Bill Guerin, Jakarta – Indonesia, the fourth-most populous country in the world, has been a net oil importer since 2004. After years of exploitation, crude oil output has steadily declined to current production levels of around 1 million barrels per day (bpd) and the country is currently unable to meet its OPEC (Organization of Petroleum Exporting Countries) output quota of 1.425 million bpd.
Oil and gas brought in US$11.8 billion in 2004, accounting for 26% of total export earnings. This was up 15% on 2003 figures mainly because of soaring global oil prices. On the other hand, imports of oil and gas have grown substantially. Indonesia imports some 400,000 bpd of fuel to meet domestic demand. This sustained boom in oil consumption coupled with a lack of new exploration and dwindling reserves has left the government with little option but to intensify exploration and press ahead with viable alternative energy policies designed to encourage switching to gas and coal.
While domestic demand for oil is increasing by around 7% every year, more than three quarters of the country's oil production is pumped from depleting resources that are decades old. The country's proven reserves are around 5 billion barrels. If annual production continues at around a million bpd, annual output is just over 350 million barrels, meaning the reserves have a lifespan of little more than 15 years. Problems besetting the oil sector include regulatory hurdles still to be addressed by the new administration, the decline in output due mainly to the natural fall off of the aging oilfields, and a lack of new investment in exploration. The Indonesian Petroleum Association says spending on new oil exploration last year amounted to a paltry $500 million at best, the lowest since 1981. Contradictory regulations have hampered new exploration in the oil and gas sector.
Incentives are being offered to multinationals such as Caltex, Medco, China National Offshore Oil Corp (CNOOC) and Unocal – who own more than half the 50 aging oilfields nationwide, mostly in onshore areas, that produce between 5,000 and 7,000 barrels a day at best. Incentives have been granted to boost production in marginal oilfields and in these older fields. Minister of Energy and Mineral Resources Purnomo Yusgiantoro says such measures could help increase oil production by as much as 50,000 bpd and has pledged to boost oil output by a total of 300,000 bpd by 2008-2009.
The Cepu dispute
The resolution of a dispute over profit sharing and development of the country's biggest known untapped oil deposits, the Cepu field in Java, is reported to be imminent. The field holds an estimated 2 billion barrels of oil and 11 trillion cubic feet of gas, and could boost the country's current oil output by as much as 18%.
ExxonMobil Oil Indonesia has been at odds with state-owned oil and gas utility Pertamina over its rights to further develop the block. New oilfields require a production-sharing contract (PSC). The Ministry of Mines and Energy is to eventually take over Pertamina's function of awarding and supervising PSCs with foreign oil companies but in the case of the Cepu field, Pertamina has been calling the shots and demanding a bigger cut of the action in return for renewal of the necessary project license.
The two have been unable to reach an agreement, with Pertamina demanding half the field's output and ExxonMobil demanding that Pertamina cover half the field's production costs. In August 1990, Pertamina granted a 20-year concession to operate the Cepu oil block field to Humpuss Patragas (HPG), owned by Tommy Suharto, son of former president Suharto, in cooperation with Australian Ampolex, which owned a 49% stake in the field.
The contract, known as a Technical Assistance Contract (TAC), contained a clause forbidding it to be transferred to a foreign party. The deal was that HPG would get 35% of its production costs rebated after production. Pertamina and the contractor, HPG, would split the revenue from any excess oil produced over the agreed limits in the contract on a 65:35 basis.
Humpuss Patragas ran into severe debt and cash problems as the 1997-98 financial crisis took its toll, and was forced to sell its 51% holding in the Cepu block to restructure its debts with the Indonesian Bank Restructuring Agency (IBRA). ExxonMobil Oil Indonesia acquired a 100% stake in the Cepu oil block through its subsidiary, Mobil Cepu Ltd, by buying the stakes of both Humpuss and Ampolex. Production was planned to begin in 2003 and the contract scheduled to finish in 2010, only seven years later.
This contract gave ExxonMobil the right to 20% of any oil produced from Cepu. Exxon sought a 20-year extension of the right from the Megawati Sukarnoputri administration in 2003 but this was refused. Megawati's government last August changed the Pertamina board of directors. The new team promptly withdrew an offer by their predecessors for Exxon to give up its rights to two oilfields close to Cepu and hand over $85 million in exchange for the Cepu block extension. Pertamina's chief commissioner, Martiono Hadianto, was quoted as saying recently that several terms still needed to be negotiated, including the production revenue split, before a "final, win-win solution" is reached.
Pertamina: Pulling a rabbit out of the hat
There is an even more immediate problem facing the government – that of securing the domestic fuel supply. The November 2001 Oil and Gas Law decreed that Pertamina's monopoly on upstream oil development (which required it to be included in all PSCs) would be phased out by the end of 2003. Pertamina's regulatory role was spun off to a new body, the Oil and Gas Upstream Regulatory Agency (BP Migas). Pertamina was to maintain its retail and distribution monopoly for petroleum products until July 2004. The government is still promising to open the sector to full competition although progress has been very slow to date. Almost four years after the law was passed, several regulations have still not been finalized. Pertamina is still, however, responsible for fuel distribution, on behalf of the government, until the end of this year, when it will have to compete with other companies. The 2005 state budget, which the Megawati administration drafted on an oil price assumption of $24 per barrel, set aside only Rp19 trillion (US$2 billion) in fuel subsidy funds for the whole year. But oil prices averaged about $50 a barrel from January to April.
The new government raised fuel prices by an average of 29% in March and at the same time proposed an oil price assumption of $35 per barrel in a budget revision that slashed the fuel subsidy allocation from Rp60.1 trillion to Rp39.7 trillion. The House of Representatives is deliberating the revised 2005 state budget. Coordinating Minister for the Economy Aburizal Bakrie has already ruled out the possibility of further fuel price hikes this year. The budget debate may take several weeks, but in the interim, Pertamina will only get around Rp3.3 trillion – a third of its monthly oil import needs – from government emergency reserve funds. This could leave Pertamina in a precarious situation and threaten the nation's fuel supplies. Energy and Mineral Resources Minister Yusgiantoro concedes that Pertamina has about Rp10 trillion in cash, roughly enough to cover fuel imports for a month. The company earns around Rp5.5 trillion in revenues from fuel sales each month but needs about $1 billion a month to pay for the imported fuel, even on the revised state budget assumption of oil prices at $36 per barrel.
Pertamina announced last month that it was in difficulties over payments for oil imports as certain banks had refused to issue letters of credit (LCs) needed to guarantee payments, because Pertamina still has outstanding debts to other banks to the tune of Rp9 trillion. Saudi Aramco and Kuwait Petroleum Corp have both reportedly refused to unload cargos of fuel without LCs.
A presidential decree stipulated that Pertamina would be able to collect almost 95% of the fuel subsidy cash by sending a monthly verification letter from the Ministry of Finance. The Supreme Audit Agency (BPK) would pay the remainder after an audit. Yet Purnomo has confirmed that subsidies due from January to March had not been disbursed and there were also "several months from last year for which the audit has not yet been completed".
Place in OPEC
Indonesia is the only Southeast Asian member of OPEC and the organization's second-smallest producer. Analysts predict consumption will moderate over the next five years, as the use of alternative energy kicks in because of continuing higher fuel prices, but the country may be a net oil importer until at least 2008. Yet its status in OPEC is not under threat. Although the OPEC statute states that only countries that export more than they import are eligible for membership in the organization, there is no time limit defining how long the net importer status may prevail before the country is no longer eligible to be an OPEC member. In OPEC's history, only two countries have withdrawn – Ecuador and Gabon – and these for reasons not related to a deficiency in export levels. Minister Yusgiantoro says the only important point is that Indonesia was a net exporter when it became a member. "Once you're inside, you continue to be a member. OPEC has no problem with that," he said recently. A team tasked with reviewing the OPEC membership rolls has recommended the government reduce Indonesia's status from member to "observer", thus releasing it from the obligation to pay $1 million a year in fees.
Looking ahead
Exxon officials have indicated that the 1,670-square-kilometer Cepu concession could be operational by 2006, if agreement with Pertamina is reached now. The field could sustain up to 180,000 barrels of oil a day as well as bring in more than $1 billion in annual tax revenue. Exxon's Banyu Urip field, also in Java, is also expected to come onstream in 2006, and reach its peak production capacity of 100,000 bpd soon after.
Australia's Santos Ltd operates the Jeruk block in Sampang off the coast of East Java. Chairman Stephen Gerlach told shareholders last week that potentially the most significant result of the company's 2004 exploration success rate of 44% was the Jeruk oil discovery in Sampang off the coast of East Java. Yet, even with new fields coming onstream, total oil production is not likely to rise markedly due to the continuing decline of the mature fields that account for 70% of production. Most of these are located onshore in central and western regions. Around half are in Central Sumatra, home to the big Duri and Minas oilfields, and the country's largest oil producing region. Other substantial fields are in offshore northwestern Java, East Kalimantan, and the Natuna Sea, all easily accessible.
The focus of new exploration will need to be on frontier regions, particularly in eastern Indonesia. These regions are much more remote and the terrain more difficult to explore, so the cost of exploration is thus substantially higher. Substantial incentives, reflected in the split of the production-sharing contract, are needed to encourage serious investment by major players.
Given the time lag between investment and the eventual production of oil – it can take four to five years to commence operations – the need for diversification and conservation of energy sources is paramount. The country has oil, gas, coal, and hydropower and the government has been encouraging domestic power plant operators to use more gas. Demand for electrical power is expected to grow by approximately 10% per year for the next 10 years. The majority of power generation is fueled by oil, but efforts are under way to shift generation to lower-cost coal and gas-powered facilities. The potential for greater usage of geothermal energy and hydropower is also being investigated.
[Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 19 years as a journalist. He has been published by the BBC on East Timor and specializes in business/economic and political analysis in Indonesia.]