are for 22 years. Unfortunately, most financiers consider PLN as not credit worthy. Financiers are typically limited to China, Japan and Korea. Each financier has strict business compliance requirements, and each will require their country contractors to participate in the design and construction process. One of the main conclusions of the ACE seminar was that finance is extremely difficult, in part because of the unsupportive roll of the Indonesian government in construction, and potential for cost/price interference during operation. By comparison it may be noted that new large solar power plants in the UAE are built with zero tax and the government provides the land.

If the feed coal can be consistent over the payback period, then the economics and design of the coal plant is more simple and reliable. Supercritical power plants can be designed for some variable coal qualities, but require larger boilers, are more capital intensive, and with less control over emissions. Note that some countries are looking to tighten up their emissions standards, and ultimately this may place sever limitations on some coal mixes. The ASEAN Coal Database System (ACDS) may become an important tool in the long-term decision to build a supercritical coal power plant – knowing where to acquire a suitable target coal for 20 – 50 years. Typical coal specifications are coals with 5.600 Kcal/kg, Moisture 17%, Ash 7.8%. Fortunately, the research into supercritical coal power plants is now looking at lower heat value coals.

Discussion.

The relevance of the ASEAN organization rose as its members started to develop, and saw certain strength in numbers. Some selfish aspects of Nationalism sentiment are replacing the ASEAN concept of working together. This new trend is reflected in Indonesia’s recent policy to restrict mineral ores from export, and to limit coal exports. By comparison, Australia is adopting a policy of economic partnerships whereby each country performs a part of the value chain according to its competitive efficiencies. For example, Australia grows wheat in large mechanized farms, exports the wheat to Indonesia that uses its cheaper and trained workforce to turn it into noodles, that are then transported short distance to local or nearby markets. It is well understood this principal is driving the bauxite to aluminium industry, where bauxite ore is shipped to refineries with the lowest price of electricity. Indonesia is just learning this principal, wherein the new West Kalimantan bauxite processing plant was placed near the ore, and electricity was “brought in”. This refinery is producing with costs above the market price of the product. Indonesia is now looking to build a new hydro-electric power plant in East Kalimantan for a source of low cost electricity to support aluminium smelting. Such a hyro-power plant would have an enormous environmental footprint, take years to build and may encounter resistance from NGO’s or local communities. The logical answer is to cooperate with ASEAN or other countries to undertake the smelting in another country with existing suitable low-cost power for bauxite smelting. Similarly Indonesia may adopt an economic partnership concept to use existing specialized international smelters for the small, but valuable, volumes of base metals and other minerals.

Indonesia may mistakenly think that its huge energy resources of coal, gas and oil will drive Indonesia’s development ahead of its energy resource poor neighbours. The present Indonesian policy of restricting coal exports is going to push other ASEAN countries to prepare for a future without Indonesian coal. The ASEAN power grid will be a significant factor in the next 50 years of development in the 10 country members. Those countries on the mainland are likely to be linked to many different power sources (hydro, nuclear, coal, gas) that can provide a robust engine for development. However, the archipelago countries of Indonesia and the Philippines may tend to develop towards a less robust island dedicated power plants (that rely upon ship deliveries of coal or gas and small renewable power systems for isolated communities), possibly resulting in their slower and uneven development. Indonesia needs to become part of this ASEAN power grid through exporting mine mouth coal power.

Conclusion.

The ASEAN organization serves as a think tank to stimulate further research, discussion and development of human capital in many sectors for the overall advancement of the 10 Member States. This includes the mineral, coal and power sectors. On the surface, it seems ASEAN produces lots of well-intentioned academic talk, and little meaningful action. However Indonesian politicians typically do not have a sophisticated technical background, and ministers come and go over short periods. The ASEAN policy papers may act as an excellent long-term planning guide.

The updating, and free public access to the ASEAN digital data base on minerals and coal would be of benefit for industry to develop the minerals and coal sectors, and may help develop ASEAN scale refineries and supercritical power plants.