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Energy conservation and diversification

Interview - December 3, 2013
Indonesia's Minister of Energy and Mineral Resources, Jero Wacik tells United World about the national strategy to encourage investment in the sectors, while boosting downstream production, increasing electricity supply, safeguarding the environment, and focusing on renewable energies
JERO WACIK, MINISTER OF ENERGY (INDONESIA)
JERO WACIK | INDONESIA’S MINISTER OF ENERGY
What is your strategy for maximizing the country’s oil and gas potential and increasing production of its aging oil fields?
 
There is a change taking place in the Indonesian oil and gas industry. Firstly, the initial perception that oil and gas represents the source of state revenue has transformed into the belief that oil and gas is the driver of economic growth. Secondly, new investments and exploration are shifting to the eastern part of Indonesia since many basins in that area have not been explored yet. These are mainly located in deep water. Thirdly, our gas production has been increasing and now it has overtaken the previously dominant oil production. Moreover, we are also managing consumer demand in order to shift from oil to gas. This will work to reduce oil imports.
 
We have put in place several strategic measures to achieve realistic oil production targets in 2014. For example, we have optimized production at existing fields, among others, through infill drilling (drilling of development wells) and work-over programs. We accelerated the development of the structures in PT Pertamina EP that were lying idle. We accelerated the development of new fields such as Duri Area 13 (CPI), Kepodang (Petronas) and Banyu Urip (MCL). We applied Enhanced Oil Recovery (EOR) techniques in the potential recovery oil fields. We improved the reliability of production facilities to reduce disruption since the majority of them are quite old. We also improved the coordination between relevant agencies in order to accelerate problem solving related to licensing, overlapping tasks and land acquisition, as well as security. 
 
What opportunities would you highlight for foreign investors in Indonesia’s oil and gas sector and what steps are you taking to streamline related bureaucracy?
 
There are numerous opportunities for investment in the Indonesian oil and gas sector. In fact there are 22 basins open for both the exploration and exploitation of hydrocarbons. We have16 basins already in production and there are 7 basins where we have made discoveries but have not yet started production yet. In 15 basins we have already been drilling, but we have not found hydrocarbons yet. An additional 22 basins still remain unexplored.
 
In terms of Coal Bed Methane, we currently have exploration and exploitation in 11 basins that are spread throughout Sumatra, Java and Sulawesi. Furthermore, we have exploration and exploitation of shale gas throughout Kalimantan, Sumatera, Java, Sulawesi and Papua. Another opportunity for investors lies in the development of new oil refineries to supply the increasing domestic demand for fuel that grows by 4% per year.
 
We are working in cooperation with other ministries and agencies to develop a draft Memorandum of Understanding between the Ministry for Economic Affairs, Ministry of Energy and Mineral Resources (MEMR), Ministry of Forestry, Ministry of Home Affairs, Ministry of Finance, Ministry of Transportation, Ministry of Environment, Ministry of Public Works, and UKP4 (Presidential Working Unit on Management Supervision), and SKK Migas (Upstream Development of Oil and Gas)."
 
What is your strategy for balancing energy sector development with environmental concerns?
 
The energy sector has been linked to environmental concerns such as natural resources degradation, pollution and waste formation. Therefore, one of the aims of Indonesia’s energy management strategy is to ensure the protection of the environment through resource management in compliance with environmental and safety standards, and ecosystem restoration. 
 
With growing concern on climate change Indonesia has also taken an active part in global greenhouse gasses (GHGs) mitigation. In the G20 Meeting in Pittsburgh, USA, and COP15 in Copenhagen, Denmark, the President of the Republic of Indonesia has pledged the national GHG emission reduction to as much as a 26% reduction from business-as-usual by 2020. He also pointed out that GHGs emission could be further reduced to 41% of current levels with international support. One of the main sectors involved in national mitigation actions is the energy sector that contributes as much as 30 million tons of CO2 equivalent.
 
However, as the energy sector grows at an average rate of 7% per year, GHG emissions from the energy sector is projected to increase. This situation therefore poses a challenge for further GHG emission reduction in Indonesia’s energy sector development. To improve and integrate the mitigation action in the energy sector, the MEMR is developing the Clean Energy Initiative, which includes not only energy efficiency and renewable energy development, but also clean fossil energy implementation. This clean energy initiative is known as Reducing Emission from Fossil Fuel Burning (REFF-Burn) and it integrates all the necessary policies, regulations, programs and tools to answer the twin challenges of energy security and environmental protection.
 
Furthermore, Indonesia also has a roadmap to increase the percentage of renewable energy in its primary energy mix from 4.4% in 2006 to 17% in 2025. Replacing a large portion of fossil fuel into renewable energy will significantly reduce GHG emissions.
 
What are your expectations for the growth and evolution of Indonesia’s mining industry?
 
Indonesia has vast mineral reserves: 28.9 billion tons of estimated coal reserves, 1.162 billion tons of nickel ore, 3.04 billion tons of copper ore, 580.2 million tons of bauxite, and 3.351 billion tons of primary gold ore. These reserves will increase in line with discoveries from new exploration activities.
 
The mining industry contributes significantly to Indonesia’s GDP and state revenue, and its role is increasing over time. Currently, this role is supported mostly by the upstream sector; however, in the near future the downstream sector will take over.
 
The growth of Indonesia’s economy creates high demand for processed mining products. For instances, the export of bauxite (raw material for alumina production) has been increasing over the last 3 years. This is due to the high demand of alumina from emerging countries such as Indonesia. So you will have a market if you develop an alumina production facility in this country. We will give our full support to every investor committed to build a smelter or a refining facility in Indonesia.
 
Can you comment on the impact of the new Mining Law 2009 on the industry in light of the current account deficit of the country? How will this boost the country’s downstream industry and increase the export of value-added products?
 
The Law no.4/2009 on mining is derived from Indonesia’s constitution of 1945, where chapter 33 states that mining should be managed well to the benefit of the people’s welfare in both the short and long term. The current account deficit is mainly due to the adaptation process of the trading scheme since the implementation of this law. However, this will not take a long time. This new policy in mining will give a sustainable and better benefit for the people’s wealth and of course, for the profit of the investor. We believe that our policy to support the downstream industry will be beneficial both for our people and investors alike. 
 
According to the new law on mining, which will be implemented in January 2014, Indonesia will support mining industries that export refined or processed mining products. Our goal is to reduce the export of raw materials while increasing the export of value-added products. We consider that exporting mining products in the form of sludge will degrade the environment in the mining sites, in the ports and in the transportation lines. We are eager to protect our environment while securing the world supply of mining products. So we export what the world needs, which are the mining products, not the sludge or soil. Shipping soil along with the mining products is a waste of fossil fuel and it pollutes the ocean with sludge at the same time.
 
To support downstream industries, we will impose taxes on the exports of raw materials. However, we have a good tax scheme for the mining companies that shows commitment and promotes progress towards building a refinery or smelting facility. Investors in the upstream and downstream industries should be convinced that their investment in Indonesia is safe and that they will make profits. 
 
 Which sub-sectors of the mining industry present the best prospect for foreign direct investment and what incentives are you providing to potential investors?
 
Indonesia’s mining industry has a bright future. Therefore the level of FDI in mining has been steadily growing over the years. We have a list of investors eager to negotiate with us and become our partners in the development of Indonesia’s mining industry. Investment opportunities are widely available from upstream to downstream, especially in the development of processing and refining facilities.
 
There are many opportunities to invest in the smelting and refining industries that could provide potential investors with high yields. The demand for value-added products will be increasing as Indonesia’s economy grows to become the 7th largest economy in the world by 2030 (according to the McKinsey Global Institute). I am very confident that Indonesia’s mining industry, especially the downstream sector, will grow positively and generate high profits.
 
The government is also making efforts to further facilitate the inflow of FDI. For example, we have created a fast and transparent licensing procedure for mining. We have also deregulated the sector to provide legal certainty, and to provide other incentives as well.
 
Could you give us some insight into Indonesia’s electricity infrastructure development program? What is your strategy to meet the fast growing demand for power use in the future? 
 
Indonesia’s power generation facilities are powered by fossil fuels (86.69%) and renewable energy (13.31%). These figures include coal (50.29%), gas (23.32%), geothermal (4.74%) and others energy sources (0.09%).
 
Indonesia has two major grids that have been well interconnected: the Java-Madura-Bali system and the Sumatra system. We also have 226 isolated systems. By July 2013, our total power installed generation capacity was about 44,661 MW. We have 38,096 km of transmission lines and 741,957 km of distribution lines. Our net production is 180.862 GWh, out of which 74.78% is produced by PT PLN and 25.21% by Independent Power Producers (IPPs). 
 
The residential sector consumes 72.133 GWh, which is 41.45% of the total national production, followed by the industrial sector which consumes 34.58%. The remaining 23.95% is consumed by other means. The diversification of the primary energy supply for power generation and increased usage of gas and coal to reduce oil consumption have improved the efficiency. Some efforts also have been made to develop renewable energy power generation. 
 
During the past decade, Indonesia’s electricity infrastructure has been improved through investment. However, more investment is needed to meet the 8.65% growth of electricity demand by 2021. By that date, we plan to have developed an additional 57 GW of total power generation. This means that on average, Indonesia should develop 5.7 GW of additional capacity every year. PT PLN will build 53% of the new capacity, while the remaining 47% will be developed by IPPs. These developments will require US$ 97.62 billion of investment. 
 
Could you give us an overview of the main power projects currently under development?
 
Our top priorities for the power sector are the following:
 
To finalize the construction of Fast Track Program Phase I and Phase II.
To finalize the construction of power generation project owned by PT PLN and IPP in regular program.
To finalize the development of Geothermal Power Plant (GeoPP) and Hydro Electric Power Plant (HEPP) to increase renewable energy share in energy mix.
To encourage the development of Pump Storage HEPP to reduce consumption of gas and oil during the peak load in Java-Bali system.
To encourage the development of Mine Mouth Coal Fired Power Plant (CFPP) to utilize Low Rank Coal.
To encourage the development of CFPP with Ultra Super Critical technology to reduce emission.
To increase gas supply for power generation as effort to reduce oil consumption.
 
The government has committed to improve the coordination between the permitting authorities and harmonize regulations in the field of geothermal and hydropower to ease investment procedure in the power sector. Furthermore, we want to develop renewable energy by issuing a series of ministerial regulations to attract investment in geothermal power plants, small and medium scale renewable energy projects with biomass, biogas and waste power plants, as well as solar power plants.
 
By 2021, Indonesia is planning to build 55,234 km of transmission lines, consisting of a 500 kV Alternating Current Extra High Voltage (AC EHV) transmission line (5,241 km), 500 kV High Voltage Direct Current (HVDC) transmission line (1,100 km), 275 kV AC EHV transmission line (6,207 km), 250 kV HVDC transmission line (462 km), 150 kV HV transmission line (38,664 km) and a 70 kV HV transmission line (3,560 km). 
 
Additionally, to increase the electrification rate from 76.56% in 2012, Indonesia will build 425,794 km of distribution line, consisting of a 207,539 km MV distribution line and a 218,255 km LV distribution line.
 
The priorities for the development of transmission lines are:
Finalization of development of transmission line related to Fast Track Program Phase I and Phase II.
To solve de-bottlenecking of transmission line especially in Java-Bali and Sumatera system.
Development of Java-Sumatera interconnection system in order to transfer power from a large Mine Mouth CFPP in Sumatera to Java.
Development of interconnection system in Kalimantan and Sulawesi.
Development of West Kalimantan-Serawak interconnection system to meet the demand and to reduce oil consumption. 
Development of Sumatera-Malaysia Peninsula interconnection system to optimize the power system operation. 
 
Could you elaborate further on Indonesia’s strategy for renewable and sustainable energy resources, as well as the main projects in the pipeline?
 
Indonesia’s energy policy consists of two main elements: energy conservation and energy diversification. For energy diversification, the government has a target to increase the share of new and renewable energy in the national energy mix by 17% in 2025. 
 
Besides coal and oil and gas, Indonesia has various potential energy resources scattered throughout the archipelago, such as geothermal, hydropower, biomass, solar energy, wind energy, ocean energy and uranium. Almost 40% of the world’s geothermal potential is located in Indonesia. Sun power intensity in Indonesia is also greater than Europe’s. Moreover, with a large agricultural economy and numerous fast-streamed rivers, Indonesia also has significant potentials for biomass and hydropower. However, this vast renewable energy potential has not been exploited yet.
 
The government has opened the opportunity to invest in new and renewable energy (NRE). To attract investment, we have improved policies and regulations on NRE, as well as created a market. Some sub-sectors in renewable energy have not been specified yet. Therefore, the government continues to improve its policy and the regulation of development and utilization of renewable energy, including the preparation of draft government regulations on NRE. 
 
The government is working on the creation of the market through the supply and utilization of biofuel, obligating the National Electricity Company (PT PLN) to buy electricity and apply the Indonesian National Standards (SNI) criteria. Subsidies for biofuel have been provided since 2009 on the difference between fuel prices and biofuel prices, distributed through Pertamina.
 
Furthermore, feed-in tariff for every kind of renewable energy has also been set up, regulating the selling price of the electricity coming from renewable energies and purchased by PT PLN. Further incentives include the reduction of taxes and customs duties, as well as simplified licensing procedures. Moreover, power plants of up to 10 MW potential will be sold to PT PLN without going through a tender process.
 
The development of renewable energy encompasses the people living in remote and isolated areas, providing funds to improve access to electricity. Furthermore, our human resources in the field of renewable energy are improved in terms of both, quantity and quality through education and training. We are conducting research and establishing cooperation with other countries and international organizations to increase the rate of capacity building and technology transfer. To implement these programs, the government is providing funding and other forms of support.
 
To achieve our targets, the government of Indonesia has developed the NRE Development and Utilization Strategy, which includes:
 
The improvement of the national electricity supply, through the development of geothermal and hydro power plant. 
The improvement of the electricity access in remote areas, small islands and border areas with micro hydro and solar power plant.
The development of bioenergy power plant including agricultural waste and municipal solid waste to provide electricity as well as to improve the environmental. 
The development of wind power and ocean energy plant as pilot project to prepare the stage of commercialization.
The utilization of biofuel (solid, gas and liquid) to substitute oil fuel. 
The development of new energy (CBM and shale gas).
 
As the country with the largest geothermal reserves in the world, what is your vision for the development of this sustainable source of energy?
 
Indonesia accounts for about 40% of the world’s geothermal potential. Data from the Geological Agency of the Ministry of Energy and Mineral Resources indicated that in 2012, Indonesia had 299 locations with geothermal potential to develop, with total potential capacity of 28,617 MWe. These resources are located across the country in the island of Sumatra, Java, Bali, Nusa Tenggara, Sulawesi, Maluku and Papua. 
 
The current pace of economic growth, higher energy demand and decreasing fossil energy reserves have led to the overpricing of fossil fuels. These have, in return, caused a financial burden for the government budget since energy supply is still subsidized by the government. In an effort to reduce the dependency on oil, and to use energy in an efficient manner, the government has committed to accelerate the implementation of energy diversification by utilizing renewable energy sources and encouraging energy conservation programs.
 
This is where geothermal as a renewable energy comes into play. Geothermal energy has many advantages compared to fossil energy. It is sustainable and environmentally friendly as the carbon emissions are much lower compared to fossil fuel. Unlike other types of renewable energy, geothermal is not affected by climate change. Furthermore, there is rich potential because it is spread throughout almost all regions of the country. For all these reasons, geothermal has become the priority energy source for reducing Indonesia's dependency on fossil fuels and improving national energy security while providing added value in energy diversification. 
 
In the National Energy Policy, the government’s target for renewable energy is to achieve 17% of the energy mix by 2025. Geothermal energy is set to contribute 5% or 9500 MW. The government has developed various policies and incentives to encourage the use of geothermal energy in Indonesia and make it an attractive business proposition for investors.
 
What message would you like to share with our international audience?
 
Indonesia has taken serious steps to support energy conservation and efficiency by changing the policy from supply side management to demand side management. Indonesia needs massive investments to develop its energy and natural resources, including: electricity, biofuel, CBM, geothermal and new and renewable sources to secure its energy supply. The government will continue to provide incentives and support the development of electricity in Indonesia. 
 
We therefore would like to encourage and invite all potential investors to come to Indonesia and invest in the energy and mineral resources sector. There are many opportunities for US investors in Indonesia’s oil and gas sector, in electricity, in coal and mineral resources, and in the renewable energy.

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