Balancing Act: One-Time Energy Heavyweight Indonesia Struggles Setting Oil & Gas Agenda

Balancing Act: One-Time Energy Heavyweight Indonesia Struggles Setting Oil & Gas Agenda

By Tim Daiss

Like an aging boxer that can still step into the ring but not deliver a knockout punch, Indonesia’s oil glory days are far behind her. The Southeast Asian heavyweight, a one time OPEC member, has multi-faceted energy problems – a complicated mix of domestic politics, lack of organization and even resource mismanagement which can baffle a Western mind trying to make sense of it all.

For starters, the country’s oil fields are maturing and have failed to keep pace with domestic consumption. Also, the industry has had limited investment in reserve replacement.  Consequently, Indonesia has been a net-importer of both crude and refined products since 2004.

Natural gas is also problematic for Indonesia. Though Indonesia continues to be a major exporter of pipeline gas and LNG, with gas production increasing over a third since 2005 according to a January 9 US Energy Information Agency Report (EIA) — domestic consumption has nearly doubled at the same time. This imbalance has caused gas shortages, and forced the country (the world’s third largest LNG exporter) to ironically buy spot LNG cargoes to meet export obligations.

In efforts to remedy the problem, the government has scrambled for answers, reorienting production toward domestic supply. On January 8, the Jakarta Post reported that Indonesia will focus on gas potential with new projects this year. Three gas projects will be prioritized.

First, Total E&P Indonesie will enhance the development of the South Mahakam field in East Kalimantan, which is expected to generate 202 million standard cubic feet of gas per day (mmscfd). Gas will be delivered to the nearby Bontang LNG plant.

Pearl Oil Development is projected to pump 50 mmscfd of gas from Ruby Field in Sebuku Island in East Kalimantuni, with supplies going to a state-owned fertilizer plant.

And, Conoco-Philips is projected to contribute 40 mmscfd from the Sumpal field in South Sumatra. Gas will be supplied to Gas Supply Pte Ltd Singapore as part of the firm’s supply contract.

Meanwhile, Indonesia’s interim oil and gas regulator SKMigas expects gas supply to the domestic market to grow by 9 percent this year.

However increased domestic demand isn’t the only problem for Indonesia’s energy sector. Another is attracting investment. According to the International Monetary Fund (IMF) infrastructure investment was a paltry 3 percent of GDP, below most of Indonesia’s neighbors. Indonesia’s energy sector doesn’t exactly inspire confidence for would-be investors due to inadequate infrastructure and a complex regulatory environment.

Indonesia’s long-time upstream oil and gas regulator BPMigas was dissolved in November by the Constitutional Court following a judicial review request of the 2001 Oil and Gas Law filed by several organizations.

“Under BPMigas, the state was not able to take full advantage of the country’s natural resources for the people’s welfare as stipulated by the Constitution since the bureau did not run the resources directly but rather handed them over to state-owned or private companies,” the Court said in its verdict.

Analysts have differing opinions on the verdict. Some agree however with the Court, claiming that BPMigas wasn’t protecting resources in Indonesia, and questioned how the agency could be both a regulator and a competitor.

Critics within the country claim the move was purely political – something all too common in Indonesia.

“BPMigas was replaced by a successor agency but the country is still without a regulatory framework for gas,” Al Troner, President of Asia Pacific Energy Consulting (APEC) told Energy Tribune.

Troner, who has been following Indonesian oil and gas sectors for 30 years, cites infrastructure problems as well. He said that there is an enormous amount of gas still out there but the country doesn’t have enough gas projects. “After the Aruns closure by the end-year of the year, there will only be two LNG projects operating until Sulawesi comes in,” he said.

Balancing exports with Domestic Market Obligations (DMO) is another problem. Domestic requirements were set up already but not the mechanism, according to Troner.

“If you want to have a domestic market, the first call is to have balance between domestic market and export role. Either bring domestic prices up (politically unacceptable) or allocate. For example, half for export and half for the domestic market, using a formula. But this hasn’t been done,” Troner said.

Gas price subsidies are also a major obstacle for Indonesia. Like several other Asian countries, Indonesia subsidizes the price that end-users have to pay for gas.

While this may be good for buyers, it can be disastrous when trying to bring in much needed investment. The reason is simple. With artificially low prices, foreign oil companies simply can’t make enough of a profit to search for and then pay large sums to develop gas reserves.

Before it was dissolved, BPMigas reported that fuel subsidies distort the efficient allocation of energy and resources and hinder investment in energy infrastructure, costing the Indonesian government 100 trillion rupiah (IDR) ($10 billion) in 2005, more than 10 percent of the government’s tax revenues.

Troner said that Indonesia toyed with abolishing price subsidies but that nobody followed it through to logical conclusions. “Price subsidies in Indonesia are like social security in the US,” he said. “They don’t ask if it’s economically rational. What subsidies do is subsidize unnatural growth of usable oil products my making them artificially cheaper.”

Another more basic problem facing Indonesia is whether to focus more on oil or gas production.

Komaidi Notonegoro deputy director of the Jakarta-based Reforminer Institute said that given Indonesia’s declining oil output, the government should aggressively focus on gas development, which is expected to supersede oil in the near future. Many in the Indonesian government echo his views.

Troner said that at least for now Indonesia is “more gas than oil, but the country is an archipelago and it costs a lot of money to stitch all those islands together.” By this statement Troner is referring to gas connectivity between suppliers and end-users.

“Will Indonesia become a great oil exporter again? Probably not,” Troner said. “Do they have ability to roll back oil dependency? Yes.”

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