Notes from Indonesia Australia business week.
Jakarta 2015 (18 – 19 November 2015) by Ian Wollff.
The event was open to registered parties only, wherein Ian was able to attend a number of presentations & discussion groups only, with other events being restricted. The resources and Energy Program was attended by about 70(18th) to50 (19th) people, of which about half were delegates from Australia, and of the Indonesian delegates about half were expats and half Indonesians. The various speakers comprised about 10% of the audience. Speaker’s material was not available before hand, nor after the event. Some speakers were changed from the printed program, and the introduction of some speakers was not clear. All seminars were conducted in English.
The following notes were taken without the aid of a recorder, thus there may be some omissions and may not be accurate in some cases. These notes are not a complete record. Apologies for any errors.
Panel discussion; Negotiating the regulatory framework in Indonesia. Part 1. An Indonesian Perspective.[ 18 Nov 11:00 – 12:30].
- Bill Sullivan [Christian Tea & Partners] – Talked against projected summary points (photographed).
- Indonesia recognizes the need for coherent and practical energy security policy as reflected by the National Energy Policy GR 79/2014 as issued by the SBY government. This includes the factors of energy independence, energy security, compatibility with environment- equality – sustainability etc, maximum benefit for the people, delivered not later than 2050, favor domestic companies. The regulations set specific targets for 2025 & 2050.
- There is a focus on capital input for development, with positive signs from the ministry ESDM as; 1) capable, proactive, investor friendly, 2) New & professional team at ESDM, 3) openness & responsive to discussion, transparent at ESDM, 4) BKPM one stop permits, 5) prioritize power generation to support infrastructure priorities.
- The change of emphases is now more sensitive to “controlled by the state” with new mining law (oil & gas) with a BUMN system. However the Constitution does not specified how much “control by the state” – leaving future negations over majority control.
- The Government is still hampered by 1) lack of research, planning & consultation with industry leading to policy “flip-flops”. 2) Coordination is difficult between ESDM and Ministries of Finance, Forestry, Manpower etc.
Agus Cahyono Adi [representing Prof Gusti – Dir Gen Oil & Gas ESDM). – Talked against projected material (photographed).
One table outlines the priorities as;
- The Government is committed to exploration (oil & gas) with stimulus particularly for the eastern part of Indonesia.
- Looking for advances in unconventional oil & gas and have introduced new arrangements for Production Sharing Contracts (PSC) – standard cost recovery, sliding scale split (Gov. gets more with increased production) , and non cost recovery with production split.
- Issues the ESDM is dealing with include;
- National emissions reduction commitments,
- Major restructuring of industry from energy dense use Java to encourage less energy transport by encouraging industry to move closer to sources of energy (Sumatra, East Indonesia ate).
- Energy mix – initial 23-25% of primary energy to be renewable, but has been revised down to 19% by 2019. However present mix (hydro, geothermal) is only 12%. Thus significant change in way Indonesia power systems work.
- Pertamina is encouraged by Government to take the lead in power generation, but have only capacity to undertake a 5 MW power plant. Not have installed capability to change from oil & gas, so Pertamina is very open to talk to parties and find strategic partners to provide funds & particularly to provide capability (proven record of building power plants). Presently there are no such approaches from Australian companies = opportunity.
- Question & Answer
- Ian – Agus confirmed 9 strategic priorities excluded exploration for minerals & coal. There is no indication when the 6 year moratorium on new tenements will be lifted.
- Need PLN to restructure, as there are identified 5 areas of conflict – including PLN focus on low cost wherein it is difficult for renewable and other energy sources to compete with lowest coal costs.
- One power plant is now waiting for PLN to complete construction of power distribution system. Thus can power providers own power lines & poles etc? Answer – that Geothermal power providers are to also supply power lines (remote sites) and thus there is a precedence. Can consider the ownership point of transfer of oil & gas is at the pipe outlet.
- Can Indonesia change its energy mix with an increase of gas, and Nicholas of GASCO would like introduction to Government parties to discuss this option. Answer – the Governments developer of choice for gas is Pertamina, that will issue competitive tenders, for example the 2X800MW in W.Java.
- Farah Indriyani – Indonesian Investment Coordinating board
- No notes .
- Ali Mudakir – Pertamina Geothermal
- No notes
Bill Agus Ali Farah
John Anderson [VP Santos Australia] – Santos lunch talk.
- Santos wants Pertamina join with Santos to invest off-shore (out of Indonesia), but no deals yet.
- Australian players have 2 main options – to invest into Indonesia, or simply sell into Indonesia.
- Santos has $7.5 billion invested off shore (from Australia) with most in PNG. However this includes $951 million in Indonesia. Santos investment does not follow some competitors wherein brand acknowledgement is not a significant factor. Santos earns about $1.2 billion from Asia, and invests about $150 mill/year in Indonesia. The present low oil & gas price is difficult, but some domestic gas sales are insulated from market down turn with fixed price.
- Santos has about 500 staff, with about 10 expats, with emphases on the business being run by Indonesians. Emphases to send in young expats to learn from Indonesian experience – particularly safety culture & working through issues. Some issues with Manpower, but get around it through Singapore office. Some great Indonesian technical professionals.
- Noticed in Perth that foreign (US/European) oil companies run by their nationals, not Australians.
- Question – Has Santos been shaken down like recent Freeport incident – Answer – No, with emphases on good corporate governance & looking at long term business picture. Drive open management systems, particularly in facilitation, with Santos applying heavy auditing etc.
Panel Discussion; Negotiating the regulatory framework in Indonesia. Part 2. An International Perspective. [ 14;00-15.15]
Luke Devine[Baker & McKenzie]
- Getting bills through parliament is slow and difficult due to changes in parliamentary power groupings.
- Laws need to be passed trough Central Parliament plus governments at provincial and District levels also. Often the latter are slowest and more demanding on inclusion of local considerations.
- Resources are now a political “hot topic”, thus government & NGO’s all want to get involved with separate agendas.
- Indonesia is a Civil Legal system, thus many lawyers can get involved and slow down – increase costs the process. There are many regulatory bodies, and thus compliance can be very tedious, particularly as some regulations are not easy to find.
- Post Suharto there has been a mega overhaul of Government (not so strong centralized), and ongoing overhauls of the different levels of government lead to increased legislative / regulatory uncertainty.
- Many policy statements give clearer direction, but often the implementing regulations can have a significantly different effect. Some aggressive players try to enter business upon the initial policy central law, and risk “back-flip” in law or regulations. This includes some donor regulations.
- Some inconsistencies Mining needs to sell down ownership [Mining law started with minimum 20% domestic ownership, but later implemented minimum 51% domestic ownership] but Power plants can be owned forever.
- Government has gradually regulated further down the value chain.
Ibu Marjolijn (IPA)
- 8 years ago the petroleum industry started engaging the private sector with the cost recovery system with a huge number of implementing regulations which is a huge burden for industry, and complex for the Government to implement. Furthermore there is poor coordination with other Ministries – adding further regulatory compliance complexities and delays. Other ministries develop regulations without understanding the impact on the oil & gas industry, and without due consultation.
- Now some regulators recognize & admit such problems – this is a starting point. The Jokowi government is more open to dialog, though not have the same perception on what needs to be changed. Industry & Government can talk clearly about some issues, but 3rd parties (NGO’s etc) continue to criticize both industry & government.
Tenny Wibowo [Santos]
- Have been operating in Indonesian oil & gas sector for 16 years, and can still be surprised by the sudden quick changes to regulations – as was shown by the overnight changes to Migas.
- Am developing a niche in the National market, particularly as tenders are becoming more stringent. The Oil & Gas road map seems to develop over time. There are clear differences/bias between Local & Foreign companies involvement in tenders.
- Have 2-3 expats and 165 people in 2012, whereas previously had about 10 expats (5-10% work force) , and this means some changes in the way they do business.
- Most concerned about government quick changes without prior socialization or consultation, though now there seems to be more emphases on consolidation.
James Tsang;[Asia Wood Group Kenny]
- Pertamina deal with a number of partnerships, often dominated by US & others, and want Australia to increase participation.
- Indonesia imports about half its fuel (oil) needs, with gas production increasingly being directed to domestic consumption.
- Belive there is still more oil & gas resources to be found, particularly in Eastern Indonesia, where drilling is more difficult through greater distances for logistics, and hilly terrain in places like Irian.
- Unconventional oil & gas less developed, but the industry needs to wait for infrastructure development – not like USA where infrastructure well developed.
- Indonesia will always want input to the oil & gas industry, particularly new technology and new geological interpretations / new sites.
- Regulations need to find the right balance between “full benefit of the people” and benefit to shareholders.
- The government is now opening up options with the 3 production sharing (PS) options (for non conventional oil & gas) A) standard , B) sliding scale, C) gross paid. This is a sign of a creative future that is still not perfect, but a move away from the old fixed single option.
- 2 areas need further coordination -1) Different ministries (Finance, Forestry, Environment) & institutions need better coordination. 2) Central Government has started consolidation, but the Provinces & Districts are still “unconsolidated”.
- Industry needs to start communication much earlier, as it takes a long time to fix anything.
Noke Kiroyan [Australian METS]
- The Indonesian 1945 constitution article 33 (2 &3) – minerals shall be controlled by the people, and exploited for the benefit of the people..” was developed at a time when Indonesia was under the influence of Socialism at the period of the Cold War, and this influenced has permeated the interpretation of the laws. Indonesia has continued to develop politically, particularly over the past 10 years since the end of the Suharto Guided Democracy period. Thus Indonesia is a young & learning democracy, where socialist ideology needs to be implemented with considerations of the real present world. A workable solution is still being sought.
Questions & Answers.
- It is not a level playing field for local & foreign companies providing services or goods into the oil & gas industry, wherein local companies have certain advantages. This in part to over correct the historic trend where foreign parties had technology / expert advantages. This situation may change again as certain Free Trade & WTO regulations come into place – and represent the next game changer. But in some industries there is very little remaining foreign participation – for example coal haulage is typically local companies.
- Many opportunities for Australian companies continue, particularly as Indonesia need specialists in all industries (particular in the downstream sectors). Indonesia still lacks experience & risk investors in E. Indonesia & deep water oil & gas sectors.
- What attributes are sought by foreign parties when looking for a local partner;
- Don’t rush, finding the right partner is like a marriage, and those who are quick in are often also quick out.
- Look for local partners track record, and emphases on code of conduct.
- Look for credible partner – do research, talk to people and look beyond yesterday only and look into family / old business connections for signs of poor character.
- Previous emphases focused on local party providing access to government approvals is now less desireable, particularly as many such people may fail new code of conduct requirements. Note Migas has a “black list”.
- Look for partner that can grow with you.
- Share core values.
- Can use IPA to channel feedback and changes to the regulatory systems.
- Local Content can be defeated by low price – particularly as government SOE’s are almost bound to accept low price (with same technical criteria & reliability of supplier).
- Contracts are subject to Indonesian law (OK), but most players elect for dispute settlement in Singapore or off-shore.
Networking over coffee in session room.
Business Forum; Connecting to Indonesia’s resources sector [14;30 – 15;30 19 Nov 2015].
Dr Sudijono Surhardjo [Pres Dir of Technip Indonesia].
- Registration for domestic product, there are listed and non listed items. Non listed items are generally OK for world wide foreign participation.
- Technip company have their own data base for managing procurement.
- Vessels must be Indonesian registered, except for selected big vessels – crane barge etc can be used with recommendations from the Minister.
Ronald Sutardja [ Pres Dir PT. BUMA]
- Pama is No. 1 contract miner (coal) and Buma is No. 2. Strong business focus on coal, with currency completion coming into place on the international market place.
- Looking for technology advantage to translate into cost benefit – for example changing from 20 ton trucks to 300 ton coal train trucks.
- Australia Brand is still in the fore-front of the coal mining industry, and Indonesia needs more “game changes’ technology etc.
Andrew Carnie [Man Dir PT. McConnell Dowell Indonesia]
- Mc Connell has been in Indonesia for 40 years, originating from Melbourne, with interests in managing/EPC coal, gold, nickel mining projects, process plants with target for downstream. Typically engaged by mining companies that want assurances of “safe hands” to run their business. Construct in range of $20-100 mill, with smaller deals typically going to locals, and bigger projects to larger competitors or SOE/China/Korea parties with linkages to funding.
- It is possible for new players to come into the market, and there are many familiar Australian faces in the Indonesian industry to give advice & it is common to have informal and meaningful discussions.
- Indonesian has its own set of regulations (that often change) but each country (including Australia) has its own regulatory issues.
- New players should bring “value” to the Indonesian market place particularly in driving costs down on mine sites etc.
- There are some regulatory favoritism to local companies (eg. different withholding tax), but it is not impossible. McConnell undertook a different approach to construction method with a 10-30% cost saving to client.
- Mc Connell will tend NOT to bid on a confirming offer, but prefers projects where they can innovate.
Jeff Pierman [ Wood group Kenny- different to printed program]
- Undertake engineering works, and outsource to niche specialty parties in some places.
- Migas domestic compliance can be quite difficult, with regulations recently updated where even choice of airlines & software can make a difference. The domestic component is heavily audited.
- Service companies should have a base in Indonesia, preferable good local consortium parties to comply with local content that leads to a 7% cost benefit. This can be challenging, but OK.
- Lower costs are favored over domestic content, but technology compliance important.
- Australian companies can also procure services from Indonesian companies, eg Woodside & Santos outsource some people to Australia. Good to promote the 2 way trade.
Malcolm McAlister [NAB – different person to printed program]
- Australia – Indonesia is seen as a 2 way flow of business focusing on A) resource development, engineering, B) infrastructure and C) Agriculture. Australian brand is strong with some world class interactions. NAB has a number of preferred financial areas, including institutional funds, hedging, extra project funds, accounting structures etc.
- There are some important aspect to customers,
- For finance credibility, payment flow structures etc.
- Issues of sanctions of counter parties – look at what else is going on with local partners broader /past business activities.
- Onerous – know your customer, particularly as some local directors can have a hidden complex financial web.
- Key summary is good relationships.
Questions & Answers.
- Bill Sullivan comment – One avenue for some foreign players is to set up a “Construction Representative Office” to be useful in oil & gas JV arrangements and domestic compliance.
- Discussion – some Australian companies tend to move away from Government contracts, and focus on the private industry contracts in upstream & downstream areas.
- Discussion – some Indonesian engineering companies (Tripatra for example) typically do not get involved with the technology process engineering aspects.
- Discussion – lower oil price tends to see overall opportunity slow down.
- Ariel of Monash – What opportunities are there for private companies to get involved with the power grid aspects – poles & wires etc? Answer that some foreign companies have developed local manufacturing units (Alstom, Siemans) to present as domestic companies in the supply of transformers and such. Indonesia will always be open for unique technology. Note Geothermal includes poles & wires, so it may be possible to expand this in other areas – depends on approach & regulation.
- It is more difficult to sell products / services to SOE’s than private companies, as SOE’s have stringent procedures, accreditation and always strong auditing processes. SOE’s tend to look at same principals as private parties – being price, cost, after sales service , but SOE’s more looking over their shoulder for public corruption, thus decisions can take much longer, and internal justification process more rigorous / slower. Ultimately the lowest price (with same technical range) wins. Private companies place emphases on “real value”.
Panel Discussion; Supplying Indonesia’s energy needs. [16;00-17;00, 19 Nov 2015]
Dr Adi Wibowo [ Dir coal & mineral replacing Dir Gen of Electricity]
- Delegates welcome to the Coal & Business development offices of ESDM.
- Improvements of efficiency are sought to lower costs – for example a proposal to introduce new rail-truck at Bukit Asam.
- Coal is increasingly considered as energy, rather than as commodity – wherein Bukit Asam has changed its vision / mission, and has changed to an Energy Company, looking at such things as coal gasification.
Pandu Sjahrir [Chairman IPBI-ICMA]
- Indonesian Coal Mining Association (ICMA) represents Indonesia’s largest tax paying group contributing some Rp 4-5 trillion Rp/year and largest exporter of global coal.
- How to provide Indonesia’s own energy security is a significant issue. The proposed new 35GW power plant will involve a capital investment of some $45-65 billion of which 60% is coal (20 GW) requiring approximately 2 X present domestic coal consumption (present about 100mill T out of 400 – 500 mil T), with planning future production for domestic power at 250- 300 mill T and only 100 mill T for export.
- Does Indonesia have enough coal for this 20GW plan? Presently there are about 20 billion T reserves (2011 figures), with top 10 miners providing 75% of such coal reserves. But current low coal price has reduced this historic reserve figure by 50-60% with present priced mineable reserves at around 8-10 billion ton. Looking at a 20GW power consumption of 250-300 mill tpy for 25 years = 8-10 billion ton – at today’s coal price.
- Capex is important to consider. In 2011 & 2012 some $2 billion was spent on all combined engineering projects throughout Indonesia. To date only some $400 million has been spent on the 20 GW power program, with equity required at around $1.5 mill/GW X 20 GW requires some $10 – 12.5 billion – to be spent at the rate of about $1 bill/year. Note that the combined market capital of all companies listed in the Indonesian stock exchange is $7 bill – the implication is that where is all this capital coming from?
- Of the 35 GW, only 8-10 has been signed (yet to be financed). It takes about 3.5 years to build a power plant, with 2019 being the election year target. This deadline requires all such power plants to be signed & finance in place by June/Sep 2016 – only 10 months to sign 25 GW – ie 2.5 GW / month or 600MW /day needs to signed & finance in place.
Elvi Nasution [ NAB]
- Energy security needs to be supported by affordable lending to this sector. The 35 GW power plant plus transmission & distribution systems is estimated at around $50-60 billion. Where does this finance come from ?
- Project Finance is increasingly coming under limitations from climate change politics driving commercial banks to withdraw from this sector, and there is a shrinking pool of lenders against increased global competition for capital. It is increasingly looking like an “out of the box” solution to financing is needed – where business as usal approach will diminish.
- Clearly Indonesia is seeking off shore funds – against a background of trade commercial banking is shrinking and limitations on export credit agreements.
- Perhaps some review as to how EFIC (Australia) can play a part in the bankability of projects.
Amin Subekti [ Dir regional business for PLN]
- The electricity ratio is now at 84% with still 16% of the population having no access to electricity. Ie 16% of 200 million = 32 million, being a similar population to that of Australia.
- Capacity issue – the 35 GW need to be finished in 5 years, against a background of 50GW installed over the past 70 years, now 35 GW to be installed in 5 years!!!
- Transformation challenge to PLN with fuel mix in past relying on coal & oil, but now government wants 25% gas & 25% renewable. As pointed out by Pandu, past electricity costs related to production cost of cheap coal. Now new mix will need to be more expensive production cost!
- The trend to LNG reflects the governments commitment to clean energy. The current production of gas is 1100 bb that will need to be increased to 2500bb to meet the 2019 power commitments. However gas requires significant infrastructure (pipes / special shipping).
- Not all gloom – as there opportunities for parties related to the planned increase in power consumption. Indonesia electricity consumption is around 860Kw/year per person, while Malaysia is now 4,000 Kw/year per person.
- PLN is now in a learning phase on the multiple challenges it faces, and is gaining experience in planning, procurement etc.
- Past providers / contractors to PLN are recognized and can be granted privileges in this completive market.
- PLN is looking at how to chose technology, how to allocate risk between PLN and it partners.
- Third parties can supply goods & services where PLN values friends 7 partnerships to reduce risks and solve challengers.
Questions & Answers.
- Ben Lawson – Pandu – It takes about 10 months to complete financial closure, and there important distinctions between debt & equity financing. Typically debt financing is with the provider with the credits full covered. Equity means PLN is involved with the process, and is divided between foreign party (typically 80-90%) and local party (typically 10-20%). This means a local party may need $30-50 million, and there are very few local companies with such financial resources – let alone those interested in this sector. Although some mining companies may appear to have cash on their books, they typically have excessive debt also. Excluding one particularly heavily in debt mining company, the remaining mining companies combined debt is around $3.5 – 4 billion. There is largely no further capacity to borrow, and few may consider a rights issue to raise limited funds. Note that borring in Indonesia has a much higher interest rate than off shore – wherein Indonesian companies need to have return on capital of 10-13%, and a 1 year delay would translate into a further 1.5% – and it is likely the 99% of power projects will encounter significant delays. Indonesian companies are likely to be further compounded by “CSR” problems. (unforeseen costs & delays related to local politics etc). Separately Ben Lawson comment that there is no debt market for coal.
- Australian Minister of Trade – Mr Rob –
- Good quality presentation.
- Indonesia is world’s 4th largest LNG gas exporter of about 20 units, and by 2018 Australia will be exporting about 80 units. Thus Indonesia could look at importing some Australian gas, and thus fast track & have cleaner energy / power.
- Sub 5-10 MW power preferential for isolated communities – with emphases on micro hydro etc – not have major grid connection costs & issues. Ariel from Monash – Monash interested to research on shared challenges to provide power to remote areas – microgrids.
- Australian energy companied developed through growth to be now static, with $55 billion in assets with over $85 bill in transactions. Is there an opportunity to apply such balance sheets into the Indonesian power market over the long term.
- Note that Java ‘ Bali has reasonable power distribution infrastructure (500 Kv lines) but development in East Indonesia is lacking, and a different approach may be needed. The less dense uptake of electricity makes grid economics a challenge.
- Australian parties suggest some of their hybrid power technology may be more applicable to eastern Indonesia, as well as developed market areas of Java & Bali. Nick of GASCO indicated there is significant wasted heat energy from gas power that can be recycled as “renewable”. Municipal waste conversion to energy is also considered renewable. Is interested to see how the private market can feed into PLN power grid?
- PLN has massive challenges, including cost of capital (cheaper from foreign sources). So PLN needs a good business plan. Technology can be a game changer, particularly for renewable. Australia is seen as a site for low cost capital. Indonesian finance needs an IRR of 18-20%, whereas some foreign companies feel an IRR of 15% is fantastic. Note Japan and others have bank interest rate of zero to very low %.
- Although PLN provides power, reliability is very poor – particularly outside java & Bali, wherein companies need to supplement their PLN monthly bill with excessive diesel fuel for back up power supply – making many provincial industries less competitive.
- Review of export pricing mechanism of LNG – but often tied to long term contracts. Less spot, more mid term pricing. Is it possible to look at some cost savings when using LNG ships that have longer sailing from Australia to East Asia markets, by combining with Indonesian shipping? Perhaps some shipping / piping could break the present point-to-point plan, and introduce multiple destinations. PLN is a major off-taker of gas, but factories (fertilizer) and domestic households are increasingly becoming important – thus PLN may need to reconsider its LNG sourcing.
- Construction of gas fired power plants is much faster than the 4-5 years for coal. It is suggested the first half of 2016 should have a stronger focus on gas.