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The Great Saudi Bet

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The Saudi decision to not to cut production back in 2014 was a ham-fisted strategy. It went askew. Besides the market share, the Kingdom of Saudi Arabia (hereinafter, KSA) put their title of ‘swing producer” in jeopardy as well(see my article here). On the other hand Shale producers in US taking advantage of the technological developmentswere successful in eating up KSA’s market share. Not only this, the Vienna accord in November 2016, according to which most of the OPEC and NOPEC producers cut their production by 1.8 mbpd, and the resultant increase in price, led US to increase its own production to an all-time high of 9.66 mbpd.

Now, as if to make amends, and relying on the principle of “it is never too late” (rightly so) the Crown Prince, known in the West as Mr. Everything, Muhammad Bin Salman (MbS) has embarked on an ambitious plan: to wean the Kingdom off oil. How? Through the Initial Public Offering (IPO) of what is estimated to be a $2 trillion company, Aramco. But there road ahead is bumpy. The stakes are extremely high. If the scion fails there can be serious repercussions for the Kingdom. The issues are galore.

A  pertinent question: What if KSA ends up selling its ‘crown jewels’, but fails to diversify its economy yet again? There is a new way of thinking, which Muhammad Bin Salman has peddled. He says oil should be taken as an investment, “nothing more, and nothing less.”However, MbS try to elude the Catch-22 situation the Kingdom is embroiled in. This makes oil more than an investment.

Price tri-lemma—Once the IPO is completed. Saudi Arabia according to plan will move towards diversification. Which means oil, at least in the kingdom, will lose its value, demand. This in turn signals negative consequences for the investors!

Also, Saudi’s want high oil prices for two reasons—to breakeven their budget and for a lucrative IPO. But US shale is a hiatus. The vicious circle seems unresolvable, rebarbative. The rising prices, as a result of production cuts,will help Shale production to increase subsequently increasing the supply glut. This in turn will put downward pressure on oil prices, affecting the IPO.Demand, that too, very strong and sustainable, is the only way to rescue KSA unless the grinding and battering of this price corollary leaves them exhausted. There is another threatthat the linchpin of the Vienna deal, Russia, now wants an exit. Why? Because oil executives in Russia, that met a month ago, do not like the idea of further extension as this results in a growing US market share. Russia cannot tolerate this and has already some tricks up their sleeves.Their tax structure along with the growing exports of wheat and other commodities makes Russians to better deal with low oil prices than other countries. They reportedly have lower energy extraction costs as well. The OPEC and NOPEC countries that agreed for an extension on 30th November 2017 will meet again in June 2018. According to observers, this ‘review meeting’ can be an ‘exit strategy’ especially for the Russians, as they have been looking for a wicket gate. Russian economy has proven to be resilient even in the face of a double-whammy (lower oil prices, Western sanctions).

The case for United States in the equation is evidently. They want higher oil prices. However, not so higher that it becomes feasible for Saudi’s or others (Russians) to go on a pumping frenzy in turn glutting the markets and eating up the share of US shale which they have built, with so much effort, in recent years. IEA in their latest World Energy Outlook 2017 claims that U.S. will take over KSA as the swing producer. Their future prospects are rosy. They have to be cautious.

The long term quandaries—If the Saudi’s want to realize their dream then this act of passing the buck (of oil and swing producer) is significant, necessary even. But if the plan fails they can be left in lurch. Everything depends on the IPO and then the execution of the plan. Observers are concerned with the IPO and its effect on the region and Kingdom itself.

The concern for exposure to legal risks is relevant. It can also affect the sovereignty of the state by wresting the power from the state to adjust taxes.  The ownership of the reserves is another question. According to experts, the type of agreement between KSA and the operator will be a concession agreement. This means that the holder of the concession will have the full right to exploit and monetize the underground reserves “in return for payment of taxes and royalties to the government”. In simple words, through the IPO, Aramco will offer investors an ownership in the concession.

The valuation of the company is itself not confirmed. Estimates about $2 trillion might be exaggerated. According to one calculation, if the old system of a royalty (20%) and taxes (85%),is maintained the total valuation will be far less than the touted $2trillion.Even if the oil price is kept at $70 and production at 10mbpd, with above taxes and royalty, the total valuation will still make only $251 billion. Recent measures which had cut the tax rate to 50% will only stretch it to $419 billion. According to Wood Mackenzie, Aramco’s valuation is about $400 billion.

How can one forget social discontent? As the government tries to wend towards a more diversified and modernize economy the masses, which were in wont of benevolent government largesse, might have to face hardships. The long holidays, low taxes, and generous government programs have to be curtailed. Will the society accept the economic overhauling?

It is instructive to note here that financial diversification and economic diversification are two different things. Economic diversification relates to changes in the economic base e.g., creation of jobs, whereas financial diversification caters to diversifying the sources of income that doesn’t necessarily translate into job creation.Most of the investment is expected to be in the foreign market as the current economic depth of the Kingdom is not enough to absorb the investment. The recent deal between Softbank and PIF is indicative that most of the investments will be towards the tech sector outside the kingdom having a limited impact on the economic infrastructure at home.

As the Kingdom welcomes 2018 this will be the most pressing issue. The above mentioned problems are not the only ones. One thing should be vivid by now. The path is riddled with problems. The IPO is directly linked with the future of Saudi economy. The ante is high. MbS’ ambition confronts the conventional mindset and the reality of international political economy. This is an ambitious plan but worth taking risk for.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

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Indonesian Coal Roadmap: Optimizing Utilization amid Global Tendency to Phasing Out

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Authors: Razin Abdullah and Luky Yusgiantoro*

Indonesia is potentially losing state revenue of around USD 1.64-2.5 billion per year from the coal tax and non-tax revenues. Although currently Indonesia has abundant coal resources, especially thermal coal, the coal market is gradually shrinking. This shrinking market will negatively impact Indonesia’s economy. The revenue can be used for developing the country, such as for the provision of public infrastructures, improving public education and health services and many more.

One of the main causes of the shrinking coal market is the global tendency to shift to renewable energy (RE). Therefore, a roadmap is urgently needed by Indonesia as a guideline for optimizing the coal management so that it can be continuously utilized and not become neglected natural resources. The Indonesian Coal Roadmap should also offer detailed guidance on utilizing coal for the short-term, medium-term and long-term.

Why is the roadmap needed?

Indonesia’s total coal reserves is around 37.6 billion tons. If there are no additional reserves and the assumed production rate is 600 million tons/year, then coal production can continue for another 62 years. Even though Indonesia’s coal production was enormous, most of it was for export. In 2019, the export reached 454.5 million tons or almost 74% of the total production. Therefore, it shows a strong dependency of the Indonesian coal market on exports, with China and India as the main destinations. The strong dependency and the global trend towards clean energy made the threat of Indonesian coal abandonment increasingly real.

China, one of Indonesia’s main coal export destinations, has massive coal reserves and was the world’s largest coal producer. In addition, China also has the ambition to become a carbon-free country by 2060, following the European Union countries, which are targeting to achieve it in 2050. It means China and European Union countries would not produce more carbon dioxide than they captured by 2060 and 2050, respectively. Furthermore, India and China have the biggest and second-biggest solar park in the world. India leads with the 2.245GW Bhadla solar park, while China’s Qinghai solar park has a capacity of 2.2GW. Those two solar parks are almost four times larger than the U.S.’ biggest solar farm with a capacity of 579 MW. The above factors raise concerns that China and India, as the main export destinations for Indonesian coal, will reduce their coal imports in the next few years.

The indications of a global trend towards RE can be seen from the energy consumption trend in the U.S. In 2019, U.S. RE consumption exceeded coal for the first time in over 130 years. During 2008-2019, there has been a significant decrease in U.S coal consumption, down by around 49%. Therefore, without proper coal management planning and demand from abroad continues to decline, Indonesia will lose a large amount of state revenue. The value of the remaining coal resources will also drop drastically.

Besides the global market, the domestic use of coal is mostly intended for electricity generation. With the aggressive development of RE power plant technology, the generation prices are getting cheaper.  Sooner or later, the RE power plant will replace the conventional coal power plant. Therefore, it is necessary to emphasize efforts to diversify coal products by promoting the downstream coal industries in the future Indonesian Coal Roadmap.

What should be included: the short-term plan

In designing the Indonesian Coal Roadmap, a special attention should be paid to planning the diversification of export destinations and the diversification of coal derivative products. In the short term, it is necessary to study the potential of other countries for the Indonesian coal market so that Indonesia is not only dependent on China and India. As for the medium and long term, it is necessary to plan the downstream coal industry development and map the future market potential.

For the short-term plan, the Asian market is still attractive for Indonesian coal. China and India are expected to continue to use a massive amount of coal. Vietnam is also another promising prospective destination. Vietnam is projected to increase its use of coal amidst the growing industrial sector. In this plan, the Indonesian government plays an essential role in building political relations with these countries so that Indonesian coal can be prioritized.

What should be included: the medium and long-term plans

For the medium and long-term plans, it is necessary to integrate the coal supply chain, the mining site and potential demand location for coal. Therefore, the coal logistics chain becomes more optimal and efficient, according to the mining site location, type of coal, and transportation mode to the end-user. Mapping is needed both for conventional coal utilization and downstream activities.

Particularly for the downstream activities, the roadmap needs to include a map of the low-rank coal (LRC) potentials in Indonesia, which can be used for coal gasification and liquefaction. Coal gasification can produce methanol, dimethyl ether (a substitute for LPG) and, indirectly, produce synthetic oil. Meanwhile, the main product of coal liquefaction is synthetic oil, which can substitute conventional oil fuels. By promoting the downstream coal activities, the government can increase coal’s added value, get a multiplier effect, and reduce petroleum products imports.

The Indonesian Coal Roadmap also needs to consider related existing and planned regulations so that it does not cause conflicts in the future. In designing the roadmap, the government needs to involve relevant stakeholders, such as business entities, local governments and related associations.

The roadmap is expected not only to regulate coal business aspects but also to consider environmental aspects. The abandoned mine lands can be used for installing a solar farm, providing clean energy for the country. Meanwhile, the coal power plant is encouraged to use clean coal technology (CCT). CCT includes carbon capture storage (CCS), ultra-supercritical, and advanced ultra-supercritical technologies, reducing emissions from the coal power plant.

*Luky Yusgiantoro, Ph.D. A governing board member of The Purnomo Yusgiantoro Center (PYC).

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Engaging the ‘Climate’ Generation in Global Energy Transition

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photo: IRENA

Renewable energy is at the heart of global efforts to secure a sustainable future. Partnering with young people to amplify calls for the global energy transition is an essential part of this endeavour, as they represent a major driver of development, social change, economic growth, innovation and environmental protection. In recent years, young people have become increasingly involved in shaping the sustainable development discourse, and have a key role to play in propelling climate change mitigation efforts within their respective communities.

Therefore, how might we best engage this new generation of climate champions to accentuate their role in the ongoing energy transition? In short, engagement begins with information and awareness. Young people must be exposed to the growing body of knowledge and perspectives on renewable energy technologies and be encouraged to engage in peer-to-peer exchanges on the subject via new platforms.

To this end, IRENA convened the first IRENA Youth Forum in Abu Dhabi in January 2020, bringing together young people from more than 35 countries to discuss their role in accelerating the global energy transformation. The Forum allowed participants to take part in a truly global conversation, exchanging views with each other as well as with renewable energy experts and representatives from governments around the world, the private sector and the international community.

Similarly, the IRENA Youth Talk webinar, organised in collaboration with the SDG 7 Youth Constituency of the UN Major Group for Children and Youth, presented the views of youth leaders, to identify how young people can further the promotion of renewables through entrepreneurship that accelerates the energy transition.

For example, Joachim Tamaro’s experience in Kenya was shared in the Youth Talk, illustrating how effective young entrepreneurs can be as agents of change in their communities. He is currently working on the East Africa Geo-Aquacultural Development Project – a venture that envisages the use of solar energy to power refrigeration in rural areas that rely on fishing for their livelihoods. The project will also use geothermal-based steam for hatchery, production, processing, storage, preparation and cooking processes.

It is time for governments, international organisations and other relevant stakeholders to engage with young people like Joachim and integrate their contributions into the broader plan to accelerate the energy transition, address climate change and achieve the UN Sustainable Development Agenda.

Business incubators, entrepreneurship accelerators and innovation programmes can empower young people to take their initiatives further. They can give young innovators and entrepreneurs opportunities to showcase and implement their ideas and contribute to their communities’ economic and sustainable development. At the same time, they also allow them to benefit from technical training, mentorship and financing opportunities.

Governments must also engage young people by reflecting their views and perspectives when developing policies that aim to secure a sustainable energy future, not least because it is the youth of today who will be the leaders of tomorrow.

IRENA

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The Urgency of Strategic Petroleum Reserve (SPR) for Indonesia’s Energy Security

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Authors:Akhmad Hanan and Dr. Luky Yusgiantoro*

Indonesia is located in the Pacific Ring of Fire, which has great potential for natural disasters. These disasters have caused damage to energy infrastructure and casualties. Natural disasters usually cut the energy supply chain in an area, causing a shortage of fuel supply and power outages.

Besides natural disasters, energy crisis events occur mainly due to the disruption of energy supplies. This is because of the disconnection of energy facilities and infrastructure by natural disasters, criminal and terrorist acts, escalation in regional politics, rising oil prices, and others. With strategic national energy reserves, particularly strategic petroleum reserves (SPR), Indonesia can survive the energy crisis if it has.

Until now, Indonesia does not have an SPR. Meanwhile, fuel stocks owned by business entities such as PT Pertamina (Persero) are only categorized as operational reserves. The existing fuel stock can only guarantee 20 days of continuity. Whereas in theory, a country has secured energy security if it has a guaranteed energy supply with affordable energy prices, easy access for the people, and environmentally friendly. With current conditions, Indonesia still does not have guaranteed energy security.

Indonesian Law mandates that to ensure national energy security, the government is obliged to provide national energy reserves. This reserve can be used at any time for conditions of crisis and national energy emergencies. It has been 13 years since the energy law was issued, Indonesia does not yet have an SPR.

Lessons from other countries

Many countries in the world have SPR, and its function is to store crude oil and or fuel oil. SPR is built by many developed countries, especially countries that are members of the International Energy Agency (IEA). The IEA was formed due to the disruption of oil supply in the 1970s. To avoid the same thing happening again, the IEA has made a strategic decision by obliging member countries to keep in the SPR for 90 days.

As one of the member countries, the US has the largest SPR in the world. Its storage capacity reaches a maximum of 714 million barrels (estimated to equal 115 days of imports) to mitigate the impact of disruption in the supply of petroleum products and implement US obligations under the international energy program. The US’ SPR is under the control of the US Department of Energy and is stored in large underground salt caves at four locations along the Gulf of Mexico coastline.

Besides the US, Japan also has the SPR. Japan’s SPR capacity is 527 million barrels (estimated to equal 141 days of imports). SPR Japan priority is used for disaster conditions. For example, in 2011, when the nuclear reactor leak occurred at the Fukushima nuclear power plant due to the Tsunami, Japan must find an energy alternative. Consequently, Japan must replace them with fossil fuel power plants, mainly gas and oil stored in SPR.

China, Thailand, and India also have their own SPR. China has an SPR capacity of 400-900 million barrels, Thailand 27.6 million barrels, and India 37.4 million barrels. Singapore does not have an SPR. However, Singapore has operational reserve in the form of fuel stock for up to 90 days which is longer than Indonesia.

Indonesia really needs SPR

The biggest obstacles of developing SPR in Indonesia are budget availability, location selection, and the absence of any derivative regulations from the law. Under the law, no agency has been appointed and responsible for building and managing SPR. Also, government technical regulations regarding the existence and management of SPR in Indonesia is important.

The required SPR capacity in Indonesia can be estimated by calculating the daily consumption from the previous year. For 2019, the national average daily consumption of fuel is 2.6 million kiloliters per day. With the estimation of 90 days of imports, Indonesia’s SPR capacity must at least be more than 100 million barrels to be used in emergencies situations.

For selecting SPR locations, priority can be given to areas that have safe geological structures. East Kalimantan is suitable to be studied as an SPR placement area. It is also geologically safe from disasters and is also located in the middle of Indonesia. East Kalimantan has the Balikpapan oil refinery with the capacity of 260,000 BPD for SPR stock. For SPR funding solution, can use the state budget with a long-term program and designation as a national strategic project.

Another short-term solution for SPR is to use or lease existing oil tankers around the world that are not being used. Should the development of SPR be approved by the government, then the international shipping companies may be able to contribute to its development.

China currently dominates oil tanker shipping in the world, Indonesia can work with China to lease and become Indonesia’s SPR. Actually, this is a good opportunity at the time of the COVID-19 pandemic because oil prices are falling. It would be great if Indonesia could charter some oil tankers and buy fuel to use as SPR. This solution was very interesting while the government prepared long-term planning for the SPR facility. In this way, Indonesia’s energy security will be more secure.

*Dr. Luky Yusgiantoro, governing board member of The Purnomo Yusgiantoro Center (PYC).

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