Indonesia, the world's largest thermal coal exporter, is finalizing regulations on a reference price on coal, on a domestic market obligation (DMO) for mining firms and the establishment of an independent agency to manage it, says a minister.

The regulations should be ready to be implemented next year, Energy and Mineral Resources Minister Purnomo Yusgiantoro said on Monday during the Coaltrans Asia conference in Bali.

"As a follow up to the Law No. 4/2009 on mineral and coal mining, the government will produce a number of government regulations, which will among other things, cover the DMO policy. To implement the DMO policy, the government will appoint an agency to manage it," Purnomo said.

He said the agency might not be formed as a state owned agency; but he did not give further details on the setting up and tasks of such an agency.

The DMO policy, whose implementation has been delayed from its initial startup plan earlier this year, would require coal producers to allocate 35 to 40 percent of their coal production to the domestic market, in line with the local market's increasing demand for coal, in particular from power plants.

The policy would also result in the allocation of licenses for any coal mining firm doing business in Indonesia, replacing the old work contract-scheme, he added.

In relation to the upcoming new government regulations, he further said, the government would also publish the Indonesian Coal Reference Price (ICPR) as the basis to calculate state revenues from royalties.

"The ICPR would be formed based on a coal price index, which should be applied to all coal production," said Purnomo, adding that the price could also be taken into consideration by any two trading parties to renegotiate their contract.

"The coal price will be used to determine and optimize government revenue from coal production. In future, you can use this coal price as a reference value."

Bloomberg reported that the formula for the reference price will be determined based on a coal price index and will take into account the calorific value and moisture content of the product. Higher calorific values and lower moisture content may translate into improved prices.

Bloomberg calculates that the government earns 35 percent of its revenue from the oil, gas and minerals industry, and of that, 4 to 5 percentage points are from minerals.

According to an annual report by Indonesia Mining in 2008, listed coal companies generated a significant increase in profits.

The 2008's net profits in all listed coal companies in Indonesia reached around US$1.2 billion compared to $1 billion in the previous year.

Meanwhile for mineral companies, net profits declined to around $2.3 billion last year from $4.2 billion in 2007.

In the first quarter, Indonesia could not meet coal production targets due to problems, including heavy rain, an energy and mineral resources ministry director said.

Bambang Gatot Ariyono, director for coal and mineral development at the ministry, has said coal production in the first quarter of this year was only 30 million tons or lower than the initial target of 50 million.

The government however remains optimistic it will be able to produce the targeted 220 million tons by the end of the year.

Bambang Setiawan, the Ministry's director general for mineral resources, coal and geothermal affairs, said Indonesia's total coal production may exceed 300 million tons per year by 2025.

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