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Government plans to provide incentives for coal bed methane project development

The government is mulling incentives for companies that develop Coal Bed Methane (CBM) projects in the country, in an attempt to attract more investment in the sector.

The energy ministry's oil and gas director general, Evita H. Legowo, told The Jakarta Post recently that the incentive scheme for CBM developers would adopt the tax facility system granted to oil and gas contractors in Indonesia.

"*The incentive is needed because* we want to attract more investment in the *CBM* sector," Evita said.

Under existing Finance Ministry regulations, every oil and gas activity in the country is exempt from import duties for exploration equipment, and also exempt from value-added tax.

Even though CBM is closely related to oil and gas exploration activities, the government has yet to include the alternative natural gas in the category that enjoys the tax and duties exemptions. The regulation only allows the incentives for the development of oil, gas and geothermal energy.

CBM is a method of extracting methane from coal seams. Once the methane has been separated, it can serve as an alternative to natural gas.

The government first unveiled CBM projects in the country in 2007, offering them up to investors.

The government provides a relatively better production split for CBM projects than oil and gas projects, increasing CBM operators' profit sharing to 45 percent - much higher than the 15 percent and 30 percent that oil operators and gas operators get, respectively.

Compared to the development of oil and gas, CBM projects require a lot more investment and time, with the exploration phase involving a process of discharging water from underground, which can take years before the gas can be extracted.

The government has awarded four CBM development contracts in Kalimantan to a group of mining companies, requiring a total investment of at least US$20 million over the next three years.

The four companies are a consortium of PT Pertamina Hulu Energi Metana Kalimantan A-Sangatta West CBM Inc; a consortium of Kutai West CBM Inc-Newton Energy Capital Limited; PT Indobarambai Gas Methan, and PT Barito Basin Gas.

Recently, Vico Indonesia, jointly owned by UK oil behemoth BP Plc and Italy's Eni SpA, announced plans to develop a CBM project in the Sanga Sanga concession in Kalimantan, with a total investment of $600 million.

Vico, which already owns a gas concession in the area, will speed up drilling for the CBM projects by 2012 and deliver gas from the coal seams by at least 2020.

Gas production from CBM is expected to help the government reverse a declining trend in gas output. Indonesia has the world's second largest CBM reserves after China, with total potential reserves of 453 trillion cubic feet.

The government has predicted a decline in gas production to 7.3 billion cubic feet per day this year, lower than the 7.9 billion cubic feet per day recorded in 2008, due mainly to aging fields.

Under its blueprint for the development of CBM, the government is targeting production of 1 billion standard cubic feet per day, or about 0.18 million barrels of oil equivalent, by 2025.

Posted on the Jakarta Post 02/02/2009

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