Saturday, June 11, 2011

Indonesia: No longer a net exporter of oil since 2004

Indonesia has the largest population in Southeast Asia and the fourth largest population in the world (behind China, India, and the United States). It is also the world's third-fastest growing economy. Although Indonesia has been a net importer of oil since 2004, it is the sixth largest net exporter of natural gas, and the second largest net exporter of coal. However, as a result of inadequate infrastructure and Indonesia's complex business environment, Indonesia has struggled to attract investment sufficient to meet its energy development goals.
Indonesia's total primary energy consumption grew by nearly 50 percent between 1999 and 2008. Oil continues to account for the most significant share of Indonesia's energy mix, at 44 percent in 2009. Coal consumption has tripled over the decade, accounting for 29 percent of total energy consumption in 2008, surpassing gas as the second most consumed fuel.

Indonesia is also a significant consumer of traditional biomass in its residential sector, particularly in the more remote areas that lack connection to Indonesia's energy transmission networks (power grids and pipelines, for example). The International Energy Agency estimates that combustible renewables and waste account for about a quarter of total primary energy supply.

How Indonesia became an oil importer?

Indonesia is currently a net importer of both crude oil and refined products. Indonesia's crude oil production has been declining since 1998, due to the maturation of the country's largest oil fields and failure to develop new, comparable resources. Indonesia was a member of the Organization of Petroleum Exporting Countries (OPEC) from 1962 to 2009. In 2004, the country became a net oil importer and in January 2009, suspended its OPEC membership.

Exploration and Production

According to Oil & Gas Journal, Indonesia had 3.9 billion barrels of proven oil reserves as of January 2011. In 2010, total oil supply averaged just over one million barrels per day (bbl/d). Of this total, about 943,000 bbl/d was crude oil and lease condensate production. Crude and condensate production has declined at an annual average rate of 4.1 percent between 2000 and 2010.

Indonesia's two largest producing oil fields are the Minas and Duri fields, located on the eastern coast of Sumatra. Chevron operates both fields with a 100 percent working interest under the Rokan Production Sharing Agreement. Producing since 1952 and 1955 respectively, production at both fields is in decline, even with the employment of enhanced oil recovery techniques at both fields to bolster production. Chevron uses steam injection enhanced oil recovery for 80 percent of the Duri field, one of the largest steamflood projects in the world.

The most significant recent discovery with the potential to counteract some of Indonesia's production decline is the Cepu Block of East and Central Java. Exxon Mobil is the operator of the Cepu PSC (45 percent interest), in a joint venture with PT Pertamina's E&P unit (45 percent working interest) and four local government companies (10 percent interest). Cepu is estimated to contain 600 million barrels of recoverable liquids, and to have a peak production of 165,000 bbl/d. Although discovered in 2001, the project has encountered several delays in the development process, and Exxon recently revised its goal for peak production from 2012 to 2014. Banyu Urip is currently the only producing field in the Cepu PSC, and as of January 2010, had reached a production level of about 18,000 bbl/d.

BPMigas and the Indonesian government have introduced policies aimed at increasing investment in the country's upstream sector - in particular via investment incentives and improving the flexibility of the PSC bidding process. However, the upstream investment environment is still considered to be risky, and 2009 and 2010 licensing rounds were disappointing. Recent events that caused particular concern were Parliament's attempts to mandate cost recovery caps for PSCs, as well as the government's cabotage rule - a shipping regulation requiring all marine vessels to carry the Indonesian flag. The government has since announced that cost recovery caps would be removed, and that implementation of the cabotage rule will except oil and gas vessels. However, Indonesia failed to meet its 2010 production goal of 965,000 bbl/d of crude and condensate production, and signed only 21 new oil and gas PSCs in 2010, relative to 34 in 2008.


Consumption of refined products grew at a fairly steady 4.7 percent average annual growth rate between 1995 and 2005, but declined by about two percent in both 2006 and 2007, largely as a result of the 126 percent increase in the price of subsidized fuel implemented in 2005. The 2005 price increases - and the removal of fuel subsidies for large industrial consumers - were part of President Yudhoyono's early attempts to gradually eliminate fuel subsidies. Consumption increased in both 2008 and 2009, exceeding 1.3 million bbl/d in 2009.

Fuel subsides will account for nearly ten billion dollars in 2010, or about ten percent of the government's tax revenues. In December of 2010 the Indonesian parliament approved a measure to remove fuel subsidies for all vehicles excluding motorcycles and public transportation vehicles. Cash transfers will be used to ease the impact on the economically disadvantaged. The policy was initially slated for April 2011 implementation in the greater Jakarta area, and nationwide by 2013. However, implementation was indefinitely delayed in March 2011 due to concerns over the effect on the rate of inflation.

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