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Jakarta signs methane deal in scramble for energy

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Jakarta signs methane deal in scramble for energy

By John Aglionby in Jakarta

Published: May 28 2008 03:00 | Last updated: May 28 2008 03:00

Indonesia signed its first coal-bed methane (CBM) production-sharing contract yesterday and said it intended to sign several more this year to reduce its dependence on oil and allow it to sell more of its huge deposits of liquefied natural gas on global markets.

Indonesia’s estimated CBM resources of 453 trillion cubic feet (tcf) are among the largest in the world after the US and China, thanks to its 90.5bn tonnes of coal deposits.

Experts say that if CBM could be developed on a large scale it would free a significant proportion of the country’s 350 tcf of natural gasfor the international market. Indonesia last year produced 2.8 tcf of LNG and is the world’s second largest exporter after Qatar.

Numerous foreign companies, including Shell, BP, Total, Arrow and Marathon, are eyeing the sector, and the energy ministry says it has received dozens of proposals for CBM projects.

Indonesia is scrambling to develop alternative energy sources because of soaring oil prices. The country is an oil producer, but a shortfall in investment led to it becoming a net oil importer several years ago.

On Saturday, the government raised the prices of subsidised fuel, which accounts for more than 90 per cent of the consumer market, by 28.7 per cent to protect the budget, which was threatening to collapse under the burden of rising subsidies.

Purnomo Yusgiantoro, the energy minister, said he was hopeful about CBM’s potential, but cautioned it would be years before production reached meaningful levels. Analysts said the development process was likely to take 20 to 30 years.

To encourage investment in the capital-intensive sector, the government is offering contractors 45 per cent of production. This compares with 15 per cent and 30 per cent, respectively, for oil and gas fields.

Several dozen project proposals have been submitted to the energy ministry but analysts say potential investors might be discouraged by the government insisting on production-sharing contracts rather than a more flexible tax and royalties system.

The first contract, for 30 years, is with local companies Medco Energi and Energi Pasir Hitam to develop a deposit in South Sumatra province. Medco is Indonesia’s largest private energy company.

Pudjo Suwarno, general manager of Medco’s South Sumatra assets, predicted that the first commercial production, of 5m cubic feet a year, would start in 2011 and peak at 10 times that amount in six years.

Mr Pudjo said CBM production was unlikely to interfere with Indonesia’s coal mining because it explored deposits between 600m and 1,000m below the surface, while most mining is of seams up to 100m deep.

He estimated it would be 30 years before CBM production approached the annual natural gas production level. CBM has so far been used only for markets close to the production site and so is not suitable for export.

CBM production is well advanced in the US, Canada and particularly Queensland in Australia – where analysts predict it could account for 25 per cent of the energy mix by 2020.

Peter Cockcroft, an energy expert who has worked in Indonesia for decades, said Indonesia’s huge demand for energy should make CBM attractive but that it was likely to be most lucrative in areas where it was not in competition with natural gas, which is cheaper to produce.

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