Coal - a fossil fuel - is the most important energy source for electricity generation and also forms an essential fuel for the production of steel and cement. A negative characteristic of coal, however, is that it can be labelled as the most polluting energy source due to its high proportion of carbon. Other vital energy sources, such as natural gas, are less polluting but significantly more exhaustive and more susceptible to price fluctuations on the world market. Therefore, the world's industries have increasingly shifted their focus to coal.
At current rates of production (and if new reserves are not found), global coal reserves are estimated to last for around 112 years. The biggest reserves are found in the USA, Russia, China and India.
Top 10 Coal Producers in 2014¹ ²
7. South Africa
¹ commercial solid fuels only, i.e. bituminous coal, anthracite (hard coal), lignite and brown (sub-bituminous) coal ² million tons oil equivalent Source: BP Statistical Review of World Energy 2015
COAL IN INDONESIA
Indonesia's Coal Production and Export
Indonesia is one of the world's largest producers and exporters of coal. Since 2005, when it overtook Australia, the country is leading exporter in thermal coal. A significant portion of this exported thermal coal consists of a medium-quality type (between 5100 and 6100 cal/gram) and a low-quality type (below 5100 cal/gram) for which large demand comes from China and India. According to information presented by the Indonesian Ministry of Energy, Indonesian coal reserves are estimated to last around 83 years if the current rate of production is to be continued. Regarding global coal reserves, Indonesia currently ranks 10th, containing roughly 3.1 percent of total proven global coal reserves according to the most recent BP Statistical Review of World Energy. Around 60 percent of Indonesia's total coal reserves consists of the cheaper lower quality (sub-bituminous) coal that contains less than 6100 cal/gram.
There are numerous smaller pockets of coal reserves on the islands of Sumatra, Java, Kalimantan, Sulawesi and Papua but the three largest regions of Indonesian coal resources are:
1. South Sumatra
2. South Kalimantan
3. East Kalimantan
The Indonesian coal industry is rather fragmented with only a few big producers and many small players that own coal mines and coal mine concessions (mainly in Sumatra and Kalimantan).
Since the early 1990s, when the coal mining sector was reopened for foreign investment, Indonesia witnessed a robust increase in coal production, coal exports and domestic sales of coal. Domestic use of coal remains relatively small. Indonesia’s coal exports account for between 70 and 80 percent of total coal production, the remainder is sold on the domestic market.
Production, Export and Domestic Consumption Indonesian coal:
in million tons Source: Ministry of Energy and Mineral Resources
What Drives this Increase in Indonesian Coal Production and Export?
Coal is the dominating force in power generation. At least 27 percent of the world's total energy output and more than 39 percent of all electricity is produced by coal-fired power plants due to coal's abundance, its relatively easy and low-cost extraction, and less expensive infrastructure requirements compared to other energy resources.
Indonesia contains abundant reserves in medium and low-quality coal. These types of coal are competitively priced on the international market (partly due to Indonesia's low labor wages).
Indonesia's strategic geographical position towards the giant emerging markets of China and India. Demand for low quality coal from these two countries has skyrocketed as many new coal-fired power plants have been built to supply electricity to their immense populations.
The main export destination countries for Indonesian coal are China, India, Japan and Korea. Coal has a clear importance for Indonesia's state revenue as the commodity accounts for around 85 percent of mining revenue.
FUTURE PROSPECTS OF THE INDONESIAN COAL MINING SECTOR
The commodities boom of the 2000s generated significant profits for companies engaged in the export of coal. The rise in commodity prices was - to a large extent - triggered by accelerated economic growth in emerging and developing economies. But this profitable situation changed with the outbreak of the global financial crisis in 2008 when commodity prices went down fast. Indonesia was affected by these external factors as export of commodities (in particular coal and palm oil) account for around 50 percent of total Indonesian exports, thus limiting the country's GDP growth in 2009 to 4.6 percent (which still represents an impressive number, largely supported by domestic consumption). From the latter half of 2009 until the beginning of 2011 a sharp rebound in global coal prices occurred. However, reduced global economic activity has lessened demand for coal, thus resulting in a downward trend of coal prices starting from early 2011.
Apart from sluggish global economic growth (and the hard landing of China's economy) reducing demand for commodities, there is also another factor at play. During the lucrative 2000s commodities boom many new coal mining companies were established in Indonesia while existing coal miners raised investment to expand production capacity. This caused a severe supply glut that was exacerbated by coal miners' eagerness in the years 2010-2013 to produce and sell as much coal as possible - amid low global coal prices - in order to generate revenue and profit.
Despite global awareness to reduce dependency on fossil fuels, developments in renewable energy resources do not show an indication that dependency on fossil fuels (especially coal) will be reduced significantly in the foreseeable future, thus coal remains a vital energy resource. Clean coal technologies in coal mining, however, will gain significance in the future (partly due to commercial relevance) and Indonesia is expected to become heavily involved in that process being a major player in the coal mining sector. These clean coal technologies focus on the reduction of emissions produced by coal-fired power generation but lack sustained progress yet. Upstream activities connected to coal mining, such as the development of coalbed methane (CBM) reservoirs of which Indonesia contains great potential, has begun to receive attention recently.
Indonesian Government policy will affect the nation's coal mining industry. To secure domestic supplies, the Indonesian Ministry of Energy and Mineral Resources orders coal producers to reserve a specific amount of their production for domestic consumption. Moreover, the government can use export tax to discourage coal exports. The government aims for more domestic consumption of coal as it wants coal to supply around 30 percent of the country's energy mix by 2025:
Another recent development is that the Indonesian government intends to curb shipments of all raw materials (except for coal), instead requiring the mining sector to add value to the products before export takes place. Initially, the plan was to ban raw mineral exports from 2014 onward. Recently, however, the government has stated that it will be more flexible towards this ban and expressed that some exports can continue under certain conditions. Coal will not be affected by this ban according to government statements made in 2012, thus can continue to be exported without being processed first.
Coalbed methane (CBM) is a form of natural gas that occurs in coal beds. During the coalification process, large amounts of gas (mainly methane) are formed biologically in the coal deposits and released during coal extraction. Although CBM production is a complementary aspect of coal mining, it has only started to gain attention in recent years.
CBM holds great potential as a global resource because the world contains abundant reserves of this gas and - moreover - it is an environmental friendly fuel. Countries that contain large CBM reserves and are active in the production of this commodity are Russia, China, Alaska, Australia, Canada and the United States. Most of the world's reserves of CBM, however, remain untapped.
COALBED METHANE IN INDONESIA
Indonesia's CBM reserves are among the largest CBM reserves in the world. Currently, the country's reserves are estimated to be around 453 trillion cubic feet (tcf) which is equivalent to around six percent of total global CBM reserves (this estimate is an optimistic one and the scientific basis is questioned). This figure also implies that Indonesia's CBM reserves are more than double the country's natural gas reserves. However, Indonesia's utilization of this energy resource remains low.
Indonesia's largest CBM basins are located in:
1. South Sumatra
2. South Kalimantan
3. East Kalimantan
And some smaller basins can be found in:
4. Riau (Sumatra)
5. Bengkulu (Sumatra)
6. West Java (northern coastal area)
However, despite having ample reserves Indonesia has been slow to develop a commercial CBM industry (compared to its regional peers). One factor that explains slow development is uncertainty surrounding the legal and regulatory framework applicable to mining in Indonesia and CBM exploitation specifically. Currently, the Indonesian government uses a production-sharing contract scheme for CBM development that is similar to the scheme used in oil and gas blocks. This has drawn criticism as the non-conventional blocks are seen to have different characteristics. Under this production-sharing scheme, the nation's oil and gas blocks are owned by the government while companies are under contract to utilize the mineral resources. For the government this scheme is beneficial as all costs and risks are borne by the contractors. Only if the project is a success, then expenditure will be reimbursed (cost recovery system).
The first significant CBM project in Indonesia was the Sanga-Sanga field in East Kalimantan that was awarded - in 2009 - to a consortium in which BP and ENI hold large stakes. State-owned energy company Pertamina is also engaged the country's CBM industry through its subsidiary Pertamina Hulu Energi. Between 2008 and 2015 a total of 54 working areas, mainly around Sumatra and Kalimantan, for CBM development were granted by the Indonesian government. However, tapping the potential remains problematic. Bureaucratic inertia at both the central and local government continues to hamper exploration in the mining sector. Furthermore, the lack of suitable specialized drilling equipment also plays part in disappointing progress.
Initially, the government targeted CBM production at 500 million standard cubic feet per day (mmscfd) by 2015. However, this target was scaled down to 8.9 mmscfd. In 2014 CBM production stood at around 0.625 mmscfd.
The Indonesian government intends to uplift the role of renewable sources in the country's energy mix towards the future: