East Kalimantan Environmentally Sustainable Development Strategy

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Implementation of a refinery operational efficiency program would reduce emissions
by 0.3 MtCO2e. The Balikpapan refinery can reduce its emissions by implementing efficiency
measures that involve replacement, upgrades, or additions that do not alter the process flow of
the refinery, e.g., waste heat recovery via heat integration and replacement of boilers, heaters,
turbines, or motors. The total cost, in present value, of implementing this initiative would be
negative USD 10 to 15 per tCO2e p.a. by 2030, as the revenues and cost savings from the refinery
operational efficiency programs outweigh the cost of equipment and investment.
Pilot Projects
The pilot projects should be implemented in Kutai Kertanegara for zero flaring program,
Bontang for LNG efficiency program, and Balikpapan for refinery efficiency program.
By 2030, Kutai Kertanegara, Balikpapan, and Bontang will account for 98 percent of the sector’s
emissions with 1.4 MtCO2e from flaring at Kutai Kertanegara, 15.0 MtCO2e from Bontang LNG,
and 3.32 MtCO2e from Balikpapan refinery. These three districts will also account for 91 percent
of the abatement potential by 2030. Kutai Kertanegara, with many fields, has high emissions from
flaring that contribute almost 85 percent of East Kalimantan’s flaring emissions. Satellite images
detect more than 10 flare points in the district. By 2030, implementing a zero flaring program in
Kutai Kertanegara could abate around 1.4 MtCO2e. Implementing operational efficiency programs
at Bontang LNG plant will reduce 0.8 MtCO2e, and implementing energy efficiency programs at
Balikpapan refinery will abate 0.3 MtCO2e.
Required Policies and Institutions
To accelerate exploration, there are five challenges to be addressed as reported by the
industry: uncertainty of cost recovery regulations hinder private sector investment; contract
sanctity is sometimes violated; unforeseen disputes with other agencies such as the tax office
create additional costs; the overall taxation rate is not competitive with other exploration locations;
and lack of security of assets and ownership rights causes uncertainty.
East Kalimantan should help the industry to address these exploration challenges
by: encouraging BP MIGAS to switch from a cost recovery focus to maximizing investment;
encouraging BP MIGAS to quickly settle the Offshore Mahakam dispute in a transparent and
credible manner; actively collecting feedback related to interference by other agencies from major
companies and escalating it to national ministries; actively collecting feedback related to total tax
rate from major companies and escalating it to national ministries; and creating a one-stop center
with staff dedicated to the largest PSCs to facilitate access and ensure security.
DRAFT
There are four regulatory issues that constrain the development of CBM: PSC regime,
local procurement requirement, land access, and water management. The existing oil
and gas based PSC regime is not conducive for CBM development. Due to the cost recovery
scheme, all well drilling, work programs, and budgets need to be approved beforehand by BP
MIGAS. This is not suitable for the complex and long-term nature of CBM activities. For example,
with the lengthy approval process of the current PSC regime, it could take up to one year for the
approval of one well, yet CBM developments require hundreds of wells to be drilled. Similarly other
approvals for work programs, budgets, and other items take a long time and are thus ill-suited to
the phased development required for CBM. The existing PSC scheme also requires First Tranche
Petroleum (FTP), a mechanism that allow the Government of Indonesia to claim upfront 20 percent
of gross production regardless of whether the production volume will be sufficient to cover the
total exploration and development costs invested by the contractors or not. This scheme, while
ensuring income for the Government of Indonesia, means higher risk for contractors. This is not
conducive for CBM development that requires higher upfront investment. Countries like India and
China offer better fiscal regimes to address the high upfront risk related to CBM development.
The requirement for local procurement hinders the development of CBM. Current
regulations require operators to use local contractors and procure equipment locally. Non-local