August 2016 | Philip Chacko

Fuel for thought

Tata Power seeks to make a mark in Indonesia with its joint venture in coal mining and its plans to help develop the country's energy industry

The quest for high-quality coal, was what prompted Tata Power to undertake the journey to Indonesia, and that remains the most compelling rationale to develop deeper roots in a country where it has been doing business since 2007.

Employees of the joint venture, in which Tata Power has a stake, in Sangatta (Borneo)

The coal was required for Tata Power’s then upcoming 4,000MW ultra mega power project in Mundra in Gujarat. Indonesia, with its abundance of the fossil fuel and logistical advantage, was a logical sourcing destination. That logic continues to hold good.

Tata Power invested about $1.2 billion to acquire a stake of 30 percent each in two coal-producing companies, Kaltim Prima Coal (KPC) and Arutmin Indonesia, as also in a trading company, all of them owned by Bumi Resources, one of the largest mining companies in Indonesia and part of the Bakrie Group conglomerate.

Tata Power further invested in two mines with large resource capacities, in 2012, for a 26-percent shareholding in the Baramulti Group-owned Baramulti Suksessarana Tbk (BSSR) and its subsidiary Antang Gunung Meratus (AGM) for an acquisition price of about $150 million. Chief operating officer Kamlesh Kumar and chief of mines ARP Reddy are positioned in the company from Tata Power to ensure proper management of the latter’s assets.

Volatile economics
KPC and Arutmin have long-term lease agreements with the Indonesian government and the premium coal they mine is perfect for Mundra. The exporting of coal to India for the project began in 2012, the year when the first 800MW unit in Mundra came online.

Two years before that happened, Tata Power inked a 50:50 joint venture with Origin Energy, an Australian entity, to form OTP Geothermal, which was contracted to develop the 240MW Sorik Marapi geothermal power project in northern Sumatra.

For a variety of reasons, the company announced in April this year that it would be selling its stake in OTP Geothermal to the Singapore-based KS Orka Renewables for $30 million.

The exit is another sign of what may appear to be a retreat by Tata Power in Indonesia — the company has signed an agreement to offload its 30 percent in Arutmin to its joint venture partner Bumi Resources — but that would be a misreading of what is merely economically sensible to do at this point in time.

“Indonesia is like a second home for Tata Power,” says Abhishek Yadav, the chief representative officer for the company in the country. “ Yes, there have been complications but we are committed to the energy sector here. We have largely been a mining enterprise here , but we are looking at other options.”

Coal being stockpiled in Sangatta

The proposed stake sale in Arutmin has much do with the slide in global coal prices. Coal prices have crashed from a high of more than $100 per tonne in 2011 to about $40 today. Add to that the Indonesian government’s decision, also in 2011, to prohibit coal exports below monthly prices determined by it. 

The Indonesian government-fixed price resulted in undermining Tata Power’s previous advantage of having its own coal mines in Indonesia. The bleeding in Mundra increased since the company could not now procure coal for the project at the cost it had contracted for, since the contracts got reneged. Meanwhile, the fall in global coal prices since 2013 has severely dented the valuation of its mining operation in Indonesia.

Holding steady
The negatives have not been a dampener for Tata Power with its Indonesia play. KPC is faring well in a seriously depressed market, mainly on account of the superior coal that it can bank on. BSSR and AGM have also done well, by expanding production and undertaking several cost rationalisation and efficiency measures.

“Many mines in Indonesia have closed down since coal prices began heading south three years back,” says Mr Kumar, “but the margins are still there for higher-grade coal, if one is able to drive efficiency and reduce costs. The drop in oil prices has helped, diesel being a big component in mining costs. We are not getting the returns we thought we would, but we are still doing okay.”

That should lift the mood at Tata Power, which has over the past two years been on a revival streak that owes plenty to the recalibrated thinking in the company and the spirit of its people. There’s no end in sight to Mundra’s woes but Tata Power is on the upswing elsewhere, with its generation and distribution businesses, its thermal and hydroelectric plants, its renewable energy projects and prospects, and its growing presence outside India.

Tata Power now has, after long decades of sluggishness on the foreign assets front, operations in Sub-Saharan Africa and Georgia, besides South East Asia.

There are opportunities outside of the Indonesian coal-mining sector that Tata Power is keen on tapping. It is part of an under-construction venture for a 54MW coal-based power project that will come under the KPC canopy. The capacity may seem small here, but it underlines the company’s intent. “We would like to do a whole lot more,” says Mr Yadav.

Tata Power has invested close to $1.35 billion in Indonesia across all operations. Keeping this investment in the pink takes precedence for the company. The representative office that Mr Yadav heads plays an important role in managing and ensuring the good health of Tata Power’s investments in Indonesia, in scouting for opportunities, and in market analysis and development.

“Fossil fuels are the mainstay of the global economy and it will be many more years before coal-fuelled growth ceases,” says Mr Yadav.

The Indonesia experience definitely suggests Mr Yadav is right, as he is with his assessment of the country and its citizens. “Indonesia is a nice place to live in. There is a blending here of religions that’s unique. The Ramayana and Mahabharata are intrinsic to the culture and you have Muslims with names like Damayanti, Rama and Shinta (Sita). We Indians may be far removed from India but not so much from home.”

Success sustained

Kaltim Prima Coal (KPC), the coal-mining entity in which Tata Power holds a 30-percent stake, has a history of doing the right thing on sustainability and community welfare that stretches back to the time it used to be owned jointly by BP (formerly British Petroleum) and CRA (a subsidiary of Rio Tinto-Zinc Corporation).

Established in 1982, KPC operates the largest open-pit mining operation in Indonesia and one of the largest in the world, spread over nearly 91,000 hectares in Sangatta in Kalimantan on the southern side of the island of Borneo. It has under its wing some 5,000 employees and about 21,500 personnel from contracting and associated companies.

Coal mining does not have a lot of fans among the ecologically concerned, but KPC has done more than most companies in its class to lighten the load on the environment, through the prevention of pollution, post-mining area restoration, biodiversity conservation, water conservation and energy efficiency. In keeping with its motto for community development work, ‘more than mining’, KPC concentrates on areas such as capacity building, sanitation and public health, education, development of small and medium enterprises.

On safety and health, KPC has standards that match, and even exceed, the best in the world in mining. It is also a standard-bearer in gender diversity, employee welfare, corporate governance and in building partnerships with its business associates and their employees.

‘Good mining practice’ is the term the company uses as the overarching rubric to cover its business activities. KPC’s deeds match those words in an industry where it is, in many ways, an exception.