Jakarta – The coal downstream project could lead to the state losing money. It is more expensive than importing LPG.

The government should rethink its coal gasification project plan. Proclaimed as a way of replacing LPG, which has long added to the state financial deficit, it is by no means certain that the coal downstream program will produce a cheaper end product. Forcing through a project that has not been successfully tested could put more pressure on the country's finances.

The coal downstream project has again become an issue this week after Bukit Asam announced its plan to sign a cooperative agreement with Pertamina and Air Products, an investor from the United States. They are to build a US$2.1 billion coal gasification plant at Tanjung Enim, South Sumatra.

At first glance there is nothing wrong with this business agreement. Despite this, foot-dragging has continued in the lead up to the signing of the agreement. One prominent sticking point is the uncertainty over the role of each entity.

The factor that has made Bukit Asam and Pertamina waver is that the estimated price of dimethyl ether (DME), the end product of the gasification, will be higher than imported LPG. This means that the two state-owned companies are facing potential losses.

If this is the case, who will have to cover the price difference? If the government is the one expected to foot the bill with more subsidies, it is not impossible that this will lead to more serious financial pressure in the future. The initial desire to save state funds could result in exactly the opposite, and lead to losses.

Of course, the government has an interest in reducing the dependence on imported LPG. Its use for households is still subsidized to the tune of Rp42-55 trillion per year. The size of this subsidy adds to the government's deficit. However, forcing through the gasification program without properly calculating its value as a replacement for LPG could double the government's losses.

A study by the Institute for Energy Economics and Financial Analysis could serve as a starting point. The IIEEFA demonstrated that the construction of a DME production facility is uneconomical and does not make sense. With a total production cost of US$470 per ton, DME costs almost twice as much as consumers currently pay for LPG. If it is continued, it is predicted that the DMA production facility will suffer annual losses of US$377 million, or around Rp5 trillion.

This alone should make the government realize that the coal gasification project is not the right decision to reduce the trade deficit, part of which is the result of LPG imports. The government must also look at the best practices in other countries. Although there have been many tests of the gasification process in coal-rich countries, not a single one of them has implemented it on a large scale.

In the end, the coal downstream program policy must be informed by a cost benefit analysis to determine whether it makes sense economically, both in the short and the long term. The policy must also not be intended to legalize the coal concession extension of tycoons that is about to reach the end of its contract period.

Furthermore, the creation of added value in the downstream process cannot be applied generally to all products and commodities. Large coal stocks are not a guarantee that we will be able to produce end products that are competitive. The ability to supply competitive products is also dependent on the availability of efficient domestic input.

President Joko Widodo must not force through the coal downstream project policy if it is at odds with the laws of the market. This decision could lead to the state companies pioneering the program implementing it in a half-hearted fashion. If that happens, the planned signing of the coal gasification agreement will be nothing more than a ceremony.

Read the Complete Story in Tempo English Magazine: https://magz.tempo.co/read/37277/a-ceremonial-gasification-project

Source: https://en.tempo.co/read/1411671/a-ceremonial-gasification-projec