Coal diplomacy and impact on foreign policy.

Coal diplomacy and impact on foreign policy.  (Vol 98)

Trade Policy.

The evolution of Indonesia’s foreign policy sets out three principal objectives, to support development, maintain stability and protect territory integrity. This was expanded in a 1993 Government resolution of eight points, that included the aspect of trade – to speed up the realization of international agreement on commodities, to remove trade barriers and various restrictions.

One long standing Indonesian foreign policy strategy is to bring international and domestic issues closer together to face global challenges, while at the same time exploiting global opportunities for national benefit. Not all countries have the same energy resources leading to a high level of interdependence of energy trading. This can lead to greater cooperation between energy trading countries, or conflict between countries over securing their energy resources and supplies. The Indonesian energy security policy is to consider interstate diplomacy and foreign policy.

“Economic diplomacy has now become one of the priorities in the foreign policy of Indonesia,

especially under the current government (of President Joko Widodo). The Indonesian president

said that all ambassadors of Indonesia should act as sales persons, placing 90 per cent of

attention on the economic aspects and only 10 percent on political aspects (Susilo, 2014).

Jokowi (President Joko Widodo) wants access to overseas markets expanded so as to encourage

the export volume of Indonesia. It is expected with the development of Indonesia’s exports, it

may ultimately help drive the economy in the country, including the welfare of all the people

of Indonesia”. [ Bulletin of Monetary, Economic and Banking, Vol7, No4, April 2015].

Much of the Indonesian policy on coal is directed towards the domestic coal policy of ensuring cheap coal supply to support Indonesia’s domestic development. The financing and operation of the coal industry also has many facets that impact on Indonesia’s diplomacy and foreign policy. Larger amounts of coal are also exported to provide income for Indonesia, and this traded coal has a significant impact on Indonesia’s foreign policy and upon Indonesia’s trading partners outlook on Indonesia.

The evolution of the coal mining and associated foreign policy.

Around the 1980’s, the Indonesian government sought foreign investors to develop its coal and mineral mining industry. The simultaneous development of the 1:250,000 regional geological maps allowed the first generation of coal contracts of work to identify some of the best potential areas that were awarded to foreign companies. Later generations of coal contracts of work (know as PKP2B) were issued only to domestic companies, wherein some were able to later incorporate minority foreign partners. In support of this much needed Indonesian national development of the mining industry, the Indonesian foreign policy was to “attract” foreign investment and development through a legally strong contract system.

Many of the early coal mines were developed by Australian companies, as such companies had the risk apatite, were able to raise funds and had the coal experts to launch and develop such projects. The Australian companies looked at the emerging Indonesian coal industry as a business opportunity. Australian politics supported such Australian business moves as an avenue to compliment the various foreign aid programs in the development of good neighbours. These Australian enterprises brought with them various Australian codes of practice, including the JORC code, along with training programs for mechanics and miners. Much of this Australian legacy continues today and may imprint upon Indonesian foreign policy in the form of expectations for technology transfer in other international business ventures.

A number of Asian countries also entered the coal exploration and mining industry, with a mix of strategies, being a business opportunity, and as an avenue to secure coal. These coal companies sought long term off take contracts (few years) to underwrite their investment in the coal mine and the coal fired power stations in their country as a key to developing their own national economies. Such countries included Thailand, South Korea and Malaysia. This security of coal energy supply enabled foreign policies of coal provider and coal off-taker to form a more peaceful relationship of mutual benefit, that would grow into the wider development of inter Asian trade and cooperation.

A system of smaller coal concessions (KP) were developed (later converted to IUP) for domestic companies. A number of such local companies had strong ties to local Indian investors and so broadened the support of the Indonesia – Indian international foreign policy. Some contract arrangement saw various ambitious foreign entities enter this mining space.

As the Indonesian Mines Department and other government agencies developed in the post-Suharto era, the coal mining and trading industry became more regulated and sophisticated. There was assistance from the World Bank along with consultation through the foreign dignitaries, administrators and technical tours to learn more about managing the coal industry. This led to a deepening of the foreign policy to develop working relationships between Mines Department staff in Indonesia and other countries. This lead to the countering of various improper practices, including price transferring and manipulation of royalty, and systems were built to monitor the coal industry.

Over time the Indonesian mining companies became stronger and the nature of coal trading changed towards shorter termed contracts. This led to many foreign parties selling out their shareholding interest in the coal mining industry. Today the Australians and Malaysians are basically out of coal mine ownership, while Thailand and South Korea retain smaller shareholdings.

The State-Owned enterprise, PT. Bukit Asam and associated infrastructure was refurbished under a World Bank program in the 1980’s. This also involved the development of Indonesian diplomacy with supporting countries of France, Germany, America and Australia. Domestic energy security concerns at the time were for coal to be shipped to power stations built in Java. This development went significantly over budget and somewhat over time. This proved to be a steep learning curve for both the Indonesian foreign ministry and for the World Bank to keep this international coal project on track. At this time Indonesia’s coal policy was to mine and export high quality coal for a premium profit, and to develop the lower coal value deposits for domestic consumption. This dual coal use policy combined domestic and foreign policy to further supported the attraction of foreign investment into Indonesia. This duel policy is still active in PT. BA today, and in many other mines.

Coal Technology and the rise of Chinese diplomacy.

During the pre-2014 coal high prices period, numerous countries promoted their coal conversion technology to Indonesian mining companies. These included parties from Europe, Canada, Australia and China. Indonesian foreign policy towards these coal upgrading trial plants was very cooperative, and included a number of joint research project involving the state research agencies. The most prominent coal upgrading plant was built as a joint venture between a Bakri coal company and White Industries out of Australia. However extended commissioning difficulties and changes to coal price strategy by Bakri saw this East Kalimantan project collapse, and was followed by various court cases. Some other China technology plants were built in Sumatra, but these also failed.

A large focus group discussion on “Coal Integrated Solution” between Indonesia and China under the umbrella of the Cooperation Forum by Belt and Road Initiative of China, was sponsored by KADIN in Jakarta on the 7th June 2017. Numerous presentations on coal conversion technology were presented reflecting China’s extensive trials in such areas. The overview of the seminar was that upgrading of low rank coal does not work well in China, and all have failed in Indonesia. The China coal conversion plants are supported by their government undertaking the coal exploration and providing various activities to reduce the project risk to the investor. Overall the coal conversion projects are high capital and operating cost producers. The commercial viability of these plants in China is extremely poor, and has sent a number of smaller China companies nearly bankrupt. Indonesian research on coal drying, gasification, briquetting, coal in water etc appears directed towards small scale plants (lower capital) to support small scale isolated factories.

This Indonesian venture into coal upgrading allowed Indonesia’s foreign policy to open many technology cooperation agreements, that have ultimately led to a more sophisticated understanding of what can, and can-not be achieved through coal upgrading. The roll of China as an investor into Indonesian coal fired power plants and later into infrastructure projects was partially stimulated through these early cooperation agreements. From this coal foothold, China diplomacy has learnt more about dealing with Indonesia, and facilitated smoother development programs etc.

Several years ago some Australian companies undertook exploration and trial mining for underground coal, but these projects were stopped. At one-point Poland was keen to sell underground mine technology in Indonesia. China is the only country presently undertaking some new underground coal mining operations in West Sumatra and South Kalimantan.

In 2004 Indonesia embarked upon a crash 10 GW power plant construction program. Many international parties bid for a number of plants. The Chinese companies offered cheaper plants, and more readily available supportive funding. It seems the Chinese diplomacy had developed sufficiently to be granted certain facilities on domestic labour and content as part of the cheaper and fast construction programs. This diplomatic relationship that included good cooperation in the coal sector has more recently been extended to other China projects in Indonesia, including the Morowali nickel plant in Sulawesi, and the high-speed rail link to Bandung.

NGO’s

In the post Suharto era, the coal and mineral mining industry became open to comment by NGO’s. These developments brought a wider foreign dimension into the coal mining industry. Indonesia developed it’s WAHLI as a local environmental equivalent of Greenpeace etc. Some positive NGO activity also directly improved the Indonesian coal mining industry, with the introduction of the EITI which brought broader international transparency systems to Indonesia. Many of these NGO’s were strongly European supported, wherein the Indonesian foreign policy became more responsive to European politics and values. Later these largely European NGO movements broadened further into the climate change area, whereupon Indonesian foreign policy went along with the various International climate policy initiatives. Such climate NGO’s spread their influence that lead to many major international banks and finance enterprises to withdraw their business from the coal industry. Indonesia’s foreign policy is to continue to support coal mining, but to soften its adverse impacts by adding in a component of renewable energy to Indonesia’s long-term development plans. This has led to Indonesian foreign policy to “attract” foreign investors in the renewable energy sector.

This climate control movement has left only the Japanese and Chinese as willing international finance countries for coal projects. This has added further difficulties for Indonesia’s growth through coal fired power plants – as the few international finance and insurance companies (essentially Japanese & Chinese) insist on new high technology power plants that are more capital intensive, need to be very large (thus not generally suited to markets outside Java) and unsuited to consume Indonesia’s massive very low-quality coals. Indonesia’s foreign policy needs to step carefully through these new global anti coal policy movements.

Industry Seminars and Associations.

In the peak of Indonesia’s coal development, the international Bali Coal-Trans Conference attracted record attendees of more than 2,000. This and similar coal conferences are often addressed by the Minister of Mines and Energy, along with key international coal figures and various embassy trade representatives. Indonesia also hosts, or attends, many other international coal industry seminars hosted by professional associations, and trade bodies. Indonesia has become members of various professional bodies that are internationally recognized – including CRISCO, EITI, ICA etc. These international meetings and association membership help build Indonesia’s profile and bring respect, credibility and a sense of international importance to the Indonesian ministry of foreign affairs. They also help the tourist industry.

International Arbitration.

Indonesia prides itself as a country based on laws. When a number of coal projects fell into legal disputes that could not be settled in Indonesian courts to the foreign parties’ satisfaction, then international arbitration was entered into. International arbitration was always an option under the Coal Contract of Work system, but not generally used. International arbitration was called upon for an IUP company under the broader one-on-one international trade agreements. The Indonesian government had previously lost similar international arbitration cases in the oil industry, so the Government was better prepared, and won the Churchill coal mining case in England.

In response to such international arbitration, Indonesia’s foreign policy was to cancel or renegotiate a number of such bilateral free trade agreements, and to strengthen the application of Indonesian law. This was largely seen on the international stage as a maturing of Indonesia legal capabilities, and as an equal party on the world’s affairs.

Coal replace oil for country creditworthiness.

It was seen that the World Bank helped Indonesia out of the 1998 financial crisis, as the Bank recognized that Indonesia could rely upon a mature oil industry to under pin national credit worthiness. We might expect foreign policy to support the trend to maintain high tonnages of coal exports to allow coal to take over from the declining oil industry in support Indonesia’s national credit profile.

400 million cap.

The national coal strategy is laid out within the Presidential regulation 22 / 2017 (March) on National Energy Strategy (Rencana Umun Energi Nasional – RUEN). This 2017 national coal strategy anticipates an increase in domestic coal consumption, with a corresponding reduction of coal exports. This involves a cap of 400 million ton per year (tpy) of coal production starting in 2019 and continuing to 2046 when exported coal will stop. This strategy of capping coal production at 400 million tpy seems to not considered Indonesia’s foreign policy to encourage trade with its Asian neighbours. The squeezing out of Indonesian coal exports may reduce growth in such countries and so provide less markets for Indonesian products, and less tourism from such countries.

Such a restrictive coal cap export policy will oblige foreign coal buyers to fill the gap left by the withdrawal of Indonesian coal exports with coal from other sources, or to hasten their abandonment of coal energy. This year of 2019 is seen as the first year to implement this coal cap policy, and if this cap is implemented then it starts a clock for the reaction by Indonesian coal customers to find alternative coal sources. It may take several years to develop the alternative Galilee coal basin in Australia, or some more years to build atomic power plants, or perhaps give renewed incentive to further develop the Asian electric power grid that is fed by hydro power plants in Vietnam or atomic power plants in China.  This coal cap policy may be seen in the terms of foreign policy as Indonesia turning its back on its Asian neighbours and long-term loyal coal customers, and lead to a shift in the centre of regional influence away from Indonesia.

At the time of preparing this article, some news reports suggest the 2019 coal production target shall be set at 480 million ton of coal. The issue for foreign policy is that if this is a temporary delay to the coal cap policy, or will there be a formal change to the coal cap policy.

Conclusion.

Almost every aspect of the coal industry has some impact on Indonesia’s diplomacy and foreign policy, and Indonesia’s international standing as a good neighbour. In most cases the development of the coal industry has led to an increase of Indonesia’s standing and influence on regional and international foreign diplomacy. Many countries have sold out of ownership of Indonesia’s coal mines, and are now focussed on providing services and products. There has been a corresponding shift in Indonesia’s foreign policy from welcome partner in development to a simply good trading partner status.

One challenge for Indonesia’s foreign diplomacy is the rise of China’s involvement in Indonesia’s coal industry, wherein Indonesia may try to restore its national standards on local content and local employment etc. Another challenge for Indonesian diplomacy is to counter various international environment concerns over coal, and so encourage more countries to invest in the Indonesian coal industry.

The biggest immediate challenge to Indonesia’s coal diplomacy and foreign policy, is the reaction of coal buying countries should the 2019 Indonesian coal cap policy be implemented.

 

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