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Tuesday, 08 March 22
THE HIGH COST OF INDONESIA’S DOWNSTREAM COAL PROJECTS IS UNDERESTIMATED - IEEFA
/IEEFAThree Indonesian ministries have come up with a DME purchase price of US$378/tonne fixed for 20 years compared to IEEFA’s US$601/tonne estimate
 
In Indonesia, coal gasification technology is seen as a saviour that will stoke demand for low-rank coal reserves, boost foreign investment and displace government subsidies for liquefied petroleum gas (LPG) imports.
 
However, IEEFA’s analysis reveals that for DME to make economic sense, it would still require heavy government subsidies.
 
The dimethyl ether (DME) plant in Tanjung Enim, Sumatra was classified as a national strategic plant in November 2020. The principle behind this project is to use the country’s coal reserves to produce DME as a replacement for LPG imports.
 
The Sumatra project progressed as Indonesia’s state-owned coal mining company Tambang Batubara Bukit Asam (PTBA) held a high-profile ceremony for its DME plant on 24 January, witnessed by President Jokowi. The event surprised outside observers because of the Indonesian government’s commitment to reduce emissions.
 
On 25 January, three ministries– the Ministry of Energy and Mineral Resources, Ministry of State-Owned Enterprise and the Ministry of Investment– announced an agreed price of DME at US$378/tonne fixed for 20 years.
 
On 26 January, IEEFA published a report highlighting that with conservative cost assumptions and 15% return each for the coal supplier and the DME plant operator, the more realistic DME price would be US$601/tonne.  The findings concluded that the DME project in its current form would not be profitable, and that Indonesia’s downstream coal plans add up to a black hole.
 
The difference between the two prices is pretty significant at US$223/tonne. Our analysis shows this is potentially due to the three assumptions used to arrive at the two DME prices.
 
1. DIFFERENCE IN COAL INPUT PRICES. To produce DME at the US$378/tonne price, IEEFA estimates that PTBA’s coal input cost needs to be as low as US$20/tonne. About 4.6 tonnes of coal are required to produce one tonne of DME. This translates to a total coal cost of around US$92/tonne of DME. IEEFA uses a coal price of US$48/tonne, which assumes a 15% return on the average PTBA production cost of US$42/tonne.
 
2. DIFFERENCE IN DME PROCESSING PRICES. For the ministries’ price, IEEFA estimates that the assumed production cost from Air Products needs to be around US$230/tonne. As a comparison, IEEFA uses US$300/tonne for the DME processing price, which is based on actual cost range from comparable Chinese coal to a DME plant currently operating in Shanxi Province.
 
3. DIFFERENCE IN OPERATOR RETURNS. Both price scenarios include a built-in 15% return for the DME plant operator. For the lower ministry price, this would be around US$50/tonne. Meanwhile, for the IEEFA price of US$601/tonne, the dollar return to the DME plant operator is US$78/tonne.
 
For the annual output of 1.4 million tonnes of DME in the Tanjung Enim DME plant, the total difference between the ministries’ price and IEEFA estimates is US$312 million per year. This huge difference could be possible, in IEEFA’s view, only if both parties in the supply chain are prepared to sacrifice profits. Without that, the US$378/tonne is unlikely to be achievable.
 
However, the real issue is whether the government should be in the business of guaranteeing profits for the operator of this strategic project, especially if there are cost overruns on the project. The lower price set by the ministries does not provide any allowance for production and coal price overruns.
 
IEEFA’s estimates consider a more conservative approach, using the coal and DME operator business as usual 15% margins as the buffer. Even if the $378/tonne can be achieved with the help of tax incentives and 0% royalty, it still leaves an open question for the Indonesian government whether the price would be raised to accommodate profits for operators and compensate them for cost overruns?
 
As the DME project moves towards the construction and build-out phase, these numbers are no longer an academic exercise. With higher input coal prices and DME production costs, the IEEFA DME price provides scope for cost overruns and profit returns for the coal supplier and the DME plant operator.
 
The key issue remains a fair return, if any, for the DME project after receiving so many incentives from the government. Should the government and Indonesian consumers be providing a guaranteed return on the project? With a guarantee, the operators will not be taking on the full market risks of the project.
 
Ghee Peh is an Energy Finance Analyst at IEEFA.
 
This commentary first appeared in Antara News.


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