Indonesia: revitalizing the hydrocarbon titan
Bolstered by an array of energy resources, Indonesia arose from the mire of the 1997 Asian Crisis with verve and buoyancy. Today, it is the largest economy in Southeast Asia, boasts a youthful population, and over the last three years has seen its GDP growth rates surpass those of the much lauded BRIC states.
Yet, underpinning the country’s remarkable growth story has been an economic engine that is only fit for a few laps of a long and fiercely competitive race.
With a ballooning current account deficit and sliding currency, the rupiah, a number of economic analysts have become increasingly concerned by Indonesia’s tendency to eschew sustainable growth paths, in favor of short-term economic gain.
Indeed, the ruthless exploitation of the country’s diverse mining resources and the timid approach to geothermal power are often lamented as cases of unfulfilled potential. Today, hampered by poor and shortsighted fiscal policies, Indonesia is in danger of blunting its own oil and gas industry.
Since Royal Dutch Shell struck oil in Sumatra more than a century ago, Indonesia has been an oil and gas producing powerhouse and a magnet for foreign direct investment. Today, confronting tumbling production rates and unprecedented energy demand growth, Indonesia faces severe energy security headwinds.
As the most fourth most populous nation in the world, experiencing relentless levels of urbanization and industrialization, Indonesia’s energy demand is poised to increase 9 percent annually from 2014-2019.
Last year, Indonesia had 4 billion barrels of proven oil reserves, down from 5.9 billion barrels in 1991. With 60 percent of proven reserves left in mature basins, investment through enhanced oil recovery techniques is desperately needed to secure these invaluable assets.
The energy picture is even more tenuous for policy makers in Jakarta, with production levels descending for the tenth consecutive year.
Adding to supply woes, Platts recently stated that Indonesia is likely to miss the government’s revised 2013 crude production target of 840,000 b/d, by pumping an average of just 827,000 b/d this year.
One beacon of hope is that Indonesia has access to the bulk of Southeast Asia’s deepwater exploration acreage. However, unlocking this potential requires substantial investment given the risks and costs associated with such exploration and production activity.
Unfortunately, Indonesia’s fiscal terms rank amongst the most severe in the world and there has been a lack of clarity on some major Production Contract Agreements. Such uncertainty has stymied crucial FDI and the long-term development of the country’s hydrocarbon sources.
Moreover, future Indonesian governments face the daunting task of solving the colossal expense of oil subsidies.
For years, the government has subsidized 60 percent of crude oil prices – roughly 11 percent of its annual budget. With crude prices hovering over USD 100 a barrel for the last few years, and the rupiah slipping in value against the dollar, the fiscal burden has been crippling.
In a country with relatively poor education, infrastructure and health services, the sustainability of such government policy is increasingly being questioned.
The unintended consequences of fuel subsidies are, perhaps, even more acute as the incentive for Indonesians to improve their energy efficiency is reduced significantly when a liter of fuel costs less that a liter bottled water.
Indonesians have been raised on cheap fuel, from which they must now be weaned, and that will not be an easy task for the government.
In June 2013, after two years of indecision, President Susilo Bambang Yudhoyono pushed through government-administered fuel price increases, garnering praise across the finance world, despite profound domestic protest.
Yet, after the slide in the value of the rupiah, which since May 2013 has been the world’s worst performing major currency, the subsidy issue is alive and still gnawing at the economy.
In November 2013, Indonesia recorded its poorest economic performance in four years. However, the latest figures may prove to be welcome news for the wider economy and the energy sector as a whole.
After years of momentous but narrow focused growth, the government and the people need a reality check, in order to set the economy and energy industry on a sustainable growth trajectory.
Positioned along the so-called ring of fire, Indonesia has access to 40 percent of the world’s geothermal potential. Yet this natural source of power propels only 5 percent of the country’s current energy output. Stimulating this nascent supply of energy will facilitate supply diversification and help to slow the ticking of Indonesia’s energy security countdown.