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with Kerry Parker, Executive Director, Panax Geothermal

18.05.2012 / Energyboardroom

Panax is unusual among ASX listed companies in having an innately international focus on becoming a global geothermal energy provider. How do you see 2012 within the company’s drive towards internationalization?

Kerry Parker (KP): Our focus in 2012 will be on our projects in Indonesia. This represents a transition in our focus from the last few years which have been dedicated to our Australian projects. These are being put on hold until we see some positive movement from the Australian government towards providing better financial support for the development of renewable energy projects. Indeed, the lack of support in Australia was part of the reason that Panax started looking at projects in Indonesia 3-4 years ago.

At Panax we feel that Indonesia is the optimum place to be for developing geothermal energy. The country has a huge abundance of geothermal energy resources with around 40% of global geothermal energy potential. Indonesia has a supportive government that has recognized the need to move away from the old hydrocarbon paradigm and that geothermal energy has the potential to provide 28,000 megawatts of power to the domestic market. This market has over 240 million consumers, for whom 35% are currently facing shortages of electricity. At the same time, this is a population with a growing middle class who have higher energy demands. Geothermal is therefore a very important part of Indonesia’s energy future not just from a renewable energy perspective but from the point of view of securing the country’s overall energy security. It is because of this favourable operational environment and the demand in the market that Panax is here.

Panax has set up three projects in Indonesia and our efforts in 2012 are dedicated to getting these up and running. Our projects are focused on conventional geothermal projects involving volcanic reserves or hydrothermal plays, rather than on the more experimental hot fractured rock style projects that other companies have experimented with in Australia. For Panax these projects represent an early-stage, unproven technology and this too much of a risk for the company. Panax has generally avoided earlier stage projects and has instead sought out those which have already had a fair degree of exploration work. This fits better within our risk appetite. Fortunately, the Asia-Pacific region and the “ring of fire” provide all the opportunities to develop conventional hydrocarbon plays.

Looking at your current work in Indonesia, what are the timeframes and expectations for your three projects?

Dairi Prima is a 30 megawatt project located in Northern Sumatra and is designed as a supply arrangement for the adjacent underground lead / zinc mine that is going to be constructed by the Bumi Group, which is projected to have a 25-year mine life. Panax has a 51% interest in this project whilst Bakrie Power has a 49% ownership. The Bumi Group will look towards the expansion of the current mining plan around 3-4 years after production commences in early 2014. This is when we will expect the first revenues from the project.

Sokoria is another 30 megawatt project located on Flores Island where the split is 45% Panax to 55% Bakrie Power. This is a supply arrangement to PLN for domestic electricity consumption on Flores. Extensive exploration work has already been conducted on this project which began back in 2010. We are now in the process of finalising a Power Purchase Agreement with PLN for 12.5 cents per kilowatt hour, which is above the national 9.7 cent minimum. First production from this site will be in 2015.

Nlgebel is a much larger project of 165 megawatts. We are earning into a 35% interest in that project alongside Bakrie Power. The project is located in East Java. We have a lower interest in this larger project which has a different risk profile – there is still some additional exploration work required before we can begin formal development. This exploration program will take place over the next 12 months with the first units coming on-line in 2018.

These projects take time but we are fortunate to have a partner like Bakrie Power. I have worked around Asia before and one of the mistakes that I have seen frequently is companies trying to enter the market on their own and do everything themselves. Our partnership with Bakrie Power is not exclusive but they are a great asset in joint developing our current projects. Panax and Bakrie Power have a good relationship with both seeking an active foothold in Indonesia’s geothermal development.

The onshore oil and gas industry faces many issues related to land particularly in Java and Sumatra. How does a geothermal company cope with these challenges?

Sjaiful Bahri (SB): Our experience of dealing with land regulations in the geothermal industry previously has been similar to that of onshore oil and gas companies. Particularly when a geothermal project overlaps with forest area, we incur many regulatory issues and when it comes to dealing with private owners, we encounter challenges in determining land titles as it is often unclear who is the real owner of the land. These issues and consequent delays have grown in scope with the decentralization of government taking place over the last decade. Previously Indonesian producers were dealing exclusively with the central government and now projects involve a combination of relationships between central and local governments.

KP: I believe the main issue comes from the disparity in timeframes and the pace of administration between local government and central government. Actually, in our projects we have received very strong support from local government. This is most evident in the case of Sokoria where they experience frequent power shortages. The local government therefore understands the benefits better and this is why local government has actually been quicker to act in many cases than central government.

SB: There was also recently an unusual situation in the Indonesian contract issuing system. When the government issued a contract area to the developer and set the pricing, the state electricity company, PLN, was not involved. As a result, we needed to renegotiate the pricing with PLN after winning the contract. Panax was one of only a few companies caught in this 12 month regulatory no man’s land where the operational environment was not clear.

It seems that Indonesia has regulatory disparities but is keen to promote its geothermal industry, whilst Australia has better regulation, but is not providing the incentives. How do you see it?

KP: The Australian government has a terrible attitude towards renewable energy. They announced $10 billion dollars under the to be formed Clean Energy Finance Corporation, but none of that money will start to flow until 2013 and even then it will be introduced in $400-500 million lots over a period of many years. If the Government of Australia was really serious about developing this industry they would be taking the same money and allocating it over a 3-4 year period. The Australian government has given $1 billion to solar energy unsuccessfully, $1.5 billion into wind energy – moderately successfully. However, the actual money that has been allocated to geothermal energy in Australia is less than $30 million – there is little to no commitment. Panax has launched several capital raisings over the last two years, but we have heard repeatedly from investors that they are unwilling to put their money into geothermal until they see a sign that the Australian government is willing to invest. This is a poor situation when out of all the renewable energies, the only one that can provide base-line power is geothermal. By contrast, the Indonesian government is providing a great environment for the growth of geothermal energy.

Given the targets set by the government for 5% of the country’s energy matrix coming from geothermal energy. How do you see the industry developing here?

KP: The government has set ambitious targets although they can afford this ambition given that the country has 40% of the global geothermal reserves. Indonesia has taken the right approach in that geothermal is not an addendum to a clean energy policy or a renewable energy policy, but rather geothermal is considered as a broader energy security issue. The government wishes to cut its ties to oil not just because of environmental concerns but because they are seeking energy security.

There are abundant potential projects across the country, which already has 1400 megawatts of geothermal power generation already installed. The targets are to increase that to 4,000 in 2015 and then 10,000. The main projects will rightly be focused on Sumatra and Java as this is where the bulk of the geothermal energy is and so is the demand. There is still a lot of demand for electricity projects in more remote places like Flores Island.

SB: The problem in Sumatra is that although the demand is high, the electricity infrastructure is not very well connected which limits demand in certain areas. There should be more work to improve the transmission lines. On Java which has 60% of the Indonesian population you can see the geothermal potential developing since 1992 under projects by Chevron. Geothermal energy in Java is therefore at a more advanced stage. Aside from Java and Sumatra there is also a good geothermal potential in Sulawesi, but progress here towards geothermal development is slow. Nusa Tenggara also has opportunities for development where PLN has already commissioned power generation projects but the installed capacity is currently only 2.5 megawatts.

The main opportunities outside of Java and Sulawesi lie in small geothermal stations designed to supply energy to small populations or for industry. On Flores Island where they currently use diesel generators for power they are paying a lot to generate power – around $250 per megawatt hour. Small-scale capacity geothermal wells can produce this electricity much cheaper.

KP: Although the company is focusing on Indonesia at the moment, Panax has aspirations to expand beyond Indonesia into the Asia Pacific region. One of the focuses of the company will be direct supply arrangements with local mines just like the Dairi Prima project, where the mine is located far away from energy infrastructure. The only alternative to geothermal energy is diesel generators which cost around $250 per megawatt hour with the current global oil prices. For a mine where the electricity costs are around 25-30% of total operating cost, if you can save on power generation then the returns will grow significantly. Geothermal energy therefore provides a natural advantage to these companies.

In Indonesia Panax has targeted smaller projects as an initial entry into the market, however Nlgebel represents our first move into is a large-scale projects. Many of the larger players from Chevron to Origin Energy have focused on these larger projects because they have the financial capacity. However for Panax, there are still many geothermal projects from the 22 to 80 megawatt size that are very attractive. This is an excellent niche market for Panax. Looking worldwide at projects in Iceland, USA and Philippines the majority of projects are below the 100 megawatt category. Therefore although Indonesia is certainly blessed in having the reserves to facilitate 2-400 megawatt projects, there is a lot of potential at the smaller end.

What is your outlook on the future of Panax in Indonesia?

Panax’s focus in the short-term will be on taking our 3 projects into production. At the same time we have aspirations to grow the business larger and we have made announcements to the ASX that we are on the lookout for other projects in Indonesia.

Indonesia has enormous geothermal potential, the government has a desire to see this developed and consequently there is a real wave of development. Many of the earlier geothermal projects had unfavourable tariffs but this is now improving. There is a 9.7cents minimum price which may be increased. 35% of the country still does not have access to power, there is a growing middle class in the 18-45 age category who are starting to earn decent wages. Indonesia is therefore the right place to be.

We see that you spent many years with a financial background before turning your head to energy and geothermal power. Why did you make this jump?

KP: I started my career with KPMG spending much of that time with mining and natural resources-based clients. From this work I saw that the problems in the world relating to natural resources which need to be solved relate to energy and water. I spent 6 years with Arrow Energy and the coal seam gas sector but decided to move on and look at other opportunities. I saw the importance of generating geothermal energy. It does not work for every country in the world but for the countries which have it, it should be in the energy mix.

And Sjaiful?

SB: I have been involved in geothermal energy since my days at university as a volcanologist. I then went on to work for the government analysing the geothermal potential of the country. After this I joined Unocal which was then taken over by Chevron. I was therefore involved in the geothermal business for industry and government from the beginning in Indonesia. Over the years I have moved from geologist to business developer to government relations and now to country manager of Panax. I have dedicated my career to this industry.



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