With total reserves of 453 trillion cubic feet (TCF), or about 81.5 billion barrels of oil equivalent, Indonesia has the largest coal-bed methane (CBM) deposits in the world after China.
CBM -- natural gas formed by the activity of microbes during the coal-forming process, and trapped amid coal beds -- could be a godsend for Indonesia as it struggles to cope with the depletion of its oil reserves and rising demand.
Under its new energy policy, the government has decided to gradually decrease the country's dependence on oil, and increase the use of other energy alternatives, such as gas and coal, to meet future energy demands.
By 2025, Indonesia's energy mix is expected to consist of 30 percent gas, 33 percent coal, 20 percent oil and 17 percent renewable energy. At present, oil accounts for 51.66 percent of total energy use, followed by gas at 28.57 percent, coal at 15.34 percent and renewable energy at 4.5 percent.
The potential to develop CBM is there, but it will be difficult for investors to take advantage of the opportunities due to the lack of clear regulations governing the exploitation of the costly gas deposits.
The government has already issued a ministerial decree in an effort to address the energy shortfall. But, potential investors still regard the regulation as being far from enough as it has nothing to say about much-needed incentives to help with the high cost of exploiting CBM deposits, or support in overcoming possible conflicts with coal miners.
The Energy and Mineral Resources' oil and gas director general, Luluk Sumiarso, said the regulation places a high priority on the production of CBM.
"We are all aware of the gas evaporation problem, so the operators will be urged to exploit the gas first, and then the coal," Luluk told reporters during a recent workshop on CBM exploration and production in Nusa Dua, Bali.
However, many investors have expressed doubts about the policy, arguing that the regulation does not specifically refer to a production-sharing scheme for CBM production.
In response, Upstream Oil and Gas Regulatory Agency (BP Migas) chairman Kardaya Warnika said that the government was considering offering a split of 70 percent to 30 percent in favor of the investor.
This would be much more favorable than the split in the case of regular gas production, which is 35 percent for the investor and 65 percent for the government.
Regarding the government's mooted 70:30 split, Kun Kurnely, the president director of Pertamina's exploration and production subsidiary, Pertamina EP, said it would not be enough unless the government also offered tax incentives to potential investors.
"In addition, the government should also give investors a kind of tax holiday of up to 10 years, as is the case in Australia," said Kun.
While many investors are still awaiting further clarity before becoming involved in CBM, others have progressed to the feasibility-study stage.
PT Pertamina, local company Ephindo, and Shell have all been conducting feasibility studies on CBM production in South Sumatra, Jambi and Sangatta since late 2006.
Pertamina, together with Indonesia's third biggest oil and gas producer, PT Medco EP and the government's oil and gas research and development center (Lemigas) signed a memorandum of understanding Jan. 25 for a CBM pilot project, also in South Sumatra, which has potential reserves of 183 tcf.
"We started the original pilot project on a small scale back in 2003 in one of Medco's fields, Lapangan Rambutan, to convince investors that the potential is there," Lemigas director Hadi Purnomo told the Post.
The government has also drawn up a detailed plan for CBM exploitation, setting out a production target of 1 billion standard cubic feet per day (BCF), or about 0.18 million barrels of oil equivalent, by 2025.
In the nearer term, the government hopes to attract up to US$2.5 billion in investment to develop 90 wells and produce 100 million cubic feet per day (MMSCFD) by 2014.
But before that, the government hopes that initial production of 10 MMSCFD will come onstream by 2011, based on an investment of $600 million.
Hadi said there are currently 10 investors that have expressed an interest in the sector, including U.S.-based oil major Chevron, local firm Ephindo, and Philippines-based Trans-Asia Oil and Energy Development Corporation.
"We are still waiting for the business model that will be applied by the government, not to mention clarification of the production-sharing contract mechanism," Chevron Pacific Indonesia president director Suwito Anggoro told the Post.
Indonesia lags far behind other countries, including Australia, in exploiting CBM. The neighboring country commenced commercial CBM production in 1996 in Queensland, which has reserves of 250 TCF.
Giving the stance adopted by the government to date, potential investors will likely have to adopt a wait-and-see approach, meaning that it will probably be a long time before Indonesia can benefit from its vast CBM resources.