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Interview

Johan De Saeger – Chief Representative, ENGIE, Indonesia

The Chief Representative of newly rebranded ENGIE discusses how the Indonesian energy sector is fast becoming a test-bed for the demonstration and scaling up of fresh technologies and innovative operating concepts. He goes on to explain how the local market lies right at the vanguard of breakthroughs in mini LNG application and geothermal power.

Could you please give us a brief overview of ENGIE’s six-decade interaction with the Indonesian market and how you came to become the largest independent power producer in the country?

ENGIE enjoys a 60 year presence in Indonesia since Degrémont, which is a company dedicated primarily to the engineering, construction and installation of waste and water management facilities, started activities in the country. Today ENGIE retains a 33.7 percent stake in Degrémont’s mother company SUEZ. Our presence in the Indonesian energy sector is actually more recent with one of the milestones being our 2008 collaboration with the independent power producer, Supreme Energy, to participate in three geothermal projects. Then another landmark was our 2011 acquisition of the British electricity generation company, International Power which acquired us a stake in PT Paiton Energy and at a stroke rendered us the largest independent power producer in Indonesia.

In 2012, we opened a development office in Jakarta that has been expanding exponentially. We have also been very busy developing projects in the downstream infrastructure sector specifically focusing on gas and renewables. Right now, ENGIE is evaluating new opportunities in the design and implementation of natural gas infrastructures, including gas transportation, distribution and storage facilities such as the development of small-scale LNG projects, LNG terminals and pipeline projects.

In April, GDF SUEZ underwent a thorough re-branding that not only established the company under the new banner of ‘ENGIE’, but also entailed overhauling the corporate strategy. In a nutshell, what are the main changes?

The rebranding to ‘ENGIE’ is part of an overall strategy to align ourselves with four emerging trends in the global energy domain. Firstly, we are aware the world is entering a new era characterized by a ‘decarbonisation’ and an urgency to limit global CO2 emissions. We are thus adapting ourselves in line with this new reality by transitioning away from carbon-heavy fossil fuels and supporting efforts towards a single global carbon price. Gas power generation produces less than half the emissions of the most efficient types of coal so we are increasing our work share related to gas and phasing out the share pertaining to coal. Cognizant of the fact that even natural gas is a bridging solution, we are also ramping up our involvement in renewables projects.

The second tendency that has come to our attention is  ‘decentralisation’ which we consider is going to be quite impactful in Southeast Asia. The power sector has been quite stable in terms of structure for the past century: changes have tended to be incremental and evolutionary and it hasn’t been subjected to the sorts of disruptive technologies that have revolutionized other industries such as upstream hydrocarbon E&P. We calculate that this is set to change radically. We think that big centralized power plants that are distributing their electricity to industrial, household and commercial consumers via transmission and distribution lines is a model that is increasingly becoming less dominant. Breakthrough technologies are now allowing us to miniaturize components such as battery storage to the extent where we can see power generation being scaled down to the ‘single self-sufficient building’ level. ENGIE is therefore transitioning to equipping a ‘tomorrowland’ less reliant on centralized utilities.

Thirdly, ‘digitalization’ is fundamentally changing the demand profile of electricity. A combination of digital applications and refined storage mechanisms are flattening the discrepancy between peak and non-peak demand and reducing the need for peak shaving open cycle gas turbines. In the future, even common household items such as fridges will incorporate smart tech components that can switch on and off anticipating shifts in electricity demand. ENGIE is therefore preparing itself to make full use of these technological leaps. Directly related to this is the fourth and final trend which is a behavioral shift on the demand side in favor of enhanced energy efficiency. This is expressed in many ways such as in the tendency to better insulate buildings. ENGIE will thus be doing more in the environmental efficiency domain via our B2B energy services business line that is dedicated to energy saving solutions.

What has been the direct impact of these four developments to the Indonesian operations?

Our Indonesian operations will actually be at the vanguard of the four shifts. The country is undergoing its own transition to gas and we will be bidding for mid and downstream gas value chain projects many of which will be tenders from PLN, the single buyer for electricity. We will not, however be following up on any new tenders issued for coal-fired power.

Being an archipelago of some 18,000 islands, Indonesia is also suited to a micro-grid, decentralised power generation approach so we will be wanting to participate in that too and bolster our capabilities in small-scale LNG. We are working with reputable local companies for potential investments in small-scale LNG projects, ecompassing small-scale liquefaction, small-scale LNG vessels, and small-scale storage and regas facilities. We have also noticed that Indonesia, historically a big exporter of LNG is no longer entering into export contracts and is now rerouting the resource to cater to domestic consumption. What’s more, Pertamina has even signed import agreements with US companies. Given our wealth of LNG assets worldwide, we can therefore envision selling LNG to Indonesia, especially for new IPP developments and within specific cooperation agreements, so will be looking into the viability of such arrangements.

Finally, as the Indonesian government starts paying more attention to energy consumption and the role of energy efficiency in bolstering national resource security, we will look into the potential for ENGIE (via Cofely) to enter the local market.

We understand ENGIE is active across the entire gas value chain holding a 45% share in the Muara Bakau offshore exploration license in the eastern part of the Kutei basin and also developing the Jangkrik Complex Project in partnership with ENI. Please update us on how this is progressing.

The Jangkrik Complex Project involves the joint development of the Jangkrik and Jangkrik North-East fields located within the Muara Bakau block, approximately 70 km off the coast of Makassar Strait at water depths of 200m-500m. Eni holds a 55 percent share and operates the Muara Bakau permit. ENGIE Exploration & Production International holds a 33.333 percent share and Saka Energi the remaining 11.666 percent share. , The plan for development (POD) of the Jangkrik Complex Project was approved in 2013 and the Final Investment Decision was taken in 2014 with the beginning of the execution phase. Production is expected to start in 2017 and the fields are expected to produce 450 million cubic feet of gas per day for the first six years and continue producing at a lower capacity for approximately eight more years. The short time frame for bringing the gas on-stream is significant: this is a priority project for the nation and has enjoyed fast tracking by the government.

Up to 47 percent of the gas produced from the Indonesian offshore field is intended for domestic supply and is being sold to Pertamina, whereas the remaining gas will either be also sold domestically or potentially be exported to neighboring Asian countries.

Can you please elaborate on ENGIE’s capabilities in small-scale LNG and the value offering you can bring to an Indonesian energy infrastructure that is disproportionately developed in the West and where many of the remote islands in the east remain undersupplied?

We firmly believe in mini-LNG as a concept for the future not only in Indonesia but many places where this could be applicable given the trend towards decentralization, smaller port facilities and grids. Very few companies yet possess a track record in this area, but given our worldwide experience pool and capabilities across the entire value chain we do think we are well equipped to become one of the pioneers. Our breadth of experience with LNG means we have much to offer from supplying the suitable molecules to implementing and operating the floating or land-based storage hubs, the micro regasification units and the small-scale power plants.

We hope that Indonesia can actually become the first place to implement mini-LNG on a grand scale and that we can assist the country in realizing this. Indonesia would be an ideal test-bed for new technologies and operating styles that can eventually be exported round the world to other countries with similar compositions such as the Philippines. Indonesia is an exciting place to be right now for micro-solutions. We see it as a great learning curve where we can conduct feasibility studies, test out new approaches and optimize them.

PLN has already come out with a tender to supply regasified natural gas to the gate of 32 small to medium sized power plants in the eastern regions. They are essentially demanding a turnkey project with the exception of the power plant element which they intend to build themselves. This means that the bidding company will have to supply the molecules and the small scale vessels that will do the milk run from storage hubs to the sites. Then there is another tender in West Indonesia for 185 MGW split over 8 different sites to each be fitted with a power plant ranging rom 5 to 20 MGW. The winner of the contract will have to design, build and operate the entire chain so as to sell the power to PLN. Indonesia is thus fast becoming a great playground for applying innovative concepts.

What about the geothermal domain? Does that not offer unparalleled, unique opportunities for experimentation as well?

Absolutely, Indonesia is blessed with 40 percent of the world’s geothermal reserves which ties in nicely with ENGIE’s refocusing on renewables. For us, geothermal energy presents another steep learning curve which is why we have teamed up with a local player called Supreme Energy which is commonly regarded as the foremost expert on geothermal in the country. Japanese companies Marubeni and Sumitomo have also been contributing their expertise and capabilities.

In geothermal power production you have to build all the supporting infrastructure from roads to well heads and conduct the drilling long before you discover how much steam you’ll end up with and for how long which entails shouldering an amount of risk upfront. Indonesia however represents a good place to start because the regulations take into account the fact that you have conducted a full exploration program of your concession in the event that the end results are less than you hoped for and allow for a renegotiation of the PPA so as to make the project economically feasible again. Right now we are conducting three joint projects in Sumatra, two of which are at a stage where we have finalized the exploration phase which should enable us to reach financial close by 2017.

How strategically important then are ENGIE’s Indonesian operations in relation to the company’s activities elsewhere?

Indonesia is becoming evermore strategically important to ENGIE. Mini-LNG opportunities are more concrete here than anywhere else in the world so that brings us huge opportunities to demonstrate our leadership and to develop new solutions. The same can be said for geothermal. The government’s strong emphasis on energy infrastructure development also raises the profile of Indonesia in our eyes. President Jokowi’s 35,000 MW program within 5 years is a case in point of the burgeoning opportunities for Independent Power Producers. The original intention was that IPPs like ENGIE would supply 25,000 MW and the PLN would provide the rest. Now it looks like it will fall to the private sector to supply 30,000 MW. This is big news. Today the number of power projects on offer in Indonesia is roughly on a par with the entire rest of the Asia Pacific region.

In Indonesia there remains a huge amount to be done and yet there is a decent track record in the implementation of power projects. To date, any revisions to the PPAs have been fair with reductions in tariffs always balanced by the sanctioning of project extensions and expansions.

That is not to downplay the difficulties of doing business in Indonesia of course. Every year the World Bank conducts a study on the ease of dong business and this year Indonesia ranked 155 of 189 countries which represents only a slight improvement on the 2014 ranking of 158. Land acquisition remains very difficult and permitting is complicated though we are much encouraged by one-stop centres for permit award and the ongoing anticorruption drive.

What are your mid-term objectives looking forward?

We seek to establish ourselves as a leading player in Indonesia’s energy transition and as a critical enabler for gas, mini-LNG, geothermal and other renewable developments. Within the coming years we will have demonstrated that we can walk the talk. We would also expect to have ramped up our services business in terms of fostering smart cities and energy saving.

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country.

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