ENERGY HIGHLIGHTS - JANUARY 2007

UNCLAS SECTION 01 OF 05 JAKARTA 000414

SIPDIS

DEPT FOR EAP/MTS AND EB/ESC/IEC
DEPT PASS OPIC, EXIM, TDA
DOE FOR CUTLER/PI-32 AND GILLESPIE/PI-32
COMMERCE FOR USDOC 4430

SIPDIS

E.O. 12958: N/A
TAGS: EPET ENRG EINV PREL ID
SUBJECT: ENERGY HIGHLIGHTS - JANUARY 2007



1. Summary. The Ministry of Finance on December 29 issued
guidelines for guarantees of power projects under the Government of
Indonesia's (GOI) "crash program" to develop an additional 10,000
megawatts (MW) of electricity generation capacity by 2010. On
January 16, state power company PLN signed power purchasing
agreements (PPAs) for the construction of 10 power plants outside
Java Island under the crash program. According to press reports,
irregularities in the selection of several Chinese firms to build
three power plants under the crash program could affect Chinese
Government financing support for the projects. PLN announced on
January 24 that to save costs it would import some diesel fuel
directly, rather than purchase it through state-owned oil and gas
company Pertamina. Oil and gas regulator BP Migas announced on
January 22 that Indonesia would aim to increase oil output by 80,000
(bpd) in 2007 by raising production at 12 existing or new oilfield
projects. Minister of Energy and Mineral Resources Purnomo
Yusgiantoro told the press on on January 31 that ExxonMobil must
provide the GOI with data that the company has collected on the
Natuna D - Alpha block gas field. On January 15, Ministry of Energy
and Mineral Resources (MEMR) Upstream Director R. Priyono announced
GOI plans to develop a new production sharing contract that will
allow extraction companies to forgo drilling if seismic surveys do
not indicate prospective resources.


2. Summary, continued. In a development that caused analysts to
question corporate governance practices in Indonesia, the Jakarta
Stock Exchange (JSX) temporarily suspended trading in shares of
state-owned gas company Perusahaan Gas Negara (PGN) on January 15
after the company announced significant delays in a major pipeline
project. Minister Purnomo on January 15 announced the GOI would
begin offering coal bed methane (CBM) development projects to
investors through regular or direct offer tenders. Purnomo also
announced on January 12 that the GOI would divert some Indonesian
condensate exports for domestic use. A senior Pertamina official
told the press on January 12 that it would ask the GOI to delay
implementation of cuts in diesel fuel sulfur content. On January 9,
Pertamina announced plans to double capital expenditures in 2007.
This report uses an exchange rate of Rp 9,115/US$. End Summary

GOI Issues Guidelines for PLN Project Guarantees
-------------- ---


3. The Ministry of Finance on December 29 issued regulation
No.146/PMK.01/2006 providing guidelines on Government guarantees for
coal fired power projects under the GOI's "crash program" to develop
10,000 MW of additional power generation capacity in Indonesia by

2010. Under the guidelines, the GOI will provide guarantees to
creditors to ameliorate four kinds of risk: a change in GOI
electricity price policy; a change in GOI electricity subsidy
policy; a change in GOI coal supply price policy; and a GOI decision
to delay or cancel power projects. To qualify for the guarantees,
creditors must meet loan agreement obligations, including activation
and disbursement schedules. They must also complete projects on
schedule and in accordance with technical specifications.

PLN Signs PPAs for Coal Fired Power Plants
--------------


4. On January 16, PLN signed Power Purchase Agreements (PPAs) for
the construction of 10 small, coal-fired power plants outside Java
Island under the GOI's crash program. The 10 plants, listed in
Table 1 below, are expected to begin operations in 2009 and 2010.
All of the plants will likely rely on Chinese coal-fired technology,
reflecting the GOI's shift from reliance on fuel oil to coal-fired
power generation.

-------------- --------------
Table 1: PPAs Signed For Coal-Fired Power Plants Under
GOI Crash Program
-------------- --------------

Project Location Contractor
-------------- --------------

Lakatong (2x45 MW) South Sulawesi Kasai Listrindo

Gorontalo (2x6 MW) South Sulawesi Gorontalo Energi

Tawaeli (2x13.5 MW) Central Sulawesi Pusaka Palu Jaya

Sampit (2x6 MW) West Kalimantan Karya Putra Powerin


JAKARTA 00000414 002 OF 005


Tanah Grogot (2x6 MW) East Kalimantan Mahajaya Arya Satya

Ketapang (2x6 MW) West Kalimantan Ketapang Power

Banjarsari (2x100 MW) South Sumatra Bukit Pembangkit

Belitung (2x6 MW) Bangka Belitung Belitung Arya Power

Tj. Pinang (2x10 MW) Riau Island Medco-Menamas-Barata

Jayapura (2x10 MW) Papua Menamas-Permata-PLN

Source: Petromindo


Irregularities Reported in China-Linked Power Tenders
-------------- --------------


5. According to press reports, representatives from Bank of China,
the China Export Import Bank, China's Chamber of Commerce and
Industry, and Chinese commercial banks informed PLN on January 22
that the Government of China would not provide support to the
planned power projects involving three Chinese state-owned firms:
equipment and technology import and export company China National
Technical Import and Export Corp (CNTIC),equipment manufacturing
and engineering group Sinomach, and construction and engineering
corporation Chengda. Sinomach or Chengda reportedly unfairly
blocked rival Chinese bidders from competing for projects, and
violated China's export guarantee rules. The decision will likely
impact the development of three medium sized power plant projects:

-- A 600 MW Suralaya power plant project in Banten Province. The
project is a joint venture between CNTIC and PLN, and would supply
electricity at Rp 378.9(4.2 cents) per kilowatt.

-- A 300 - 400 MW Indramayu coal-fired power plant in West Java, a
joint project of Sinomach, China National Electric Equipment (CNEEC)
and PT Penda Adi Samudra. The project would supply electricity at
Rp 403.6 (4.4 cents) per kilowatt.

-- A 300-400 MW Labuhan coal-fired power plant in Banten, a joint
project of Chengda and PT Truba Jurong. The project would supply
electricity at Rp 386.2 (4.2 cents) per kilowatt.

PLN to Import Diesel Directly
--------------


6. PLN Director for Power Generation and Prime Energy Ali Herman
Ibrahim announced on January 24 that PLN would import one million
kiloliters of high-speed diesel fuel directly for the first time,
rather than obtain the fuel through Pertamina. At present, PLN
purchases diesel from Pertamina at an average cost of Rp 5,202 (US$
0.57) per liter from Pertamina, while the average cost in
international fuel markets is reportedly Rp 5,190. By importing the
diesel directly, PLN claims it could save Rp 117.2 billion ($12.9
million). PLN Chief Commissioner Alhilal Hamdi told Parliamentary
Commission VII on January 29 that 12 local and foreign companies
have expressed interest in supplying the diesel, including Petronas,
Shell, and private trading company PT AKR Corporindo. In addition,
Hamdi noted that several banks and financial institutions have
expressed interest in providing financing for the fuel purchase,
worth some Rp 5 trillion ($548.5 million).


7. Meanwhile, Pertamina Fuel Division Head Djaelani Soetomo told
the press on January 29 that Pertamina would bid on the PLN tender,
provided PLN pays its outstanding debts to Pertamina. (Note: Under
the GOI fuel and electricity subsidy programs, PLN, Pertamina and
the Ministry of Finance frequently run arrears to each another that
are netted out and settled on an annual basis. End Note.) Djaelani
also claimed that Pertamina could provide PLN with the best tender
price. Pertamina's president Ari H. Soemarno said on January 26
that the Pertamina was prepared to provide a special discounted
price to PLN and, if necessary, to sign a special contract.

Indonesia to Increase Oil Output 80,000 Barrels in 2007
-------------- --------------


8. BP Migas Chairman Kardaya Warnika announced on January 22 that
Indonesia plans to increase its oil output by 80,000 bpd in 2007 to
reach the GOI's target output of 1.05 million bpd. According to
Warnika, 12 existing and new oil projects will supply the additional
output, including four existing fields operated by ConocoPhillips,

JAKARTA 00000414 003 OF 005


Chevron, Pertamina, and a joint venture. Warnika said that
ConocoPhillips would increase its offshore fields' output by 15,000
bpd; Chevron would add 25,000 bpd to its output from fields in the
northern Duri Block in Riau; Pertamina would increase output at the
Pondok Tengah field in Bekasi, West Java by 17,000 bpd; and the Bumi
Siak Pusako/Pertamina would add 5,000 bpd from the Bene Bekasap
field in Riau.


9. BP Migas also expects a number of new projects to begin
producing oil this year: Amerada Hess will produce 7,500 bpd from
the Ujung Pangkah (Madura) field; Total E&P Indonesia will produce
4,680 bpd from the Sisi and Nubi fields (East Kalimantan); PT Energi
Mega Persada will produce 2,229 bpd from the Sepanjang Island field
(East Java); Chevron will produce 1,098 bpd from the Telisa
Kotabatak field (Central Sumatra) and 177 bpd from the Seturian
field(East Kalimantan); Australian firm Santos will produce 1,027
bpd from the Oyong field (East Java); Petrochina Tuban will produce
281 bpd from the Gondang field (East Java); Petrochina Jabung will
produce 171 bpd from the West Betara field (Jambi).


10. Separately, Vice President Jusuf Kalla on January 15 instructed
ministries to remove regulations that hamper oil production so that
Indonesia can meet its target of 1.3 million bpd of crude oil
production by 2009. The Ministry of Energy and Mineral Resources has
not yet released a detailed plan for meeting this production
target.

Dueling GOI Press Statements on Natuna D-Alpha
-------------- -


11. Minister of Energy and Mineral Resources Purnomo Yusgiantoro on
January 30 said that ExxonMobil must provide the GOI with data the
company has collected on the Natuna D - Alpha block gas field. On
January 25, Yusgiantoro told the media the GOI's initial contract
with ExxonMobil had expired and that further development of the
field would be open to all bidders. These remarks were in contrast
to BP MIGAS Chairman Kardaya Warnika's January 22 statement that
ExxonMobil has until June to submit a new contract proposal for
further development of the block before the GOI could consider other
proposals. ExxonMobil Indonesia Vice President for External
Relations Maman Budiman said on January 26 that ExxonMobil would not
bring the matter before international arbitration, even though the
GOI claims to have terminated early Exxon's existing contract to
develop the block. The Natuna D - Alpha block contains an estimated
222 trillion cubic feet (TCF) of gas high in sulfur dioxide content,
of which 46 TCF is believed to be commercially recoverable.


12. Pertamina President Director Ari S. Soemarno on January 25
insisted that Pertamina own at least a 50 percent share in the
block's further development, since Pertamina had already invested a
considerable amount in the block to date. However, Purnomo on
January 25 noted that Pertamina does not have first right of refusal
or any other priority right related to the further development of
the block.

GOI Frees Contractors from Drilling Obligation
-------------- -


13. On January 15, MEMR Upstream Director R. Priyono announced GOI
plans for a new form of production sharing contract (PSC) that would
allow oil and gas companies to forgo drilling if seismic surveys do
not indicate prospective resources. Priyono said the new
contractual terms should reduce contractors' risks in exploring
frontier areas. He added that the GOI would offer these terms to
contractors interested in 30 new blocks that the MEMR plans to open
for bids in mid-2007. Under the existing GOI contracts, oil and gas
investors have six years to carry out exploration activities (from
seismic surveys to exploration drillings). They also must establish
bank accounts to hold performance deposits that the GOI has the
right to confiscate should they not meet drilling obligations. Many
contractors have voiced complaints about the drilling obligations,
arguing that they should not have to drill in areas where seismic
surveys do not indicate the presence of significant hydrocarbon
resources.


14. Under the new PSC, companies will have between two and three
years to carry out seismic surveys of frontier areas. If surveys do
not indicate significant commercially viable resources, then
companies can return the concessions can be returned to the GOI
without penalty. Share splits and signing bonuses in the new
contracts will remain the same as those in the previous contracts.


JAKARTA 00000414 004 OF 005


JSX Suspends Trading of PGN Shares
--------------


15. The Jakarta Stock Exchange (JSX) on January 15 temporarily
suspended trading in shares of state-owned gas company Perusahaan
Gas Negara Tbk (PGN). PGN's shares plunged more than one-fifth on
January 12, wiping out $1 billion of the firm's market
capitalization. This followed a PGN January 11 press release
announcing significant delays in its development of its South
Sumatra - West Java pipeline project. JSX lifted the trading
suspension on January 16. Since then, PGN shares have rebounded to
as much as 90 percent of their value in early January. PGN President
Director Sutikno said that based on PGN's agreement with Pertamina,
the company should have delivered gas to Pertamina beginning in
November 2006. However, due to delays, PGN has delayed scheduled
deliveries to March 2007. According to many analysts, the
announcement of significant project delays at such a late date has
raised concerns among many international investors about the quality
of corporate governance in Indonesia.

GOI Offers Alternative Energy Development
--------------


16. Minister of Energy and Mineral Resources Purnomo Yusgiantoro
announced on January 15 that the GOI would begin offering coal bed
methane (CBM) development projects to investors through regular or
direct offer tenders. Purnomo explained that GOI would give first
priority to develop CBM projects to existing holders of mine
concessions and work agreements. Estimates indicate that Indonesia's
CBM potential is as much as 453.3 trillion cubic feet (TFC),with
most located in South Sumatra, Central Sumatra, Kalimantan, and
Sulawesi.


17. MEMR Director for Upstream Business Development R. Priyono told
the press he hopes that the GOI could tender CBM working areas in
Kalimantan and South Sumatra in March 2007 through direct offers.
He noted CBM and oil and gas projects have different business models
because CBM projects usually must receive approval from local
government authorities. He added that the GOI would refer to CBM
development in other countries to determine appropriate ownership
splits.

Government Cuts Condensate Exports
--------------


18. Minister of Energy and Mineral Resources Purnomo Yusgiantoro
said on January 12 that the GOI would divert some Indonesian
condensate exports for domestic use, especially those produced by
Pertamina refineries and PT Trans Pacific Petrochemical Indonesia
(TPPI). Purnomo said that the GOI was still calculating how much
condensate to divert, but emphasized that any condensates diverted
for domestic use would be sold at international prices. According
to Purnomo, the GOI would not need to provide subsidies to Pertamina
or TPPI, since they would save on transportation costs by selling
locally.

Pertamina Asks Delay in New Diesel Sulfur Levels
-------------- ---


19. Pertamina Fuel Division Head Djaelani Sutomo said on January 12
that the company would ask the GOI to delay implementation of cuts
in diesel sulfur content so that Pertamina had time to prepare its
refineries to meet the new requirements. The GOI in March 2006
informed Pertamina and other companies that they had one year to cut
diesel sulfur content to 0.35 percent from 0.5 percent to meet EURO
2 standards, established in the year 2000. Automobile importers have
expressed concerns about Indonesia's ability to supply diesel and
other fuels that meet the EURO 2 standard at petrol stations across
the country.

Pertamina to Double 2007 Capex
--------------


20. The Ministry of State-Owned Enterprise, acting in its role as
Pertamina's shareholder, agreed on January 9 to Pertamina's plan to
expand capital expenditures to Rp 14.6 trillion ($1.6 billion) in
2007, more than doubled the Rp 6.3 trillion ($691.2 million) in

2006. Pertamina says it has secured $500 million worth of loans
from a syndication of local and international banks to partly
finance the new capital expenditures. Finance Director Frederick
Siahaan said Pertamina would seek other lending facilities or issue
bonds to finance the remaining capital expenditures. He added that

JAKARTA 00000414 005 OF 005


the majority of the new capital expenditure would be used to further
develop the Cepu and Pondok Tengah oil blocks. Pertamina is
targeting total revenues of about Rp 300 trillion ($32.9 billion)
for 2007, down from Rp 355 trillion ($38.9 billion) in 2006.
Meanwhile, the President Director of upstream subsidiary Pertamina
EP, Kun Kurnaely, told the press the company would boost drilling
activities in 2007 to at least 23 exploration wells and 145
development wells, compared to 6 exploration wells and 96
development wells in 2006. Pertamina EP is also aiming to increase
crude oil production to 118,000 bpd from 102,000 bpd in 2006; and
gas production to 1,319 million cubic square feet per day (MMSCFD)
from 944 MMSCFD.
PASCOE