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Is geothermal the answer to Indonesia’s rising demand for power?

Interview - July 17, 2014
Mr. Darmoyo Doyoatmojo, Chairman of Sarulla Operations Ltd. Discussed the geothermal energy sector in Indonesia and his company’s ambitious plans to develop it
What has led you to the position of Chairman of Sarulla Operations Ltd?

Energy has been part of my life since my student days. I was previously CEO of Medco Energy International and now I am a commissioner of Medco Power Indonesia, I worked for the company for my entire career. I’ve been in construction, fabrication, and the drilling industry as well. Actually I have worked in every area related to energy. Sarulla is one of my babies, a project I pushed for a long time. When it began to be realized the stakeholders asked me to become chairman.

How does geothermal fit into the Indonesian energy mix?

Darmoyo Doyoatmojo: Oil reserves in this country have been declining since 2002 and I believe that it is impossible for production to increase. Unfortunately energy takes a long time to materialize, usually 10 years from the end of exploration to the start of production. This is important to remember even if new projects are initiated today.

Because of this shortfall, Government of Indonesia has to import 800,000 barrels of crude oil and derived products to meet local demand. It still plays a huge role in the economy and consumption of oil accounts for 50% of the current energy mix. In 2025, we expect that demand will double, assuming that economic growth is maintained at 5-6%.

Geothermal energy is necessary. Of course, there are many renewable energy resources, such as the sun, but few can play a significant role. Palm oil is one of those that has potential. The second is geothermal. Geothermal is an expensive investment. Not many people understand about exploring and risk. Sometimes production is not economically feasible because of the permeability; the cost per megawatt can be quite high.

If you consider that energy requirements in 2025 will be double what they are now, we have to develop every option we can. We are active on the biofuel and hydropower fronts also. The National Energy Committee is encouraging the country to reduce oil dependency from 50 to 22%. We do not really have any choice we simply must develop geothermal energy. The potential of geothermal is close to 30,000 megawatts, so it is very big. It is one thing we can achieve with a better regulatory framework and better pricing.

I’d like to hear from your perspective, the milestones in development of Sarulla, and your expectations for the future?

Sarulla is unique. Initially it wasn’t commercially feasible. Then we put a bid on the project in 2006, and we won it. Medco Power Indonesia was part of the project at the time with a majority interest. Then it took almost 7 years until we negotiated the contract and got the approvals and financing with government assets. It is something new for us and it is a big project that we can develop.

Just how important is the project?

It is important for us and also for the country. There is a deficit in electricity, and in the use of diesel fuel. We got special support from the government. It was a big milestone for Medco and for the country.

What will take place at each phase of development?

We are already starting the test of the well which has a potential of 50 megawatts. We have 13 wells, and we plan to drill a total of 33. Not all of these wells are for production, some of them to put the water back into the ground. The first stage is to produce 110 megawatts by 2016. The second stage is one year after that, and then stage three begins. 110 megawatts are produced at each stage.

How does Medco apply its expertise conventional energy expertise to geothermal?

Medco Energy International started as a drilling company but it is diverse now. Some time ago we also developed geothermal. Drilling is one of key components of geothermal development. The second is harnessing the energy with a steam turbine.

The explorations have already been done and the well has been drilled. One of the major problems we and other companies face in Indonesia is land acquisition. Medco is good at handling local issues. It did quite well. We are already settled. If the land is not completely free, the financing cannot be formalized. Everything is ready now, so we only have to complete the job.

How many people are working in the project?

During the construction phase, there are approximately 1,000 people. They are working in infrastructure and drilling. We have already built some infrastructure to get to the site, such as bridges and roads. One of the big issues is how to manage local people.

What has been the response of people in the area?

We expect them to work for our project. We explained to them what the project means for the local community. It means a lot of jobs, and services including food, accommodation. Local communities have the opportunity to serve a thousand workers.

For people who haven’t heard about geothermal. How does it rank against conventional forms of electricity in terms of environmental impact?

Geothermal is environmentally friendly. It is renewable, and safe when compared to coal and oil. It is just hot steam, not burning coal. We use noise filters, so the level of noise is tolerable for the surrounding population. People have known for a long time about the project, and everybody has heard what geothermal energy is. We have made them aware of the potential risks, and they have accepted them.

How you see this project ten years from now?

It will have come on stream and people will be appreciating the benefits. Electricity will be provided to homes at lower prices than they currently pay. The potential is big, so if we feel excited when we finish the project we will do another one.

What is the estimated life of the resource?

Approximately one hundred or two hundred years. When you look at other geothermal projects in the world, you see that after 50 years are still in operation. That is why we call it renewable. We have a 30 years contract, and after that we return it back. It is similar to a BOT (Built Operate and Transfer) arrangement. We are an operator, but all the ownership belongs to PGE (Pertamina Geothermal Energy) and PLN (state owned electricity company) under JOC (join Operation Contract) and ESC (Energy Sales Contract). We will return it to them after the concession is finished.

Is it difficult to find the specialists you need?

Yes. There is a scarcity of drillers all over the world, even in oil. With increasing activity in North Africa and Russia, we lost people. My experience in developing people is that we have been quite successful. In the last 10 years, we ended up first in Indonesia with our Graduate Engineer Training program. We recruited 50 or 60 new graduate engineers every year from universities and trained them for a year, six months in class, and six months in the field. Many
Medco Energy International has also operations in Oman, and we rotate people but some people want to stay there and I don’t mind. It is good for the country, and I can always train new ones and replace them.

The legal framework for geothermal energy is complicated. There is exploration risk in geothermal. You may spend millions in drilling and it may be not commercially feasible. Government can do that and then put it in operation. In Sarulla it is different. The wells are already drilled and have proven adequate. Exploration is not understood by people outside this industry. Of course geothermal is less risky than oil. Geothermal is there, even though it may not be economically feasible because of permeability.

How much time will it take you to recover costs and start making profit?

Probably fifteen years. New electricity tariffs won’t be applied, and we don’t want to negotiate until it is already on stream. The government may put other incentives for compensation.

Energy is something the government needs urgently so they will discuss it in the best interest of the country.

With this project, we are developing a brand new billion-dollar asset. We have government arrangements and partnerships that put us in a different league. In Indonesia, we are the premier geothermal country and we can develop our potential further. Energy needs to evolve with economic growth.

Sarulla is proving that Medco cannot do the project alone; this is why we align with partners to finance the project.

Finally, geothermal is a renewable energy source and many people want to see this project succeed. And of course, there will be multiplier effects for the local community