Update-Govt may take coal royalty in in-kind form to secure domestic requirements

The government may change the way it collects coal royalty right from taking cash from producers to in-kind form to secure supply for domestic power plants, a government official said Monday.

Director Mineral and Coal at the Ministry of Energy and Mineral Resources Simon Sembiring told Petromindo.Com that the government is seriously considering the option.

Another high ranking official at the office of Coordinating Minister of Economic said that a team was already in advance stage to draft the regulation to change coal royalty collection and state electricity firm PLN had basically agreed to offtake government?s take.

?This way, PLN will be able to secure coal requirement at cheaper price,? said Deputy Minister Wimpy S. Tjetjep. He added that around 10 percent of the in-kind coal would be allocated to coal briquette, which had recently gaining popularity after the government drastically cut kerosene oil subsidy.

He expected that the new regulation could take effect next year.

Under the coal contract of work, coal-mining companies are obliged to set aside 13.5 percent of their production as royalty.

Indonesian Coal Mining Association (ICMA) predicted the country would produce 155 million tones of coal this year. PLN predicted that within the next two or three years, domestic power plants coal consumption would increase by two fold to 40 million tones PA within the next two-three years with the operations of new power plants.

ICMA chairman Jeffrey Muljono said that government?s plan to take in-kind royalty would not very much affected Indonesian coal producers? business.

?Before 1997, the royalties are paid in in-kind form with state coal mining firm PTBA acted as collector and seller. I don?t see why it can?t be done now,? he said.

He however, said in-kind royalty system, might not be able to thoroughly solve domestic market security problem, adding that the 13.5 percent royalty was far below domestic market requirement of around 40 million tones currently and would keep growing the years to come.

?At 150 million tones annual production, 13.5 percent is barely sufficient to guarantee domestic supply,? he said. ?Not to mention the complexity of the operations, because PLN must take all coal with different specification and not all will be fit to feed domestic power plants.? He added that that would also mean the government might have opportunity loss in revenue because the coal would be sold to PLN at lower price.

He said that domestic market obligation (DMO) regulation, which required coal producers to set aside a certain volume of production to be sold to domestic market might offer a more comprehensive solution to secure domestic supply problems and enable PLN to get coal supply at lower-than-export price.

?If the country needs 40 million tones this year, for example, the government can order, as stipulated in coal contract of work, coal producers to set aside that amount proportional to each producer?s production capacity for domestic market,? he said.

That way, he said, domestic market price, which is lower than export price, will be created, but producers with high quality coal would still be able to sell their coal to export market. ?Through this mechanism, high-quality coal producers would ?buy? lower quality coal from other domestic producers to meet its domestic market quota and be able to export all of its production. This will make everybody happy, including government whose revenue is not significantly reduced compared to in-kind royalty system and PLN which is still able to get lower-than-export price, ? said Jeffrey. (alex/godang)