Indonesia’s Increased Gasoline Demand Casts Shadow Over its Energy Planners
There is a shift-taking place in global gasoline markets. No it’s not the often-dreaded bad news of increased gasoline usage that plagued the US for decades (in fact the country is expected to see declining gasoline consumption into 2014) nor is it even increased automobile ownership and gasoline demand in the world’s second largest economy and top net oil importer, China. It comes from a country that some would not have even considered, Southeast Asia’s largest economy, Indonesia.
In a report released September 19, energy consultancy Wood Mackenzie said that Indonesia will increasingly influence global gasoline trade flows and prices by 2018. This is because Indonesia’s gasoline deficit and hence imports will exceed combined markets in both the US and Mexico. Collectively, the US and Mexico will see deficits fall from 560,000 barrels per day (bpd) to about 60,000 bpd during the same timeframe, moving to surplus in the upcoming years.
From 2012 to 2018, Indonesia’s gasoline deficit will grow from 340,000 bpd to around 420,000 bpd, the report states. “Almost all Indonesia’s gasoline deficit is now met from volumes within Asia Pacific, with the majority supplied from Singapore. By 2018, Asia Pacific will have moved from a 2012 surplus of 55,000 bpd of gasoline to a deficit of 118,000 bpd, driven most by Indonesia,” Wood Mackenzie states.
While this is a cause of concern for Indonesia, it offers an opportunity for US refiners who are receiving ample feedstock supplies of domestic light sweet shale oil amid the country’s shale boom, especially US Gulf Coast refiners.
In fact, earlier this week, Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch said that the bottom line is US refiners are pushing product everywhere. “They can. They have a lot to sell,” he added.
Unlike US crude oil exports, which are mostly prohibited, refined products do not have these limitations. The US Energy Information Administration (EIA) said that American refiners exported a record 3.8 million bpd of refined products across the world in July, including even the Middle East and Venezuela. US Gulf Coast refiners are already enjoying healthy profits exporting gasoline and diesel globally and Indonesia’s growing gasoline demand should fit nicely in their plans.
The Wood Mackenzie report added that Indonesia’s strong gasoline demand from now to 2025 is driven by income growth, increased car ownership and government subsidies.
Asia Pacific Energy Consulting (APEC) President Al Troner, who spent nearly 30 years working in and with Indonesia’s energy sector, agrees. On a trip this week in the region, he told Energy Tribune that Indonesia is a hard country to predict but the main problem of increased gasoline demand is from simple retail subsidies, which is complicated because of the election campaign there.
“Like China, this used to be a diesel market, not gasoline,” he said, “but now gasoline outstripped ADO [diesel] around 2007 or 2008. So, import substitution is always the big worry for Jakarta.”
“In Indonesia the problem is exacerbated by the fact that the country is an archipelago and this creates enormous energy infrastructure obstacles,” he said. The EIA’s latest brief on Indonesia says that it has refining capacity of just over 1 million bpd and eight refineries, with the majority located on Java and Sumatra Islands.
However, the EIA also stated that the country’s refinery output goes primarily to the domestic market and meets only about 70% of domestic consumption. In 2011, state-owned oil and gas company PT Pertamina could only meet 54% of domestic gasoline demand.
In an effort to remedy the problem PT Pertamina announced several new refinery upgrade and expansion projects, but thus far the projects have been delayed due to low refinery margins and regulatory hurdles. Also attracting foreign direct investment (FDI) for these and potential new projects is a constant problem.
The International Monetary Fund (IMF) says that infrastructure investment in Indonesia is around just 3% of GDP, below most of Indonesia’s neighbors. Indonesia’s energy sector doesn’t exactly inspire confidence for would-be investors due to a complex, often confusing regulatory environment and inadequate infrastructure, among other reasons.
Troner added that Indonesia has been unable to build a new refinery for years and that the last one was built back in 1992.
Juxtaposing China and Indonesia, he said that China is a different story since, unlike Indonesia, it is a continental country [geographically] and has expanded refining capacity and now over-capacity so can meet the light end and also the cost of producing too much gasoil.
“China is also trying to restrict car ownership and use in urban centers and substitute other fuels for gas,” Troner said. “Also, Indonesia is a democracy but still unstable, while China is mostly an autocracy but stable.”
He added that in Indonesia provincial governments have enormous power so there are inconsistencies but China can implement policy faster and more thoroughly.
This is hard news for Indonesia. The former OPEC member has been plagued by falling oil and gas production from its conventional oil and gas fields and is reorienting energy production away from exports to serve its growing domestic consumption. In 2009 Indonesia suspended its OPEC membership to focus on meeting domestic energy demands.
The combination of growing domestic gas consumption, maturing of the country’s oil fields, and limited investment into reserve replacement caused Indonesia to become a net importer of both crude oil and refined products by 2004.
Yet, Indonesia’s economy is still robust. The IMF said that the country has sustained relatively strong economic performance throughout the global recession, with an average GDP growth of just under 6% for the past five years. However, questions remain. Can the country (with growing energy demand and corresponding increased energy imports, inadequate infrastructure, complicated energy regulatory policy and lack of much needed FDI) maintain this growth rate? It’s a question that is sure to cast a shadow over planners in Jakarta and a problem that will surely be a drag on its economy in the near future and also the long term.
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