Petromindo.com / Coal Asia Mining Legal Conference.

Petromindo.com / Coal Asia Mining Legal Conference.

On the 25^th April 2018, Petromindo.com held a one-day Mining Legal Conference in Jakarta titled “Regulatory changes in mining investment; What is going on?”. Several prominent industry leaders from government and industry made presentations and discussions (English) to a 40-strong audience of lawyers, company executives and industry associations. This was a great opportunity to gain insights on the coal industry and contribute to the pool of knowledge and broaden the industries outlook. The presentations were accompanied with slides showing a detailed understanding of the coal industry and current issues. The following are brief personal notes but are no substitute to the wealth of knowledge held in the numerous presentations.

I apologize for any errors or misunderstandings that may arise from these notes.

Hendra Sinadia, Executive director of Indonesia Coal Mining Association (ICMA); – Opening Speech.

The Indonesian government has introduced 16 regulatory packages to encourage foreign & domestic investment, including some packages applicable to the Mining Industry. The current GDP is around 5.1%, with the aim to lift this to 5.3 or 5.4%, though this is acknowledged by observers and various think tanks to be a difficult task. It is generally agreed that 1) a political policy of a friendly investment climate is needed, 2) that implementation is a difficult process and 3) the politics of increased government take and popularity often conflict with the needs for a sound business climate.

The manner in which regulations are brought in without sufficient consultation with industry is off putting to investors and reflects a lack of confidence in a stable business environment. For example; – 1) The industry uproar over the recent Ministry of Trade (MOT) requirements on shipping and insurance led to this regulation being postponed before its date of implementation. 2) The coal industry suggested other mechanisms to assist PLN, but the Government insisted on its coal cap program. 3) Forestry continues to impose restrictions and fees upon the mining industry, despite the miners paying increased land rent fees. 4) The imposition of biofuels for mining equipment is effectively a subsidy for the CPO industry that may burn out the huge motors on mining equipment.

The ICMA is encouraging the ESDM to be more open in the development of regulations. This includes the ESDM to improve its participation with industry through allocating more time for the ICMA to discuss with stakeholders and consult with lawyers and specialists. The ICMA is encouraged by Presidential Regulation 7/2017 to improve the development of regulations through public discussion and disclosure of cost benefit studies.

Muhammad Whaib, from the directorate of coal business development at the Director General of mineral & coal; – Opening Remarks.

Read from a prepared keynote speech to reflect present policy. The present interpretation of the Constitution is that coal is to be used to emphasize the people’s prosperity. Coal is no longer simply a commodity, but a source of development capital. The main domestic use of coal is to produce power (electricity), support industrialization, as an export earner of foreign capital, and non-tax revenue earner. The government has introduced a number of regulations to manage the coal industry and seeks to further maximize revenue from the coal sector, including increasing the share of coal in the national energy mix.

Questions & Answers included: –

1. The industry is concerned that setting the PLN coal cap at the low price of $70/ton will encourage illegal coal mining.
2. The new PLN coal cap policy includes incentives to produce 10% more coal – will this change the ESDM policy on limiting total coal mining at 400 million ton?
3. Now that the ESDM recognizes coal not only as a commodity, but as “development capital”, and considering coal is subsidizing PLN, CPO and other ministries, then should coal be classified as an Indonesian “Vital” industry, and so gain operational benefits through easier land access, permitting etc? Answer – Parliamentary revisions of the mineral & coal industry are ongoing, and the status of coal could well be reviewed.

Jisman Hutajulu, Dir of program Development of Electricity at ESDM. Understanding the newly published 2018-2027 electricity procurement business plan (RUPTL), with emphases on coal.

The energy policy is based upon energy security, sustainability and equitability, and implemented through many Government Regulations (GR). A number of good power point slides shown. Coal shall be the major fuel to generate electricity (54% in 2027). A matrix of regulations was shown, along with installed capacity and power growth projections. The elements of the revised power plan to 2027 were outlined, the various power purchase schemes summarized, along with the Mine Mouth power CFPP pricing structure (for each project) under the new coal cap pricing scheme.

Questions & Answers included: –

1. The one issue not addressed is Return on Investment relative to the project risk for independent power producers. Many investors are leaving because of the Ministers public statements for private power producers not to expect good returns. Answer referred to basic terms of take-or-pay, and change from BOO to BOOT etc, but avoided the central issue of ROI & political risk.
2. Concern the power purchase agreements move the risk allocation too much on the producer, and not balanced properly with PLN as off taker.
3. The proposed 30-year power purchase agreement period has less significance to Independent Power Producers, as the government can too easily change regulations impacting on the Power purchase agreement. This contract uncertainty was emphasized when the Government recently reneged on some power purchase agreements. The 30-year contract is similarly less stable, as it requires each year the power price be set by PLN, and PLN is not so transparent in showing the actual cost structure.
4. PLN is now receiving a “gift” of caped coal prices, is PLN willing to improve its terms of prompt payment to the coal suppliers? – Answer, not his area to answer!!

Bill Sullivan. Senior Foreign Counsel with Christian Teo & Associates. Understanding PR 13/2018 on new beneficial ownership rule.

Indonesia’s introduction of this Beneficial ownership regulation is a regional leader in this area of transparency and responsible governance. Slides and presentation outlined the new regulation on Beneficial Ownership that applies to all business, including mining where nominee structures are often used to get around foreign ownership restrictions. The teeth include penalties that the parties should “comply with all prevailing laws and regulations”, therein it may be conceivable that offenders could have their mining licenses terminated.

The regulation may have unintentionally impacted on banks and finance institutions on lending to the mining industry. Most funds are secured through share pledges, and so could come under the provisions of this beneficial ownership regulation. There is a transition period, however we are yet to see how well this regulation will be implemented, and if it will be implemented fairly. There are so many regulations under the ESDM, and other ministries that investors have to be careful of not stepping on a “land mine”. I.e. that some obscure regulation will be used to squeeze the IUP owner for some purpose.

Questions & Answers included: –

1. This regulation has been considered for some time, and its recent introduction is considered to reflect the current pollical scandal of the key politician Setya Novanto who was recently sentenced to 15-year prison for setting up nominee structures to hide his corruption activities. Some people refer this Beneficial Ownership regulation as the Settya Novanto bill.
2. There would seem to be no limit to the depth of ownership layering that needs to be probed and reported upon. This may be practically more difficult where multiple IDX share holders may indeed be backed by one Beneficial Owner party.

Kirana Sastrawijaya. Senior partner of UMBRA. Understanding MEMR regulation 10/2018 on principals of Power Purchase Agreements (PPA) as amended.

The government often changes the regulation on Power Purchase Agreements (PPA), and in response the companies need to reassess the impact on the project viability and risk, leading to ongoing excessive consultation costs and other overheads. Each change means the Power Purchase Agreement needs to be redrafted in synchronization with bankability requirements. A very lively talk accompanied with slides delved deeply into this subject.

Some major concerns are being considered. The main one is about Force Majeure where PLN does not want to accept a fair balance of risks. Otheres include limiting the take-or-pay period to loan repayment time schedule, and the currency exchange change risk, and considerations around share pledges and ability to sell out to another party etc.

Questions & Answers included: –

1. Given the recent government forceful tactics around the renegotiation of the COW’s for minerals & coal, how will the bankability of such PPA be looked upon in terms of sanctity of the contract? Answer – the PPA is a business to business agreement, but some concerns linger as to how to manage future new regulations that may impinge upon the PPA. The government has considered risk to coal supply side, wherein one option is for PLN to manage the coal supply.
2. Arbitration is according to international standard (ICC) in Singapore.

Phillip Payne, Foreign counsel of ABRN. Review of recently revoked ESDM regulations.

The stated purpose of reducing the regulations is to improve the investment climate. However, what was actually done was just tidy up old regulations that were mostly no longer significant factors for investors. For example, some scrapped regulations were from the 1990’s, 2 on environmental matters and 4 related to the now out of date COW system. Although welcome, this could hardly be categorized as “reform”.

The revision brought about some new impediments to smooth flow of the mining business. The ESDM no longer issues Export Lists (Terdaftar ET) letters to simplify export, however another ministry requires such letters to release cargo ships. This issue can be a bureaucratic coordination failure between ministries, as well as a human resource failing. This lack of understanding on how the industry works was also demonstrated with the MOT regulation 81/2017 on obligations for Indonesian shipping & insurance for exports of coal & CPO.

Questions & Answers included: –

1. Some consider that if the Mining Law is to be revised by Parliament at this point, then we might have a law with more problems.
2. The ESDM can take input from industry, but the timing is poor with little opportunity for feedback and socialization. For example, on one occasion the ICMA was called in the morning to a meeting a few hours later (27^th Dec) wherein the regulation on DMO coal price cap for PLN was issued on the 6^th January, before the stakeholders could be adequately be consulted.

Legal Hard talk #1 on Ministerial Regulation for DMO power plant.

Haydn Dare, of Holman Fenwick Willan LLP.

The original regulation required backdating the effective date, but industry pointed out how difficult this was in practice, so the government adjusted the effective date. There is a long history of coal being allocated for DMO, wherein it was originally the burden of early Coal Contract of Work companies, but this regulation now makes it a 25% of production obligation on all coal producers and does not distinguish on the many types of coal. The ESDM estimates this will save PLN some $1.3 billion, but this also means the same amount less for miners and royalty to the provinces etc. The $70/ton cap is for a high thermal value, in facto PLN typically buys a lower thermal quality at an average price of $37/ton. The ESDM has offered miners to increase their production by 10% once their commitment to PLN is met. In reality a company’s commitment to PLN may be reached very late in the year and so revising the mine plan & export sales program at that point is difficult. There are a number of similar unexplained scenarios with this poorly designed regulation, perhaps if the 100 million ton limit is reached within the year, then the ESDM may simply adjust the target tonnage to 120 million ton??

Luke Devine, Foreign Legal Consultant HHP Law.

Coal for Public Interest is not defined. Therein an engaging test of the audience was undertaken for a number of different business situations to see who knew if “public interest” applied. I was surprised to learn that coal for an industrial park power plant may be in the “public interest”. Some Independent Power Purchase agreements (including mine mouth power) treat coal as a “pass through” item, wherein the contract is written in terms of thermal heat rate. This is why some Power Purchase Agreements with PLN need to fit their agreement word for word with coal suppliers and finance parties.

Adi Kurnia, GM legal of PT. KPC and head of legal committee at ICMA.

Very interesting trace of the history for the development of the DMO. The issue is that PLN does not want to buy 25% of coal from every producer. Indeed, there are only about 15 companies that PLN wants to buy from (85% of coal from 1^st generation CCOW companies). During development of this regulation the coal companies asked for the benchmark at $85/ton, but the ESDM self-declared $70/ton. The industry offered alternative mechanisms where all coal producers paid a levee (to be fairer), but this was rejected by the ESDM. The ICMA is still looking to develop a fairer system, and there are concerns that many of the CCOW are due to expire in 2019-2021.

Discussion, Questions & Answers; –

1. The ICMA have been invited to visit the ESDM to discuss PLN’s urgent situation where some 30 day coal stockpiles are now as low as 5 days. The reason for the low stockpiles was not mentioned, perhaps supplier’s prioritizing exports, wet weather at the mines, or PLN not paying invoices??
2. Some small supplier’s trying to sell coal to PLN, but loose tender. In some cases, small suppliers may have long logistics obliging them to bid relatively high to meet their new DMO commitments. Small and large miners are now reviewing their operational efficiencies, mining strip ratio, manpower levels etc to adjust to this new price imposition.
3. There was a call by the ICMA for PLN to be more transparent about its real cost structure, as the coal cap imposed on the miners may not be the only way to improve PLN’s business. There are concerns that PLN may fiddle some of their real cost data and there may efficiencies that PLN could undertake.
4. The ICMA supports the good citizen approach to provide coal under this new PLN cap system, but how to make it work is difficult. Most of the burden comes back to a few big players. Apparently, there has been no complaints by Provinces and Regencies over the associate loss of royalty income. There are many operational aspects for this policy that are unknown – for example, how will ESDM manage the implementation of exporting only 75% of production?

Arfidea Saraswati, Partner at AKSET Law. Ministerial regulation 11/2018 on tender mechanism and licensing etc.

The original draft for this regulation was some 500 pages, including various attachments, but was finally issued as “only” 115 articles. Some significant changes include the exploration must get an annual work plan (RKAB) approved “before” starting field work. The presentation included many well-prepared slides and much information and a number of issues such as; There are new restrictions on business licences – for example one must have separate licence for mining and coal blending. There are some odd new requirements, such as reporting on local diseases, and some apparent simpler processes, such as not needing a recommendation letter from ESDM before engaging foreign workers (but registration in annual work plan still needed to be approved). Other matters are yet to be regulated on, such as signing bonus being 10% of annual work plan? and value yet to be determined for data.

Diyana Putri Alan, Senior Analyst at HIS. Global coal supply and demand in the near term.

Many slides to show production ands consumption trends. India may be an opportunist buyer in the 2^nd & 3^rd quarters, but likely to drop off later to demonstrate local political support for national production. China is likely to reduce coal buying to prop up good domestic coal prices but may be more active to in the last quarter for winter stocking. Long term price trends likely to drop slightly, but volatility to remain. Strong Asian demand linked to growth in Asian power utilities. However, it seems all world-wide producers are endeavouring to increase production. The price of oil is relatively high at the moment, but this does not help coal much, as there is little control amongst coal miners to “manage” their output. The main wild card in coal production is China and the weather.

In Indonesia the Government has some control over the CCOW miners that produce about 80% of Indonesia’s coal, but have very little real control over the 20% produced by the IUP coal companies.

 

 

 

Legal Hard talk #2 on outlook for coal fired power plants under the new RUPTL and coal price regulation.

Arthur Simatupang, Dir Indonesia Independent Power Producers Association – APLSI.

The evolution of the coal industry has seen some coal miners expand into becoming power producers. A number of key figures give great insights to the coal industry. One figure shows the major coal producer costs relative to the new PLN price cap that is $39-55 adjusted to actual supply thermal qualities. In most cases miners are making a small loss on PLN coal. It is assumed the 75% exported at higher international costs should sustain the companies. Another figure shows the ESDM’s combined policy to limit coal exports to 400 million ton, and to increase DMO coal consumption at about 50% total production by 2027.

Adrian Simatupang, Dir Adaro Power.

The development of the private power industry has seen many changes and new regulations that have blown out overheads and time frames to get started in this industry. Power purchase agreements are an ongoing complex work that seems to become ever less certain. The new lower national energy targets are just another issue. At the start of negotiations, the growth of power was projected at around 1.5 X GDP, but now it is more likely 0.7 of GDP. Regulatory issues and challenges seem to be thrown up on a daily basis. For example – The lowering of power needs might seem to need less capex, but now longer production agreements mean more capex needs. Endless debates over coal price, risk and other matters might eventually lead PLN to better understand this industry.

Discussion, Questions & Answers; –

1. Many Indonesian coal producers are looking at this new PLN coal price cap and adopting a “wait and see” approach, and hope others don’t panic and stampede to increase production.
2. There is no new investment in the next generation of coal mines, and there is concern about other Asian countries growth will not be able to access coal from Indonesia, and so will look elsewhere for their next 20 years energy supply.
3. There is concern how the policy for the DMO will impact on next year’s production – if some companies can not sell into the DMO (price & quality restraints), then will they be penalized with smaller (50%) production limits? There is increasing uncertainty for investors in the coal sector.
4. China and other Asian countries are looking at various coal import restrictions, (China limiting ports, India limiting quality etc) and this could lead to greater market volatility. Production social costs are increasing in Indonesia, particularly access to land is now more difficult in Indonesia compared to Australia. Despite efficiency efforts, Indonesian costs are rising. High CV coal is in greater demand than low CV coal, and buyers are looking for specific coals for specific needs. Is Indonesia still attractive for coal investors? Certainly, investors are becoming more focussed on a particular project, rather than simply on a country.
5. There are mixed opinions about what happens to the DMO – PLN coal price cap at the end of 2019. Some feel it will stay and Indonesia risks heading towards a Venezuela scenario where subsidies eventually lead to a wider collapse of the national economy (no one left to pay the subsidy), or will the government take the bitter pill and end the PLN coal cap system and return to a stronger market economy, along with ending subsidies on fuel gas etc.
6. ICMA is hopeful PLN will provide more of its cost data that could lead to the recognition of further PLN efficiencies. Coal comprises some 30-40% of the production cost for PLN, so what further efficiencies can be found in the remaining 60-70% costs.

 

By Ian Wollff

The author is an expatriate principal geologist of about 30 years’ experience in the Indonesian exploration and mining industry. The authors’ web site is www.ianwollff.com