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Resources, a driver for future growth

Interview - February 27, 2014
In January 2014, the Indonesian Government put into force a full ban on raw mineral ore exports as stipulated by the 2009 Mining Law. In an interview with United World, the Vice Minister of Energy & Mineral Resources Susilo Siswoutomo explains how the implementation of this act will now induce players in the industry to add value to production, allowing the country to greatly benefit from the domestic improvement of downstream production in the sector by creating a multiplier effect for the economy; resulting in increased employment, knowledge transfer, technological innovation and capital investment
SUSILO SISWOUTOMO, VICE MINISTER OF ENERGY & MINERAL RESOURCES
SUSILO SISWOUTOMO | VICE MINISTER OF ENERGY & MINERAL RESOURCES
What is the impact of the 2009 Mining Law on the industry and what are the measures taken by the Government for the law to be implemented? What long-term benefits do you believe it will bring to the country?

Indonesia’s Law No. 4 of 2009 on Minerals and Coal Mining is the prevailing law for the sector. It took the Indonesian Government more than 6 years to prepare the 2009 Mining Law until it was approved by the House of Representatives of the Republic of Indonesia. Every detail and implication of the Mining Law was thoroughly discussed in Parliament, as well as with industry stakeholders. That includes foreign companies who have Contracts of Work (previously foreign investors could only act as operators of mining projects if they owned a contract of work, which protect them from incurring taxes extraneous to those stipulated in the contract), as well as other mining companies. 
 
The purpose of the 2009 Mining Law is to induce players in the industry to add value to production. Enterprises are required to carryout processing and refining activities related to mining production in Indonesia, or they will face an export duty. Indonesia will greatly benefit from the domestic improvement of downstream production in the Minerals and Coal Mining sector. This law actually requires that the resource is mined, processed and refined in Indonesia, so that our country will benefit from the most comprehensive value addition possible for that resource. Processing and refining, rather than just the export of ore is fundamental for the development of Indonesia’s energy sector. 
 
Despite the urgency to reform the sector in order to encourage value added production in 2009, after consultation with industry stakeholders, the government allowed a five-year transition period for the enterprises involved to comply with the mandatory processing and refining requirements.
 
The Law dictates that all of the extracted mineral resources are to be processed and refined in Indonesia. For example, the American company Freeport Indonesia currently operates a smelter and a refinery in Gresik in East Java to process concentrates into products. Under the 2009 Mining Law, they are required to process the remaining ore they extract in Indonesia as well. Companies can opt to either use their current capacity, or build an additional smelter, as long as all of the mineral resources that the company extracts are processed domestically. 
 
As the end of the transition period approached, the 2009 Mining Law was slow and insufficiently implemented. Hence, Hon. Jero Wacik, Minister of Energy and Mineral Resources, ensured Ministerial Decree No. 7/2012 on mineral processing was issued. This Decree acted as a supporting regulation of the 2009 Mining Law and was conceived in order to avoid mere export and exploitation of raw minerals. Under the 2009 Mining Law, Indonesia fully banned exports of raw mineral ores starting from January 12th, 2014. This was done in order for mining companies to process and refine the minerals and build smelters in Indonesia.
 
However, under Ministerial Decree No. 1-2014 the government allowed copper, zinc, lead and iron ore concentrates to continue to be exported. 
 
Obligatory building of smelters is required by law and is therefore non-negotiable. The enterprises that are committed to the building of processing facilities will be allowed a three-year period to construct smelters. If and only if, the enterprises agree to a binding agreement to build refining facilities, as well as detailing a project schedule of the construction of the refinery, will the said enterprises be allowed to export raw materials for the duration of the three-year construction period. There is also an obligation to pay a progressive export duty in accordance with Ministerial Decree no.06/2014 by the Minister of Finance.
 
Therefore, American companies Freeport Indonesia and Newmont Nusa Tenggara, that together account for 97% of the country’s copper output, can still export unrefined production if they comply with the above-mentioned conditions. By early 2017 these refineries will have to be completed after which there will be no continued export of unrefined products.
 
These provisions will enable Indonesia to increase the value of its mineral exports. This policy will temporally negatively affect the quantity of exports, but in the near future it will vastly increase the value of exports. Although there has been a lot of debate over the Mining Law, the return to Indonesia in terms of value-added, as well as technology and knowledge transfer is undeniably beneficial. 
 
Last year, $20 billion worth of foreign direct investment (FDI) went to the mining sector. Do you think that public debate regarding the 2009 Mining Law will have an impact on future investor confidence?
 
Our nation has vast mineral resources and the potential to become a value-added manufacturer. Until now however, Indonesia has been a large exporter of mineral resources and as a result a driver of commodity pricing. Because of the large volumes of production and cheap export prices, other countries have enjoyed the benefit of added value. For example, the price of unrefined nickel is 40-50 USD per metric ton. If it is processed and refined, the value will increase 50-fold to 2,500 USD per metric ton. 
 
The underlining reasoning behind the 2009 Mining Law is that it is logical and beneficial to the country. This law creates a multiplier effect for the economy resulting in increased employment, knowledge transfer, technological innovation and capital investment.  Foreign investors recognize that this law strengthens the mining and coal sectors and should expect greater profits and lower costs in the long term, as the new refineries come online. 
 
Could you explain to our readers the brief history of how Indonesia turned from a net exporter of crude oil into a net importer? What is your strategy today for increased oil self-sufficiency in order to lessen national dependency on imports? 
 
The history of oil in Indonesia encompasses two concepts: decreased domestic supply and increased domestic demand. From the supply side, the production of crude oil in Indonesia has decreased and therefore more imports are needed. From the demand side, local consumption of crude oil has increased drastically, which further increases the need to import oil in order to sustain the country. 
 
The decline in production is the result of limited discovery of new oil reserves coupled with discontinued production from oil fields and aging of existing oil fields. In fact, the water cut, which is the water content of 1 barrel of crude oil and hydrocarbons as they flow from a well, used to be 0%. Meaning that for every barrel of liquid flowing from the well, we were able to produce 1 barrel of oil. Over time, the water cut has increased dramatically to 98.5%. Therefore today, for every 100 barrels of liquid currently extracted, 98.5 will be barrels of water, while only 1.5 barrels will be crude oil, which increases our production costs dramatically.
 
Although we face the above-mentioned challenges, proven national reserves are still considerable, about 3.7 billion barrels. There is an additional potential 50 billion barrels that are not yet discovered. Converting this potential 50 billion barrels into proven reserves requires substantial exploration efforts. 
 
Despite the challenges we face, Indonesia is still managing to attract investors (both domestic and foreign) because we need new technology to reduce the declining production rate and sustain the domestic consumption of oil. We also need investors to fund exploration and discover new oils fields, as well as to improve production of our existing fields. For the purpose of attracting investors we are planning to auction 27 blocks in 2014. To increase the attractiveness of these blocks the government will ensure transparent geological data on the characteristics of these blocks. At the moment, the government is financing many projects for data positioning and seismic programs. 
 
We used to produce 1.6 million barrels per day (bpd) when our domestic requirements were only 400,000 bpd, which meant that the remaining amount was exported. 
 
Nowadays, our consumption needs are 1.4 million bpd. Indonesia’s production is about 825,000 bpd of which only about 650,000 bpd can be processed domestically, due to technical considerations. Therefore, everyday Indonesia has to import about 750,000 barrels of crude oil at an additional cost of $150-200 million. 
 
In addition to this, consumption is forecasted to increase in the near future. This is because the economy is expanding and the population is growing, which means that energy requirements are growing by 8% a year. For 2014 we believe that consumption needs will increase to 1.5 million bpd from 1.4 million bpd, at least. By the year 2015, if we factor in an additional 8% increase, local demand for oil will reach 1.65 million bpd. In 2017, Indonesia will need approximately 2 million bpd. 
 
At the moment oil consumption is outpacing oil production, making Indonesia a long-term net importer of oil for the foreseeable future. Hence, we are in need of technologies to improve exploration and production, as well as alternative sources of energy. 
 
To reduce dependency on oil imports, the government has implemented, among other measures, an incentivizing of the introduction of biodiesel. Our target for 2014 is to produce 100,000 bpd of biodiesel, with a goal of reaching 300,000 bpd over the next 3 to 4 years. The biofuel will balance the increasing demand of fuel import. Currently, biodiesel production derived from Crude Palm Oil (CPO) reaches approximately 100,000 bpd. This level of production requires around 5 million tons of CPO per year. 
 
The current production of CPO is 26 million tons per year. By 2025, we expect production to be 50 million tons per year. A good course of action would be to reduce the import of fuel by manufacturing 400,000 bpd of biodiesel with 20 million tons of CPO. This would effectively compensate the increase in consumption needs and stabilize imports of crude oil. 
 
Currently, we are not considered to be environment friendly despite the numerous projects undertaken to become a greener economy. This is something that can be changed through the development of biofuel production capacity. 
 
Another priority we have set is energy management. First of all, the government will educate Indonesians by encouraging them to protect the environment, and conserve energy, even through small acts like switching off house lights when they are not in use. 
 
In light of the above-mentioned challenges Indonesia also needs to implement the introduction of new technologies. This includes the development of alternative and renewable sources of energy such as hydro and solar energy.
 
In 2012, Indonesia was the world’s 7th largest natural gas exporter in 2012, selling over 46% of its total output overseas. But this is likely to change as the Government plans to export only 10% of its natural gas production by 2030. What is the national vision for the future of natural gas?

Indonesia has 3.18 trillion cubic meters of proven gas reserves and we plan to increase investment in exploration and production of this substantial resource. Our current production is 8,150 billion standard cubic feet of gas per day. 
 
The government is set to build and improve infrastructure in order to meet the needs of the gas sector, especially to reduce waste and maximize returns in this sector. The government will continue to export part of the gas production, despite increasing consumption needs, because it provides steady revenues that the Government reinvests in order to improve productivity of the gas industry. 
 
Government’s policies in the gas sector are directed towards improving the returns to investment. Furthermore, investor’s confidence should strengthen as infrastructure is improved. 
 
Indonesia also has vast potential of shale oil and gas. Shale oil is a substitute for conventional crude oil; however, extracting shale oil is more costly than the production of conventional crude oil, both financially and in terms of its environmental impact. We started to move in that direction, but we still have a long way to go. Indonesia does not have the same financial resources, technology and infrastructure as the United States. 
 
Last year the Indonesian Government has announced that companies involved in the exploration of oil, gas and geothermal resources will receive tax incentives. Companies can also import goods used in upstream oil and gas exploration, as well as geothermal exploration, without paying import duties. 
 
By 2025, renewable energy sources should account for 15% of the national electricity portfolio. Indonesia has the largest geothermal reserves in the world. What is your strategy to develop geothermal energy in Indonesia?
 
Indonesia has 40% of the total available geothermal energy in the world, with a capacity of 29,000 MW. Today we produce 1,340 MW, while our target for 2022 is to reach 6,500 MW. We have to increase production by 5,000 MW that means we have to develop to increase production by 600,000 KW every year. This is a challenging goal to achieve, and if there is one area that needs investment, it is geothermal. 
 
We are currently cooperating with other ministries to attract companies and investors. The Government is setting up incentives, such as establishing well-suited tariff levels. Incentives are not only provided for geothermal energy, but also for other new and renewable energies, like solar energy, tidal energy and hydropower. In terms of hydropower, Indonesia has increased production from 100 KW to 600 MW. 
 
Renewable energies have vast potential to develop, and there is space for both domestic and foreign investors to operate in this field. We want cooperation in this sector because Indonesia needs technology and investment. We will provide incentives in order to guarantee investors that this is a profitable sector. 

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