Having been a mainstay of the economy for many decades since the first discovery of oil in 1885, Indonesia’s oil and gas sector is perceived as in a state of decline. Having become a net importer of oil in 2004 and relinquishing OPEC membership in 2008, oil production figures have continued to decrease from their peak at 84.9 MET in 1977. Since the Asian Crisis of 1998, investment in exploration of new fields has dwindled and the sector shrank by 3.61% in 2010 according to the Central Statistics Agency. The country still has significant reserves of both oil and gas, but substantial investment is required to access them and fund the necessary exploratory infrastructure. Changes in governmental regulations are also required to incentivise investors and guarantee cost recovery for exploring new blocks. As global demand for both oil and gas picks up with global recovery; renewed focus has been placed on production and exploration. The state oil and gas company Pertamina is targeting 1 million bpd by 2015 to once again make the country a net oil exporter; but this will be no easy task. The energy sector faces the challenge of meeting its export commitments, satisfying domestic demand and effectively leveraging its resources for economic growth.
Source: Ministry of Finance (MOF)
BP Migas is the upstream regulator in the oil and gas industry, while distribution is carried out under state owned Perusahaan Gas Negara (PGN). Pertamina accounts for about 15 percent of total natural gas production, CNOOC for 37% as per 2009 alongside local and international energy companies such as Total, BP, ConocoPhillips, and ExxonMobil who dominate the upstream gas sector. The main production sites are in Arun Aceh, the site of the first LNG exports in 1978, Bontang in East Kalimantan and Tangguh in Papua. The main domestic purchaser of gas is PLN for gas fuelled power stations with sales and distribution heavily dominated by the state owned institutions of Pertamina and Perusahaan Gas Negara (PGN). While there are hundreds of companies operating within the sector, exploration and production is concentrated among the key players aforementioned.
Indonesia has the third largest reserves of natural gas in the Asia Pacific region at 108.4 trillion cubic feet of proven reserves at the end of 2010; three times that of its oil reserves. From 2006, the government has aimed to reorient domestic energy consumption towards gas in light of high oil prices and the environmental benefits considering the 50% reduction in carbon emissions that gas offers compared to oil and coal. This preference for gas has been espoused at the international level as Asian countries secure gas exports for their energy needs. In 2008, 52.2% of natural gas was exported to the traditional markets of Japan, South Korea and Taiwan. The share of supply taken up by the domestic market has been doubled since 2004, to 50.3% in 2010. While gas production has been increasing for the past decade and was up by 14% in 2010 from 2009, domestic demand is reducing the country’s capacity for LNG exports. Hanung Budy, President Director of Badak LNG, a state owned company, believes that the potential of Indonesia eventually becoming an LNG importer is ‘unavoidable’ in the next 10 to 15 years to fulfil domestic demand. Mr Budy told GBG that he envisions current and future LNG plans to become receiving and re-gasification facilities.
Indonesia began exporting LNG from the Badak gas field in 1977 as a pioneer in the sector and positioned itself as the world’s leading LNG exporter until 2005. Badak LNG operates the Bontang gas field in Kalimantan that made up the backbone of the country’s LNG sector, producing 22 million tons of LNG/year and 1.2 million tons of LPG every year for the 2001-2005 period. According to Mr Budy, the company is preparing for the decline in capacity of the over 30 years old gas field. ‘We are now operating at 65% of capacity due to the lack of feed gas, so this year we only produced around 15.5 [million tons of LNG]. The strategy is that PT Badak will become one of the first producers in Coal Bed Methane with Vico... we will also use our facilities for storage as a receiving terminal. We are already selling our expertise to companies abroad by training operators and providing technical expertise’.
The country now faces increased competition from countries such as Qatar and Malaysia. New projects that are underway such as Tangguh in Papua under BP, that came on-stream in 2009 and the Cepu block in Central Java by Exxon Mobil and Pertamina are designed to give a boost to the country’s role as an LNG exporter. With adequate infrastructure development, Indonesia is in the ideal position to further serve the Chinese market as well as the west coast of the USA. Outlook on gas production is therefore positive with new sources to allow the country to keep up its exports and take advantage of its advantageous geographical position for energy exports. Pricing of LNG export contracts that are undertaken by BP Migas require revision for the future to ensure that such exports pay back to the country accordingly. A 2004 contract signed with China setting the purchase price at $2.4 USD mmbtu, which was then subsequently raised to $3.8 USD mmbtu for 25 years is an example of the employment of weak pricing formulae. The MEMR stated that it will be stepping in to renegotiate agreed contracts as of June 2011 to bring prices in line with the market prices of $6 USD mmbtu and linked with that of oil prices.
The future for Indonesia’s oil industry is an uncertain one given the lack of exploration being undertaken in the sector and with 4.2 billion barrels of proven reserves with only 23 years left at current production figures. Indonesia ranks 20th place in the world as an oil producer, providing 1.2% of total global production. The two largest oil fields by production are Minas and Duri on the east coast of Sumatra that are both maturing with over 80% of reserves realised for both. This has yielded a pessimistic outlook on the sector as production figures steadily declined by 33% from 2000 to 2009. The suspension of OPEC membership from 2008 and the country’s position as a net importer of oil has been heralded as a ‘sunset’ of the industry with focus on other sources of energy being the governmental priority.
The main players in the country’s oil sector are Chevron, Pertamina, Total, Conoco Phillips and Medco. Chevron is the leading producer of oil accounting for 47% of total production in 2009 after acquiring Unocal in 2005 to cement its dominant position. Pertamina accounts for 16%, but is looking to further consolidate its position within the oil sector and take a more aggressive stance to be a standalone company rather than rely on joint ventures. The company is bolstering its role within the country; Vice President for Corporate Communications at Pertamina, Mochamed Harun, told GBG that ‘Pertamina is focused on employing enhanced oil recovery activities to increase efficiency and production from existing fields and reactivating idle fields.’ Ambitious targets for production increases have been set at 1 million bpd by 2015, up from 2011 production figures at 443,790 bpd. Mr Harun revealed that the company is currently raising $2.5 billion USD in investment with a May 2011 global bond issuing for $1 billion USD. Of the total, 75% of it is earmarked for exploration and upstream activities.
Domestic demand for oil is rising and thus imports are increasing, with the gap between imports and exports widening. Indonesia’s main sources of imports are from Asian countries and the Middle East including Saudi Arabia. In 2010 MEMR data shows that 277,000 bpd of crude oil were imported as well as 407,000 bpd of fuel oil. The spike in oil prices in 2006 accelerated the shift from oil to gas fired power stations, thus reducing reliance on oil for electricity generating purposes only to be replaced by increased demand from vehicles and other transportation means. Figures from the beginning of 2011 show a 22% jump in imports from December 2010, mainly for diesel and fuel oil which doubled to 5.2 million barrels and tripled to 510,000 million barrels respectively.
Refined product capacity is also failing to keep up with demand from industry as production remained stagnant at 1127 thousand barrels per day in 2001 and 1158 in 2010 which met only 70% of domestic demand in 2009. Pertamina, which accounts for almost half of all oil refining capacity, is aiming to address this reliance on imports by 2015 through the expansion of existing facilities and construction of 8 new refineries that will double current output figures. While demand will still outstrip supply of oil, the development of the country’s renewable energy and other resources as part of the plans laid out in the Energy Law of 2007 will ideally curb further import needs. Further refinery capacity is still required and is an area that has attracted foreign investors such as the Kuwait Petroleum Corporation that announced in April 2011 plans to construct a refinery at Balongan, West Java. In June 2011, the Ministry of Energy and Mineral Resources and the Ministry of Finance authorised a study to be carried out on new tax incentives for investors that would thus amend Government Regulation No. 62/2008.
Indonesia Oil Consumption and Production
Source: BP World Energy Statistics 2011
Indonesia heavily subsidises fuel consumption which is mainly made up of kerosene accounting for nearly half of the total and through a subsidised gasoline called ‘Premium’ produced by Pertamina. Subsidies are becoming an increasingly untenable situation given the rise in car sales that increased by 57% in 2010 from 2009. The maintaining of a low fuel price encourages unsustainable and wasteful use of the subsidised fuel as well as a lack of controlling mechanism to ensure that only the low income segment use it. The abuse of the subsidised system has been further exacerbated by soaring oil prices due to volatility in the Middle East that has given rise to smuggling of fuel. In Q1 of 2011, consumption of subsidised fuel reached 9.6 million kilolitres (6.85% more than the same time last year) out of the allocated 38.6 million kilolitres for the year. Should consumption rise above the allocated amount, it may force the government to revise up the state contribution to fuel subsidies which currently stands at 18.1 trillion RP. As of the end of April 2011, subsidised fuel was only to be available for motorcycles and public transport in Jakarta with the plan to roll it out to other parts of the country and phase out subsidies completely by 2014-15.These plans were thwarted by the high oil price, growing inflation and fears of protest by the public although it is slated to go ahead in Jakarta from July 2011. The inevitable removal of fuel subsidies will renew the need for better infrastructure to distribute Pertamina’s ‘Pertamax’ fuel that will require an estimated $400 million USD for constructing new gas stations to 2014.
Global Business Guide Indonesia - 2012
Contribution to GDP: 3.44% (2016)
Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).
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