Indonesia’s balancing act
Increasing production in both oil and gas is the government’s goal, but how?

The Asia-Pacific region – including Japan, China, Indonesia and India, is expected to emerge as the world’s largest economic centre over the next century, producing over 50 per cent of global GDP. If you add this to the United States’ contribution, you get a combined GDP of 80 per cent of the world’s total.

Indonesia is aware of the importance that its geographic position and its energy sector will play in this future global scenario. Now on the road to recovery from the devastating Asian financial crisis of 1997, and shifting from authoritarian rule to democracy, the country, and its political and business leaders, feel the pressure of time. They understand that Indonesia must grow quickly, must develop infrastructure and must play catch-up in terms of economic and social development if it is to assume a significant position in the growing force of the Asia-Pacific.

This is where the importance of the country’s oil and gas sector lies. Along with mining, it is the means through which Indonesia can propel rapid development. Consequently, being minister of energy in Indonesia these days is a big job. How do you get enough production to sustain growth in a country with a rapidly expanding population, and the corresponding growth in domestic energy needs, while securing financing for new exploration and balancing the need for export-generated foreign revenues?

DR PROFESSOR SUBROTO Chairman of the Indonesian Mines & Energy Society (BIMASENA)

CHRIS PRATTINI MD of Chevron Indo Asia and Chairman of the Indonesian Petroleum Association

ANTON TJAHJONO Chairman of the Indonesian Gas Association

Surprising, then, that Indonesia’s minister of energy and mineral resources comes across as a thoughtful and unruffled man. Since 2000, he has been steering the country through the debris of the financial crisis, and more recently, declining oil production, a historic reduction in oil subsidies, the subsequent national clamour this caused as the public responded to rising inflation, and now, the explosion in domestic energy needs that along with the drop in production have seen Indonesia become a net oil importer for the first time in its history.

Minister Yusgiantoro is fully aware that if Indonesia can develop its mines and energy requirements successfully, it will provide the foundation of the industrialisation process that will, in turn, allow it to emerge as one of the major economies in the world. He also knows that Indonesia’s energy sector is one of the most important on the planet. In 2006, revenues were up 88.4 per cent over 2004. Today, the sector represents nearly a quarter of government revenues – $23 billion last year alone.

But the question remains, how to increase production? Indonesia currently pumps just over a million barrels per day of crude, and the government has set a new target of 1.3 million barrels by 2009, aiming in total for a 30 per cent increase in oil and gas production.

Mr Yusgiantoro responds, “By spreading the load between Chevron, which currently represents 45 per cent of oil production in Indonesia, Exxon Mobil in Cepu, and Pertamina, we can compensate for the drop in production. Gas will also be an important contributor. All things being well, we should have a total increase of perhaps even 40 per cent by 2009-2010.”

Gas is indeed an important factor in the equation. In 2005, Indonesia was the world’s largest exporter of LNG, and the country has the largest reserves in Asia. Chris Prattini, managing director of Chevron IndoAsia and chairman of the Indonesian Petroleum Association believes that increased production will be much easier to attain in gas than in oil. Increased oil exploration is definitely underway, he says, pointing to the 27 new licenses awarded this year, but the problem is bringing new production on at a pace that will outstrip decline. “On the reverse side, you are seeing these type of developments already coming online in the gas sector, for example South Sumatra’s gas is coming into West Java. In my opinion, we’re going to see some very attractive developments in the gas sector soon.”

Indonesia must, however, build up its downstream capacity, while balancing domestic energy needs with export commitments. Anton Tjahjono, chairman of the Indonesian Gas Association, comments, “Historically Indonesia started developing gas by building LNG plants and exporting to neighbouring countries. That is how it originated, there was no reason whatsoever for the big consumers to utilise gas. Since the government has gradually lifted the subsidy, the price of gas has become more valuable for development but again there is a limit to the buying power of domestic consumers. It is also not a secret that the government needs foreign exchange revenue and that’s the reason why we are still exporting. Moreover, the locations of the gas sources are spread all over the place. To transport it from Papua to Java Island, you have to do it in LNG form, but we do not yet have LNG receiving terminals; to build one costs money. Who is going to do that?”

One of the proposed solutions to the quandary is cross-subsidy pricing. Investors must commit 25 per cent of gas production for domestic supply at a lower price, which they recover in higher priced exports.

Finally, there is investment in oil and gas, which totaled $14 billion last year. “Investment is what the industry requires and we are finally beginning to again see much higher absolute numbers than we’ve seen in previous years,” states Chris Prattini.

Dr Subroto, chairman for the Indonesian Mines & Energy Society (Bimasena), adds, “The energy and mining sectors are positioned as important pillars for economic development so we need to make investors here feel secure and help them understand what is actually going on in the country at the moment, which is Bimasena’s main goal.”