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Analysis: Air Products exits RI's coal downstream projects

Jakarta Post - March 23, 2023

Tenggara Strategics, Jakarta – After a tug-of-war in coal supply price negotiations for a coal-to-dimethyl ether (DME) conversion project with Indonesian state-owned enterprises (SOEs) Bukit Asam (PTBA) and Pertamina, United States chemical company Air Products & Chemical finally decided to leave all coal downstream projects, including the coal-to-ethanol gasification project with Kaltim Prima Coal (KPC) and Arutmin Indonesia.

The coal-to-DME gasification project was supposed to bring in US$2.3 billion in foreign investment from the US firm. The facility, whose construction project started in January last year and was initially set to be completed in 30 months, was planned to utilize 6 million tonnes of low-calorie coal supplied by PTBA to produce 1.4 million DME per year, enough to substitute 1 million tonnes of liquified petroleum gas (LPG). Based on Indonesia's Rp 60 trillion ($3.9 billion) to 70 trillion LPG subsidy in 2021, domestic DME production could save the state budget around Rp 7 trillion per year.

However, a tug-of-war on the price set for the coal supply from PTBA has likely led to Air Products' exit from the entire coal gasification projects in the country. Previously, the Energy and Mineral Resources Ministry suggested through its study in 2021 that the coal supply price for conversion into DME should be set at around US$19-21 per tonne. The ministry also estimated in that scenario that Pertamina, the designated DME off-taker, would have to buy the DME at around US$400-420 per tonne.

However, PTBA was against the proposed coal supply price range proposed because it was far lower than coal's market price, which reached US$250 per tonne in 2021. On the other hand, Air Products pushed for the price to be below US$20, maintaining that its obligation was limited to providing production services to convert coal into DME. Meanwhile, Pertamina complained that it would have to buy DME at a higher price should the coal supply price to Air Products be set at market value.

Following Air Products' exit, Bumi Resources said it was finalizing a collaboration with a new partner to replace Air Products for the coal-to-ethanol conversion project, although the firm did not reveal the identity of its new partner. Moreover, the Energy and Mineral Resources Ministry said that some Chinese companies had expressed their interest to invest in various coal "downstreaming" projects that include the coal-to-DME and coal-to-ethanol gasification projects.

Air Product's exit from Indonesia creates a major delay to the country's "downstreaming" efforts to produce added value for the country's natural resources and reduce reliance on exports. The government also needs to obtain additional off-takers for the coal gasification project on top of Pertamina, because relying solely on the SOE could make the state budget savings from decreasing the LPG subsidy be hampered by the need to greatly compensate the state-owned buyer.

What's more

The Energy and Mineral Resources Ministry reminded the 11 mining firms, which have committed to downstreaming the coal industry, that the special mining permits (IUPK) they hold could only be extended by delivering on their commitments. However, a source at an SOE claimed that the IUPK extension requirement is merely a gimmick. The source noted that the coal-to-ethanol gasification project is still in the form of a study, but some firms involved in it still received license extensions.

Moreover, Article 128A of Government Regulation in Lieu of Law (Perppu) No. 2/2022 concerning job creation effectively eliminates a revenue channel for the government from its coal "downstreaming" efforts with the zero percent royalties for coal used in said efforts. The regulation is part of the Joko "Jokowi" Widodo administration's seeming reversal from its commitment to reduce the country's dependence on coal as coal derivates are recognized as three out of the five sources of "new energy" in the new and renewable energy (EBET) bill.

What we've heard

Several sources in the government said that President Joko Widodo was disappointed with Air Products' departure from the coal gasification project. Especially after he had met Air Products CEO Seifi Ghasemi in person at the Ritz Carlton Hotel in Washington, United States, to discuss the investment plan. The discussion of this groundbreaking project was also attended by Investment Minister Bahlil Lahadalia, Energy and Mineral Resources Minister Arifin Tasrif, and Maritime Affairs and Investment Coordinating Minister Luhut Pandjaitan.

A source at the State-Owned Enterprise (SOE) Ministry added that a number of ministers were embarrassed and devastated by Air Products' cancelling their investment plans in Indonesia. So much groundwork had already been laid for this project, including its designation as a national strategic project (PSN) and PT Bukit Asam preparing a Special Economic Zone (SEZ) that covers an area of 585 hectares.

According to the source, the root cause of the problem is not meeting the project's economic scale, rather that Air Products views this project as uneconomical. However, there were also rumors circulating that Air Products is having difficulty bringing in an investment of US$15 billion, which is what was claimed by the government. "They sell technology," said the source earlier. "But from a financial standpoint, they also depend on lenders." Meanwhile the current financial situation in the United States is sluggish, so they also need capital inflow.

On the other hand, for PT Bukit Asam as the coal supplier and Pertamina as the off-taker, Air Products' cancellation of investment is actually good news to them. According to a different source, the two state-owned companies felt overwhelmed by the gasification assignment project. The two also felt that this project was not economical. "But because Jokowi ordered this project to continue, SOEs did not dare to refuse despite the uneconomical nature," said a director of an SOE.

After Air Products left, the government is now considering two options: renegotiate the contract with AP or find a new investor from China. But a source within the government added that finding new investors has been extremely difficult. So far, not a single investor, not even investors from China, have showed any interest in the project. The news that there is already a Chinese investor interested in continuing the DME project is only limited based on a claim from the government. "Interest in the project one thing, but the economics of the project remains a non-negotiable factor," said the source.

A source who followed the birth of the coal gasification policy said that the coal gasification project as a substitute for LPG was faulty from its inception, going as far back as when President Jokowi sparked this program around 2018. "But nobody ever offered a counter to the economic calculation of this project," said this source. Similarly, nobody could guarantee that the cost of producing DME per ton is cheaper than importing LPG.

Unfortunately, no one dared to correct Jokowi. "The concept of coal downstreaming should have been debated at the start of the launch," said the source.

Instead of giving a correction, the Energy and Mineral Resources Ministry designed a grand national energy program for coal downstreaming and gassification. One of the articles in the new Mineral and Coal Law states that the downstream program must be integrated with the IUP/IUPK holder system. This term is also to be used when the company obtains a concession extension.

Despite the royalty payment exemptions (zero percent royalty) for coal companies involved in gasification and downstream projects, this project still could not be made economical. "In the past, it (the exemption) was expected to help the internal rate of return. But reality was different," said the source. That is why KPC, a subsidiary of the Bakrie Group which has also collaborated with Air Products, is reported to have asked for additional relief programs in addition to the royalty payment exemption, such as relief in fiscal and non-fiscal matters, to the point that the project would finally be economical.

[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]

Source: https://www.thejakartapost.com/opinion/2023/03/23/analysis-air-products-exits-ris-coal-downstream-projects.htm