Fri, 12 Feb 2010

The promulgation of government regulations on the security of coal and natural gas supplies for domestic needs was one of the programs on the agenda for the administration’s first 100 days in office - which ended late last month.

The program was carried out well.

The minister of energy and mineral resources issued re-gulations obliging coal, oil and natural gas mining companies to allocate portions of their production for domestic use.

However, the regulations are so brief in their provisions that they fail to address all the important aspects of the domestic market obligation. And an ambiguous ruling is not only open to misinterpretation, but could become a new source of uncertainty for businesspeople, notably investors in coal and hydrocarbon mining.

The question here is what is the purpose and use of half-baked policy measures?

The regulation is clear cut about penalties for coal producers failing to fulfill their obligations, and for domestic users failing to take up orders, but it is devoid of clear-cut provisions on how volume of domestic coal demand is set, and how the obligation will be shared among producers.

The regulation on natural gas is slightly clearer because it requires producers to set aside at least one-quarter of their output, for domestic users, and sets conditions for domestic market obligation.

However, neither of the regulations stipulates how coal or natural gas allocated under the domestic marketing obligation will be priced.

The government’s policy to prioritize domestic industrial users of coal and natural gas makes sense because energy independence is quite strategic for the economy.

The main challenge though is how to make producers accept domestic prices as fair compared to what they get from exports. This is vital to make investments commercially viable.

Commercially, as long as the prices are right, miners will happily sell their output on the domestic market as this will cut the delivery time and freight costs.

Look at how the government’s excessively tough negotiating position - which requires that the entire output from the Matindok and Senoro gas fields in South Sulawesi be sold to domestic buyers - turned out to be counterproductive, leaving the whole gas development project in limbo.

Industry Minister M.S. Hidayat announced another half-baked policy on Monday, pointing out that the government would cap crude palm oil (CPO) exports at half of the total output by 2015.

This policy makes economic sense because it will increase the value added from palm oil. Indonesia, which produced about 20 million tons of palm oil last year, making it the world’s largest producer, exported about 75 percent of the total output in the form of CPO, and not in such high value-added derivatives as oleo-chemicals or basic materials for cosmetics.

But this policy is not clear cut about how the government will go about promoting investment in downstream palm oil industries.

The government has the right and is in fact obliged to achieve the right balance between maximizing export revenues from coal, gas and palm oil and other commodities but also securing supplies for domestic users.

Policies should be clear cut, transparent and predictable, not abrupt in their application, because investment in mining and plantations is long-term in nature.