Market Insight: Downstreaming Coal Companies Get Zero Percent Royalty Rate

Summary

The Indonesian Government has decided that coal companies downstreaming their operations are free from paying any royalty. This incentive is stated in the Government Regulation (PP) No. 26/2022 concerning non-tax state revenue (PNBP) in the energy and mineral sector and the Government Regulation in Lieu of Law (Perppu) No. 2/2022 on the job creation issued on Dec 30.

Article 39 of the Government Regulation in Lieu of the Job Creation Law mentions that one sub-article in the amendment to Law No. 3/2020 on mineral and coal Mining, which is Article 128A, regulates the royalty exemption for mining business license (IUP) or a special mining business license (IUPK) holders downstreaming their operations.

Meanwhile, Article 3 Paragraph 2 of Government Regulation No. 26/2022 states that the royalty exemption will be regulated in an Energy and Mineral Resources Ministerial Regulation. “These regulations are to encourage the coal downstreaming,” Directorate General of Taxation’s director of non-tax state revenue from natural resources and separated state wealth Kurnia Chairi said on Monday.

**Government Regulation in Lieu of Law No. 2/2022 is available for downloaded here

Coal companies operating in Indonesia, currently enjoying rising coal prices on the global market, welcome the royalty exemption. The government claims it allows the country to be energy independent and encourages the Indonesian coal industry to satisfy domestic needs.

The coal downstreaming could result in alternative energy products such as methanol and coal water mixture to substitute LPG in industries and household consumers. Coal processing also provides additional income for miners when international prices fall. There will be seven types of coal downstreaming businesses that will receive a zero percent royalty incentive, such as:

1. Coal briquette production for household consumers and industries.
2. Coal upgrading to increase coal’s calorfic value, allowing it to burn efficiently.
3. Coal gasification or dimethyl ether extraction and the production of various types of gases such as syngas, methanol and hydrogen from coal.
4. Underground coal gasification (UCG) or gas extraction from coal carried out in underground mines.
5. Coal liquefaction to produce liquid fuel from coal.
6. Coke and coal tar production for industries.
7. Coal slurry and water mixture as alternative energy.

Only two of the aforementioned types of coal downstreaming businesses operate commercially in Indonesia: briquette production and coal upgrading. The first one is carried out by PT Bukit Asam Tbk (PTBA) and PT Thriveni, with a total investment of US$15 million. Bukit Asam’s briquette production of 20,000 tons per year is mostly absorbed by household consumers, small and medium enterprises, restaurants, and catering businesses in Jakarta and its surroundings. Meanwhile, Thriveni produces 85,000 tons of briquettes per year for industries. Meanwhile, an US$80-million coal upgrading project is carried out by PT ZJG Resources Technology with a production of 100,000 tons per year.

On the other hand, the ESDM Ministry has received several investment commitments for the up-and-running coal gasification, such as from the Bakrie Group through PT Bumi Resources Tbk (BUMI) and PT Arutmin Indonesia. BUMI partners with Ithaca Group and Air Products in Bengalon, East Kalimantan, in a project that will expectedly operate in 2025 with a methanol production capacity of 1.8 million tons per year. Meanwhile, Arutmin processes coal into methanol at the IBT Terminal, Pulau Laut, South Kalimantan, with a production capacity of 2.8 million tons per year. The coal-to-dimethyl ether processing will be carried out by Bukit Asam Tbk (PTBA), PT Pertamina, and Air Products in Tanjung Enim, South Sumatra, in 2024, with a capacity of 1.4 million tons per year. Other projects to be underway are the UCG project by PT Kideco Jaya Agung and PT Indominco in East Kalimantan, as well as PT Medco Energi Mining International and Phoenix Energi Ltd in North Kalimantan. PT Megah Energi Khatulistiwa runs the coke production through a semi-cooking coal plant project worth US$400 million.

Even though these are pilot projects, the royalty-free incentive is expected to boost their development, attract more investments, and increase the country’s employment rate. However, the gap between large and small-scale producers due to this policy will widen since only large companies can afford to invest in the downstreaming efforts. They will get two incomes, from exports and downstreaming projects. Moreover, Indonesia’s coal phaseout will be disrupted since the incentive will attract more investments in the coal business.

Source: https://dinsights.katadata.co.id/read/2023/01/03/downstreaming-coal-companies-get-zero-percent-royalty-rate, Published by www.tribhakti.com with no copyright infringement Intended.