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Kiwi consortium poised to crack tough Indonesia geothermal market

Filed under International, News.

Copyright www.energynews.co.nz 

Edward White Fri, 12 Jul 2013

Hawkins hopes a new partnership with Alstom will provide it entry into the potentially lucrative Indonesian geothermal industry.

The Auckland-based firm and the French energy giant have put forward a joint bid to build a 30 MW project, Karaha Bodas, in West Java for Indonesia’s state-owned Pertamina Geothermal Energy.

Bernard Hill, Hawkins’ energy manager, is upbeat about the partnership; apart from Mitsubishi, Alstom is the only company that carries out EPC process engineering and technology supply for geothermal flash plants, he says.

If the bid is successful, Hawkins will bring in the expertise of a consortium of New Zealand firms covering everything from consultant engineering, subcontractors, legal, banking and insurance.

But the partnership is understood to be up against Japanese firm Sumitomo, which has this time partnered with Balfour Beatty – the latter company is likely to bring in New Zealand geothermal expertise from its PB Power subsidiary.

The multi-million project makes up a small portion of the potential USD $15 billion investment the Indonesian government is targeting in the geothermal market over the next five years. 

New Zealand engineers and geothermal scientists already bring in a tidy profit from consulting services to Indonesia. Firms active in the market include Auckland UniServices, GNS, SKM, PB Power, Aecom and ARANZ Geo, among others. Tim Anderson, New Zealand’s trade commissioner in Indonesia, says the value of their work is already worth millions of dollars per project.

“We’re aware of a number of our New Zealand companies who are picking up that sort of work,” he says.

Given the roughly 9,000 megawatts of capacity the Indonesian government is hoping to see developed by 2025, and an improving investment environment, Anderson is confident New Zealand firms will be able to lift the revenues they receive from the market.

“I think it is fair to say that $10 million to $20 million worth of work annually is not far-fetched at all, in terms of the potential in that kind of space,” he says.

However, New Zealand is not alone in its efforts to increase its market share, and international firms have some advantage in their capacity to take on bigger risk and put up equity or debt on developments. Alex Smillie is a senior advisor with local player Star Energy. Despite the “unequalled expertise” of New Zealand companies, he says they are not operating on a level playing field.

“It is very difficult to compete,” he says. “It is tough.”

The United States, for instance, is understood to be creating a new USD $100 million facility to fund the high-risk drilling stage of geothermal developments. International firms, including Japan’s Kyushu Electric and New York-listed Ormat, are taking on chunks of development risk. David Taylor, New Zealand’s ambassador to Indonesia, says Kiwi companies simply “can’t compete” with the sorts of incentives offered by other countries.

“They can just drop huge amounts of money into these sorts of projects that we just don’t have access to,” Taylor says.

New Zealand should be looking at partnering with other countries as much as possible, he says. To that end there have been behind the scenes diplomatic efforts to align New Zealand firms with the major Japanese geothermal players. Taylor is very supportive of the Geothermal NZ initiative, under which firms market their geothermal expertise and bid for work under a single banner. The programme is led by Mighty River Power director Mike Allen.

The initiative involves more than 30 organisations and last year appeared to be on the way to getting early ‘runs on the board’ when it signed an agreement to work with state-owned Pertamina Geothermal Energy to add binary units to its 110 MW Ulubelu plant, in southern Sumatra.

Construction on the Ulubelu expansion, which would potentially involve as many as 10 different New Zealand companies, was expected to have begun about now. However, the brakes appear to have been temporarily put on after a purge of PGE’s top-brass earlier this year, and a change of tack from the company’s new management.

PGE’s president director Adriansyah says the company is prioritising bigger developments than the smaller binary units at Ulubelu. Still, the company is keen to work with New Zealand firms in “any possible collaboration” – including continued education and capacity building ties. New Zealand, he says, is the global geothermal “powerhouse.”

That bodes well for Geothermal NZ’s members given the sharp ramp-up in activity Adriansyah, previously head of business development at PGE’s oil and gas-focused parent Pertamina, has been charged with delivering.

PGE currently owns 402 MW of geothermal capacity and has nine projects in the pipeline, including plant expansions. Its most optimistic target for the commissioning of the projects is 2018, given a roughly six-year timeframe from exploration to on-stream. Its next planned projects, in addition to Karaha Bodas, are two new units at Ulubelu, and two new units at Lahendong, in north Sulawesi.

Adriansyah is eyeing an “aggressive partnership programme” to help drive development.

“If I look across the board at PGE I am very optimistic that we can do it better,” he says. “We have a lot of good resource in people, in funding and a very good resource in subsurface.”

Star Energy is the owner of the Wayang Windu project, which was originally developed by Brierley Investments with ECNZ working in an operational role. It is now looking to expand the 227 MW plant in the near-term with an additional 127 MW. Star is also developing the Jailolo field in the Maluku Islands, east of Sulawesi – a project where it plans to start exploration drilling later this year. The company is understood to be looking at ways to involve New Zealand firms in both developments.

Fellow developer Supreme Energy believes it could be sitting on about 660 MW of generating capacity across three fields in Sumatra. It has already started drilling at one, Muara Laboh, and the Auckland-based geothermal experts at PB Power are bidding to work on the project.

“It is a really important for us to win,” says PB regional manager John Bottomley. He notes that it could provide a three- to four-year work stream for PB, and that PB often works in partnership with Auckland UniServices.

US energy giant Chevron is another active player in the Indonesian energy market, with its 636 MW Salak and Darajat developments, in Java. It is also exploring the Suoh-Sekincau prospect in south Sumatra. The New Zealand division of Sinclair Knight Mertz continues to pick up work for its Parnell office through its long-held relationship with that company.

Some former Contact Energy employees are also understood to be focused on Indonesia at present, working with Origin Energy on its interest at the Sorik Marapi field in northern Sumatra. Origin, in a joint-venture with India’s Tata Power, is eyeing a 200 to 300 MW development at the project.

While a spokesperson for Origin says the company has started negotiations with PLN for offtake sales and is planning initial exploration drilling, the project is understood to be facing delays. The spokesperson wouldn’t comment on the challenges it is facing other than to say there are “idiosyncrasies” in every country in which it operates. 

It is easy to be cynical about projects like Sorik Marapi and the many others where developments have consistently fallen behind their original schedules.

Hill says companies in the Geothermal NZ group, which have been “poised and ready to go,” may have been too optimistic in assessments of when projects would come to market.

However, there are some signs that investment dollars from the private, public and aid sectors are starting to flow.

Star Energy in March raised USD $350 million from the international bond market to help fund the next phase of development at Wayang Windu. The issue was more than 10-times oversubscribed, a sign of the strong international interest in renewable energy projects in developing countries.

The World Bank has approved a USD $300 million loan from its Climate Technology Fund to Pertamina – the cash is likely to assist PGE develop the next stages at Ulubelu and Lahendong. According to its senior energy specialist Anh Nguyet Pham, the bank is open to providing more cash to assist developers.

Pham adds that the World Bank’s private sector division, the International Finance Corporation, is in discussions with other developers about potential lending.

Last month, the Indonesian Ministry of Finance investment agency reportedly decided to make a further USD $300 million open to local government and developers to help fund the exploratory stages of developments.

Several of the major Australian-owned New Zealand banks – ASB, ANZ and BNZ – have also shown interest in the market. In May, representatives of each bank travelled to the archipelago as part of a New Zealand trade mission.

“They are very interested in understanding more about the Indonesian geothermal space,” trade commissioner Anderson says. They are currently looking at “how these projects work, where the risks are, how to go about mitigating some of those risks.”

Anderson sees potential for the banks, which have experience in the New Zealand geothermal market, to become involved at the early exploration phase where investors have historically been hard to come by.

“We see an opportunity for a specialist team – ideally we’d like to see a New Zealand element to that – who has greater understanding of drilling, field validation and data process, to grab hold of projects at that stage with the incentive that they are in-line to get a good chunk of the action further down the project cycle.”

The involvement of New Zealand’s banks, albeit Australian-owned, in Indonesian geothermal projects could be an important part of the expanded offering New Zealand is able to make.

PB Power’s Bottomley is upbeat about the potential that collaboration under the Geothermal NZ banner could bring.

“We can increase the revenue we can make from overseas work. This revenue is going to come back to New Zealand,” he says. “We can give the very best offering to our clients, in terms of the best people and skill sets, irrespective of what company they’re currently working for.”

In the future, he says, New Zealand companies could also look to combine to offer financial investments in projects.

“Maybe we can look at taking on more risk,” he says. “It is possible, for instance, by being able to offer EPC-type bids, or even taking on the role of project developer, that we could utilise the strength and skills of companies such as Hawkins, Fletcher, Mighty River Power or Contact Energy.”

That sort of approach would “open a lot more doors” for consultants, technical experts and smaller companies to break into areas that they otherwise wouldn’t be able to, he says.

While Contact’s geothermal expertise is already being utilised in Indonesia by majority shareholder Origin, Mighty River is already an active international geothermal player with interests in the US and Chile.

Chief executive Doug Heffernan told Energy News earlier this year that although the company has no commitments in Indonesia it does not have a “blind eye” to the opportunity.

“It probably is and always would have been a longer horizon than either of the US and Chile,” he said. “We need to make those work, to have confidence about going any further.”

Still, NZTE’s Anderson is equally upbeat about the future potential for New Zealand companies in Indonesia.

“We don’t see any reason why there couldn’t be a couple of dozen New Zealand companies who could be on the road to having a permanent establishment here with a multi-million dollar annual business.”

Edward White travelled to Indonesia with assistance from the Asia New Zealand Foundation and New Zealand Trade & Enterprise