Hanan Nugroho, Jakarta – While domestic demand for oil is escalating uncontrollably (12 percent for gasoline and 15 percent for diesel fuel in 2007) and domestic oil production has been on a continuous slide for the last 13 years, it is sad to find that oil prices are skyrocketing and our energy infrastructure is deteriorating. What will happen next?
Oil refinery capacity in Indonesia has not expanded since Balongan EXOR (West Java) started operating in the mid 1990s. The total capacity is stuck at 1.055 million bpd, even decreasing since Pangkalan Brandan was shut down recently.
Except EXOR, all the refineries are old, most of them having started operation before the 1980s (Sei Pakning in 1957, Plaju in 1930 by Shell). Four out of nine refineries (about one-third of national capacity) are located in Sumatra, far from the middle and eastern islanders who also need oil.
Geographical constraints, old technology and capacity does not fit the changing domestic demand, resulting in the increasing cost of importing fuels.
Infrastructure for distributing oil across the archipelago is also decaying. There has been no significant development except in gasoline stations, which currently number about 3,000.
A middle-high pressure pipeline for oil products is still very limited and has not been expanded for the last three decades. The country's 170 oil storage sites are not sufficient, but the progress to build new sites has been very slow.
Nevertheless, infrastructure for distributing oil in western parts of Java is sufficient; oil fuel in this region is transported efficiently through a transmission pipeline from Cilacap refinery (Central Java) to demand centers close to Bandung/Jakarta.
But for the rest of the country, even in other parts of Java – the island consuming three-fourths of the country's fuel – the oil distribution system is far from efficient. There is no refinery or oil distribution pipeline operating in East Java. A distribution system relying on trucks, train, ships, barges and small aircraft in the country's remote areas results in very expensive transportation costs.
Indonesia's energy consumption will continue to grow in line with the growth of the country's economy, urban population and changes in lifestyle that consume more energy. This trend of energy consumption will continue to take place despite rising oil prices.
Energy demand does not have to be fulfilled by oil alone, as it can be replaced by other fuels such as natural gas for electricity generation, industry, households and transportation. Coal may substitute for oil, particularly in electricity generation and the industrial sector, while coal briquette can replace kerosene for cooking. Natural gas is cheaper, cleaner and more efficient than oil and Indonesia has larger reserves of natural gas than of oil.
Unfortunately, our capacity to switch from oil to natural gas is very small, constrained largely by the availability of infrastructure.
Only the South Sumatra-West Java natural gas transmission pipeline is ready to operate, brining natural gas from Jambi (southern Sumatra) to Banten's industrial estates and further to power plants near Jakarta.
Large parts of our gas are still exported by pipeline to Singapore and Malaysia, and to Japan, South Korea and Taiwan as LNG. Combined cycle power plants in Java, constructed under a crash program during the 1990s, are still facing difficulties in getting natural gas delivered to them, forcing the plants to burn expensive oil.
The development of city gas distribution systems faltered in the 1990s, leaving only about 75,000 households receiving gas deliveries. Below 1 percent of all households in Indonesia rely on natural gas, far lower than in the United States, major European countries or even Japan and Korea, whose gas consumption depends on LNG imports from Indonesia.
Recently, there was an attempt to move people over from using kerosene to LPG. LPG may substitute for kerosene for cooking, but the benefits of this switch will not go far since our LPG production capacity (coming from oil, small LPG and LNG refineries) is limited and the price of LPG is expensive (compared to that of natural gas). LPG technology is not intended to provide energy for a large number of households; piped city gas normally does this job.
Coal provision faces similar obstacles. Compared to for export – Indonesia became the world's largest exporter of coal three years ago – the infrastructure needed to deliver coal to the domestic market is very limited.
This could derail prospects for the government's ambition plan to build coal-fired plants with a combined capacity of 10,000 MW.
Following the New Order regime, the implementation of a 2001 law on oil and gas and other laws on regional autonomy and business competition, as well as the annulment of the 2002 law on the electricity industry by the Constitutional Court, have done nothing to improve energy security. The implementation the 2001 law on oil and gas has not resulted in the development of any new downstream infrastructure.
The master plan for the national gas transmission and distribution network was officially released by the government in 2005, but so far there has been no new transmission pipelines or distribution areas built in accordance with the master plan.
A national master plan for oil downstream infrastructure (refineries, storage sites, transmission and distribution) has not been released.
It is not clear now who should be responsible for the development of the country's energy infrastructure. The government, which for too long relied on state companies (Pertamina, PGN, PLN) for the provision of energy infrastructure, seems ill prepared to perform the task as an effective regulator.
State-owned oil and gas company Pertamina does not prioritize development of downstream oil and gas infrastructure; rather, it prefers to run its business by receiving government subsidies for the procurement of fuels.
There are good concepts on infrastructure development in the 2001 law on oil and gas, such as an "interconnected network, third-party access, efficient toll fees, preventing small customers and households, etc." But those will not work as the country's infrastructure is still poor and plans to increase the capacity have always been delayed.
The deteriorating energy infrastructure might jeopardize Indonesia's energy security and economy. The state budget might collapse in the next three to five years if the current trend of providing energy subsidies continues and if the construction of new energy infrastructure is not seriously carried out.
[The writer is a lecturer in energy and natural gas economics for the Graduate Program in Natural Gas Technology and Management, University of Indonesia. He can be reached at hanan_nugroho@yahoo.com.]
Power rationing until 2009
Jakarta Post Editorial - July 11, 2008
The electricity sector today faces at least one certainty. Acute power shortages that require power rationing through rotating electricity blackouts or changes in industrial operating shifts will continue until late 2009.
Businesses are now calculating the losses they will suffer during the rotating blackouts. But most industrial companies seemed resigned to the tragic fact that the Indonesian government is virtually powerless to cope with the power supply crisis until some of the new power plants currently under construction, with combined capacity of 10,000 megawatts (MW), come on line in early 2010.
Hence, instead of asking for an assured power supply, let alone for additional electricity, they simply beg the state electricity monopoly PLN to give them a guaranteed schedule for the impending power blackouts.
Businesses have suffered big losses due to the increased frequency of sudden, unannounced power blackouts over the past two months. Unexpected power outages cause losses not only due to the stoppage of operations or production but also the severe damages inflicted on production processes and equipment. For example, in many industrial plants, the raw materials might be wasted if the production process abruptly stops due to power outages.
The Jakarta Japan Club complained early this week that 42 of its members had suffered total losses of Rp 42 billion (US$4.5 million) in May and June alone due to production interruptions caused by power blackouts. The Indonesian Chamber of Commerce and Industry (Kadin) and the Japan Club therefore asked PLN to provide a definite schedule for the planned blackout periods.
Such advance notifications as those PLN has issued in Jakarta and its surrounding towns for rolling power blackouts during the next two weeks will enable industrial firms to at least adjust their operations schedules to minimize losses.
Industries have asked that advance notification be clearly stipulated in the joint ministerial decree on power rationing which will take effect in October.
The power supply crisis is the culmination of ignorance, misguided energy policy and extreme lack of political leadership in pushing forward the development of badly needed basic infrastructure.
Analysts and industrialists had warned as early as 2002 of a looming power supply disruption in Java and Bali in view of the anticipated steep increase in demand when the economy began a robust recovery, while the prospects of new investment in power generation seemed quite bleak, due to financing and regulatory problems.
Legal foundations for private participation in the electricity sector were severely weakened in 2004 when the Constitutional Court annulled the new electricity law.
So until some of the power plants currently under construction start operations, forget all the big talk about bold reform measures to improve the investment climate. Without a reliable, adequate supply of power, not a single investor will come to this country.
Forget all the optimistic projections of more than 6.5 percent economic growth this year and next year. Lack of power or frequent blackouts could kill all the bullish sentiment.
The power supply crisis should therefore serve as a strong warning to the government that the current crash program to add 10,000 MW to the PLN grid only offers a medium-term solution.
This power crisis will continue to loom over the country as long as the government fails to improve the electricity rate structure. The current universal rate structure imposed on PLN cannot provide it with adequate revenues for achieving long-term financial sustainability.
Just look at how the government was forced to put up financial guarantees for investors and contractors, without which they would have been unwilling to take part in the implementation of the crash program.
The universal rate structure the government imposed on PLN, irrespective of the varying costs associated with providing electricity in different regions, places the company in a financial quandary as it cannot cover its supply costs.
The distorted rate structure also sends the wrong signal to private investors and creditors whose participation is badly needed in power supply. Still more damaging, other provinces outside Java are at a great disadvantage for attracting new investment in power generation because the costs of electricity supply in the outer islands are much higher than in Java.