Pertamina president director Nicke Widyawati, in a joint statement on Monday, said the companies aimed to convert low-rank coal – the dirtiest fossil fuel – into dimethyl ether (DME), which would replace imported liquefied petroleum gas (LPG) as the go-to cooking gas in Indonesia.

“This aligns with Pertamina’s strategy going forward to optimize [domestic] natural resources as feedstock to produce energy so we can reduce imports and the trade deficit,” she said.

Pertamina’s partnership with Adaro and Indika is meant to fill the gap in domestic DME supply needed by Pertamina, the country’s largest LPG distributor.

The switch to DME is supposed to lower the consumption of LPG, a fuel the country has been heavily importing at the cost of widening its trade deficit, a key vulnerability for Southeast Asia’s largest economy.

From January to October this year, the trade deficit in oil and gas reached US$5.14 billion, as imports stood at $11.68 billion against exports at $6.54 billion, Statistics Indonesia (BPS) data shows. The trade deficit is less than $7.99 billion recorded in the same period last year.

Read also: Indonesia to mix coal-based DME, LPG as cooking gas to reduce imports

In October this year alone, Indonesia’s oil and gas imports fell by 38.6 percent year-on-year (yoy) to US$1.08 billion from the same month in 2019, amid cooling economic activities due to the COVID-19 outbreak.

Nicke had told lawmakers in Jakarta in February that Pertamina’s own under-construction, coal-to-DME plant in South Sumatra could only replace roughly a quarter of the country’s total imported LPG.

Pertamina’s plant, being jointly developed with national coal miner PT Bukit Asam and United States-based Air Products, is slated to produce 1.4 million tons of DME annually, compared to the country’s need for roughly 5 million tons of LPG annually.

Meanwhile, while Adaro is currently looking to develop a coal-to-methanol facility and Indika an underground coal gasification facility, the statement did not indicate which company would build the capacity to convert these coal derivatives into DME. Both miners' facilities are slated to be built in Kalimantan.

“[Indika] is committed to studying downstream technology,” the coal miner wrote in a separate statement on Monday.

The deal also brings Adaro and Indika closer to securing a state-backed DME offtaker for their capital-intensive projects that according to one landmark study, might not always be economically competitive with imported LPG.

An Institute for Energy Economics and Financial Analysis (IEEFA) study published on Nov. 10 calculated that at current low LPG prices, Bukit Asam would face $377 million dollars in operational losses each year in selling DME at competitive prices with LPG.

The government countered the study in a statement on Monday by saying that LPG prices had averaged at $600 per ton over the past 10 years, higher than the $365 per ton price tag used in IEEFA's study, and thus, the project was "economical and not a loss”.

“That means Pertamina is committing itself to a capacity payment for DME, whose profit or loss depends on the LPG prices at that time,” IEEFA analyst Elrika Hamdi to The Jakarta Post on Tuesday.

For Adaro, Indika and Bukit Asam, downstreaming is also a means of diversifying its coal business as the global market slowly moves away from coal-fired power plants, the biggest market for the dry fuel.

Adaro commissioner Arini Saraswaty Subianto, who Forbes listed as one of Indonesia’s richest women last year, said in the joint statement that the downstreaming project “opened the opportunity to diversify and develop Adaro’s business”.

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