Oil & Gas, by David Braithwaite
The continued low oil price dominated activities in the oil and gas sector during 2015. Whilst end users were able to benefit from lower oil and gas prices, and reduced cost of oil imports all companies involved in oil and gas exploration and production including those providing drilling rigs, other types of equipment and support services, saw profits fall dramatically. As a result there was a big cut back in exploration expenditure, a number of projects in the development phase were put on hold, and all oil and gas companies and service providers were obliged to find ways to cut costs and increase efficiency.
On a positive note, the government issued a regulation which required them to decide at an earlier stage than before, whether operators of Production Sharing Contracts (PSC’S) could be granted extensions when they expire or if they will be transferred to another party such as Pertamina. This was needed as many of these PSC’s will expire in the next few years. At the retail end of the industry, the low oil price avoided motorists having to pay much higher prices for their fuel during the year, after the long-standing fuel subsidies were removed at the end of 2014.
CONTINUED CHALLENGES IN 2016 (and OPPORTUNITIES)
Oil and gas exploration and production activities have continued to be curtailed by the continued low oil and gas prices, during the year to date, although there has been a modest recovery in the oil price from the low levels seen in 2015. The government have indicated they will soon be issuing a reform and stimulus package for the oil and sector, to help resuscitate investment. However industry concerns are not just related to the low oil and price. Regulatory uncertainty continues as the revision of the existing Oil and Gas Law is still many months away from being finalized, and may not this may not happen during this year. Some of the reforms being considered could marginalize the role of private companies both at the exploration and production stage, and also in the storage, transportation and retailing of oil and gas in the future. One bright spot though, is that that rates for drilling rigs, and other services have now fallen significantly, and several companies have embarked on new drilling programmes to take advantage of these. Another opportunity for investors is in the gas infrastructure sector, where government have laid out aggressive plans to increase capacity involving a wide range of technologies including gas transmission and distribution pipelines, LNG regasification terminals (both onshore and offshore), small scale LNG carriers to deliver gas to smaller islands in eastern Indonesia, CNG storage for power plant, and systems for delivering LNG/CNG to land transport vehicles and shipping fleets
Mining, by Bill Sullivan
HIGHLIGHTS OF 2015
1.1. Continuing Low Coal and Mineral Prices: Continuing low coal and metal mineral prices, with no obvious improvement in sight and except for gold, caused numerous mining companies to cut costs, reduce operations and lay off workers.
1.2. Continuing Slow Progress of Smelter Development: Construction of a number of nickel smelters was completed. However, overall progress in smelter development was very slow, with almost no progress in respect of the construction of alumina, copper, iron ore or manganese smelters.
1.3. Continuing Slow Progress of CoW/CCoW Renegotiations: Very little progress was made in moving towards a satisfactory conclusion of the long running CoW/CCoW renegotiations. A widely reported scandal, in late 2015, regarding the attempt to secure shares in Freeport’s Indonesian subsidiary, as the price for facilitating the conclusion of the Freeport CoW renegotiations on favorable terms, effectively resulted in the Freeport CoW renegotiations being “put on hold” and had a similar, indirect effect, on the other outstanding CoW/CCo0W renegotiations.
1.4. No New Mining Law: A new mining law, to replace Law No 4 of 2009 re Minerals & Coal Mining, was meant to be a legislative priority for 2015 but this did not happen. However, a discussion paper, issued by DGoMC, indicated that ESDM was considering a much expanded role for BUMNs (i.e., state-owned enterprises) in the local mining industry, with the private sector being possibly confined to back to back financing and services arrangements with the relevant BUMNs.
CHALLENGES FOR 2016
2.1. Expanded Role of BKPM: BKPM has been given the authority, for the first time and on behalf of MoEMR, to issue (i) all IUPs for PMA Companies and (ii) all IUPs for PMDN Companies where the relevant mining concession crosses the borders of two or more provinces, Delegating to BKPM the authority to issue certain IUPs is part of the ongoing efforts of the Central Government to facilitate the doing of business, in Indonesia, by making BKPM a “one stop services shop” for all the approvals and licenses foreign investors need. In the long run, it is reasonable to expect that there will be cost savings and time efficiencies realized by foreign investors, in the local mining industry, in not having to deal, first, with BKPM in order to obtain their PMA Company establishment approvals and, second, with DGoMC/MoEMR in order to obtain their IUPs, being their principal business licenses. Nevertheless, how quickly and the extent to which these expected benefits are realized will depend greatly on the administrative ability of BKPM and its staff to implement the delegation of certain IUP issuance authority on a day to day basis. The short term result may actually be longer delays rather than shorter delays for PMA Companies seeking to take advantage of BKPM’s new role as a “one stop services shop”. These initiatives always sound promising when reduced to a clever slogan such the “BKPM – the one stop services shop” but the reality can be and often is disappointing as practical problems with the initiative only become apparent once the implementation process is underway.
2.2. Renewal of IUPs: The Central Government is insisting upon full compliance, by the Provincial and Regional Governments, with a 2014 government regulation that provides for the delivery to and renewal by MoEMR of IUPs previously issued by the Provincial and Regional Governments to PMA Companies. Until such time as this happens, DGoMC/MoEMR is refusing to approve various proposed changes to the investment sources, management composition and articles of association of PMA Companies holding IUPs. As (i) the Provincial and Regional Governments have very little incentive to comply with the 2014 government regulation and (ii) nether the Central Government nor PMA Companies have any way of compelling such compliance, there is a real risk that PMA Companies, holding IUPs, may be indefinitely delayed in obtaining approval for important proposed investment and governance changes.
2.3. Relaxation of Certain Mineral Export Requirements: Metal minerals, non-metal minerals and rocks, that have met the minimum requirements for processing and refining or that may be temporarily exported in concentrate form until January 2017, may now be exported without the need for the exporter to become a Registered Exporter. More importantly, in the case of metal mineral producers temporarily exporting in concentrate form, the requirement to achieve a specified level of progress in domestic refining facility construction, as a pre-condition to renewing their Export Approvals, has been significantly modified. Concentrate exporters are also being allowed to more easily amend their Construction Plans and recover their refinery construction Guarantee Deposits. These changes may indicate the continuing evolution of the Central Government’s thinking regarding the wisdom of making full domestic processing and refining of metal minerals a medium term priority for Indonesia as opposed to a long term aspirational objective only. Investors in and financiers of already constructed and under construction domestic smelters are likely to be seriously concerned about this development.
2.4. ESDM Draft of New Mining Law: In April, a draft of the proposed new mining law, as prepared by ESDM, was published on-line. The April Draft Mining Law provides an interesting and useful interim “snapshot” of ESDM’s current thinking about the New Mining Law and how that thinking has evolved since 2015. The April Draft Mining Law indicates that (i) at a minimum, copper, iron ore and zinc producers will be given a further 5 years to build domestic smelters while, in the interim, being able to export processed product in limited amounts and (ii) ESDM no longer sees any merit in giving BUMNs a dominant position in the local mining industry. Despite these positive proposals, there are a number of other aspects of the April Draft Mining Law that are likely to be very worrying to the private sector in general and to foreign investors in particular. More specifically and as presently worded, the April Draft Mining Law envisages that (i) CoW/CCoW holders will be compelled to exchange their CoWs/CCoWs for IUPKs not later than one year after the new mining law comes into force or face the prospect of the cancellation or termination of their CoWs/CCoWs, (ii) new forms of non-tax state revenue are to be imposed on IUP/IUPK holders, (iii) IUP/IUPK holders will no longer be able to use PMA Company mining services providers, (iv) expatriate workers will require a special recommendation from MoEMR before they can be employed by an IUP/IUPK holder, (v) mining companies are to be held directly liable to local communities and individuals for the negative consequences of their mining activities if those mining activities are not carried out in strict compliance with the relevant laws and regulations and (vi) mining officials will be given quasi police powers to investigate alleged criminal actions of mining companies. Until such time as the New Mining Law is passed by the DPR, many local and foreign investors will surely want to “sit on the sidelines”.
2.5. Constitutional Court Uncertainty: The Constitutional Court is currently considering various challenges to the Central Government’s endeavors to severely limit the authority of the Regional Governments in respect of forestry, mining and related matters. If the Constitutional Court was to decide that the authority of the Regional Governments cannot be limited in the manner sought by the Central Government, this would substantially undermine the efforts of the Central Government, over the last couple of years, to concentrate all IUP issuing authority at the level of the Central Government and the Provincial Governments only. This would also create great uncertainty as to the timing of the New Mining Law and increase the risks faced by all IUP holders whether local or foreign owned.
Power, by Ainsley Mann
As at the end of 2015, 10 million households across Indonesia still lacked access to electricity . The the target expressed in the long term energy plan (KEN) is for for there to be 99% electricity access by 2020.
Demand is expected to increase to 442TWh by 2022 meaning capacity would almost need to double to 90GW. The estimated total investment is US$93bn. However, the Government is currently well behind schedule and very unlikely to achieve it’s interim target of new 35GW by 2019.
(B) ELECTRICITY SUBSIDIES
Other than in Tarakan and Batam , PLN sell electricity at a uniform national tariff. Under Law 19/2003 the government may instruct a State-Owned Enterprise to provide certain services for the benefit of the public (PSO) , but in this case the government is obliged to ensure the profitability of the company is not compromised by compensating the SOE for all the addititional costs incurred plus a margin.
(C) RELIANCE ON COAL
Although conventional coal-fired plants will be the focus, Indonesia is also moving ahead with new cleaner coal technology such as ultra-critical, which uses high steam temperatures to generate electricity more efficiently and produce fewer emissions.
A consortium comprised of US engineering firm Black & Veatch, Japan’s Sumitomo and Indonesia’s Satyamitra Surya Perkasa is leading a 315-MW expansion of a coal-fired plant in Indonesia’s Banten province, which will increase the facility’s installed capacity to 1.26 GW.
Meanwhile, the PT Cirebon Energi Prasarana consortium – comprising Chubu Electric Power, Cirebon Energy Holdings and subsidiaries of Marubeni Corporation and PT Indika Energy – will construct and operate a $2bn ultra-supercritical coal-fired plant in the city of Cirebon with an output capacity of 1 GW.
A 25-year power purchase agreement with PLN for the plant was finalised in autumn, which should enable the state utility company to meet growing energy demand in Java, where more than half the country’s population lives.
(D) RENEWABLE ENERGY
Both Law 30/2007 on Energy and Law 30/2009 on Electrcity ,promote renewable energy, following which several regulations have been issued addressing technology –specific pricing, including feed-in-tariffs for grid-connected biomass , municipal solid waste , and hydropower generators under 10MW. Grid-connected PV generation (photovoltaic) and larger hydropower generator are awarded through tendering on price. In 2015 the first tidal steam energy MOU was signed between the PLN and SBS International marking Indonesia’s planned entry into that renewable sector.
(A) ELECTRIFICATION/ELECTRICITY ACCESS particularly in Eastern Indonesia. The cost of connecting to the grid is prohibitive for many remote areas so the challenges to provide electricity to the less developed eastern part of the country are still immense. It may well be that these areas offer the best immediate potential for renewable energy sources.
(B) LAND ACQUISITION. Despite improved land acquisition regulations problems of land acquisition continue to plague many projects particularly in Java. Therefore nearly all projects suffer some form of delay.
(C) ELECTRICITY SUBSIDIES. In order to reduce energy subsidies the government has prepared an Electricity Road Map which aims to eliminiate electricitiy subsidieis except for low income households. The lower oil & gas prices combined with a move to reduce subsidies may prove problematic for many renewable energy projects which rely on subsidies in the early years in order to be financially viable.
(D) HUMAN RESOURCES. Given the Government’s ambitious plans for all facets of infrastructure the demand for related professionals and technicians is and will continue to outstrip current supply.
OPPORTUNITIES FOR BRITSH EXPORTERS
The main opportunities will exist in areas relating to :
- the design , construction, operational, maintenance etc of large scale coal-fired power plants
- goods and services related to smaller scale range of renewable energy power plants, and power systems
- goods and services related to tranmisson and distribution facilities.
- logistical support services for major infrastructure projects including energy projects.
- higher education provision for future power sector / engineering professionals