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Interview Prof.

Dr. Subroto – Founder and Chairman of BIMASENA, Former Minister of Energy and Mineral Resources, and ex-Secretary General of OPEC, BIMASENA, Indonesia

One of the Titans of the Indonesian hydrocarbons sector, a former Soeharto-era minister, OPEC secretary general and founder of the country’s prestigious Mines and Energy Society speaks out about the state of the local industry. Sharing his insights on Indonesia’s energy security conundrum, he also assesses the performance of the new presidency from an oil and gas policy perspective.

Indonesia’s energy identity is shifting as the country weans itself off a reliance on oil. Where does the country look next in terms of energy security?

Up until now, Indonesia has always been heavily dependent on fossil fuels to power the economy and generate revenues for the public purse. This was all well and good when we enjoyed bountiful hydrocarbon reserves, but in recent years our oil endowments have been depleting at an alarming rate and this necessitates a change of direction in energy policy. Now that we can no longer rely upon oil wealth, the obvious next energy source to utilize is gas. At the same time we have to look beyond merely the short-term perspective and understand that this particular source of energy isn’t renewable either and will eventually lead us down the same sort of cul-de-sac whereby new reserves are increasingly difficult to seek out and then bring on-stream. A more enduring and sustainable pathway thus has to be identified.

For a start, energy policy should align with the country’s natural strengths and competitive advantages. When we carefully analyze Indonesia’s geographical predicament, it becomes clear that our equatorial positioning combined with a diverse mix of fauna and flora lends itself well to a transitioning towards biofuel. Today we produce some 30 million tones of compressed palm oil of which a mere 6 percent is used for cooking and the rest exported. Why not harness this readily available resource for the energy sector as a substitute for diesel oil consumption? Meanwhile Indonesia’s volcanic geological features straddling what’s affectionately referred to as the ‘pacific ring of fire’ also renders the country highly suited to geothermal power development. We need to make full use of this natural attribute too.

It is also important that we think about how we utilize our energy resources in societal terms. I would strongly urge policymakers to look beyond the very narrow vision of supplying needs and adopt a more enlightened approach. A smartly organized energy industry can play critical roles in poverty alleviation, job creation and cluster growth and thus should be properly anchored to the domestic economy. A well-structured energy mix targeted towards the right industries and communities should be lubricating the wheels of the national economy and generating balanced growth and prosperity for all. The key to realizing all of this is optimizing the ‘management’ of our energy industry and natural resources. We need to think outside the box and be more aware of the bigger picture.

Despite its dwindling oil reserves, Indonesia enjoys a reputation as a giant in the international hydrocarbons community having pioneered the PSC model and been one of the early members of OPEC. What does the future hold for Indonesia on the world stage in terms of energy?

It’s time we faced up to our limitations. Especially at home, there is an enduring misconception that we are an oil rich nation. This is simply not true any more. We need to stop denying the reality and that means giving up any aspirations of maintaining low domestic oil prices subsidized by the state. Indonesia has to adopt an attitude of thrift and be less wasteful. It is the duty of the politicians to communicate the true state of affairs. To date, energy conservation has not been given the due attention it merits in policy circles. We need to reassess how we are using our energy. We no longer have the liberty of being slapdash in our usage and regulations should penalize energy wastage. To my mind, national energy policy should be built on three main tenets: intensified exploration, energy mix diversification and conservation.

Internationally, Indonesia will continue to have an impact by virtue of the fact that is by a long way the largest energy consumer in the South East Asia region. We are also taking steps to reclaim our prestige as seen by our imminent return to OPEC. The cartel was initially formed by Iraq, Saudi Arabia, Kuwait and Iran so as to enable them to become master of their own resources. Indonesia gained its own independence by exhibiting the same sort of courage and fighting spirit and duly joined OPEC in 1962 as a producer of 1.682 million barrels per day. Then in 2004 when our national production sank as low as 780,000 barrels per day we suspended our membership considering ourselves to have lost our weight as a producer. I, at the time, counseled against this because of the other contributions that we brought to the club. We used to play a strong mediating role between the different factions and were the voice for an entire region, being the sole Asian member.

Returning to OPEC is significant not only as it bolsters our relationship and networks many of the world’s most prolific oil producers and renders us less dependent on the spot markets as an overall importer, but it also enables us to rekindle our gravitas on the world stage. We can play an important role as a mediator and communicator especially in an era in which OPEC is looking to shore up and secure markets to supply to. There are many synergies that can be leveraged even for a minor oil producer that is nowadays an overall importer.

Is the PSC model still fit for purpose in your eyes given that the age of easy oil is now over in Indonesia?

Generally yes. This is not because of some sentimental attachment to a model that Indonesia pioneered, but rather because it is in line with the constitutional vision of how we want to develop our national resources. Our founding fathers who delivered Indonesia’s independence after a long period of colonial rule were adamant that the nation should own its own natural endowments, but that exploration and production risk could be borne by international entities. Developing oil and gas fields requires considerable capital, technology and technical expertise. We have to be honest about our capabilities and concede the fact that we don’t have all of this know-how and equipment in-house so will have to make it worth the while for foreign entities to come in and partner with us. This does not mean handing over our national riches however. The model is very much in spirit with the constitution and does its job well. What we can play around with is the terms of the PSC by increasing the private sector take of the split so as to better incentivize exploration and production of more risky plays.  This is sensible economics.

How do you evaluate the performance of the new presidency on energy policy? What advice would you give as a former energy minister yourself?

The first thing to note is that President Joko Widodo has made energy reform one of his four core priorities alongside infrastructure development, food security and building Indonesia into a major maritime power. That is a very good sign. So far there have been some triumphs and some failures. The government is still only 9 months old and it takes time for a new administration to build up the requisite experience to act efficiently. There have also been many adverse externalities such as the fall in oil prices and drop in commodity prices. I daresay there have been some policy mistakes such as the decision to increase tax rates when the economy was weakening.

The temptation for all administrations looking towards a five-year electoral cycle is to be short-termist with the policy creation and to maximize short term while forgetting the longer-term implications. Jokowi’s presidency needs to be bigger than that and more responsible. Energy reform needs to look beyond a five-year horizon, because otherwise future governments will enter office with a full-blown energy crisis waiting for them. The time has come to take unpopular and difficult decisions and to press ahead with diversifying the energy mix and rewiring our energy dynamics on both the supply and demand sides. We owe this to future generations.

My other piece of advice would be to pay greater attention to the coordination and implementation of policy. Different ministries have a tendency to act as information silos and as separate sectoral ecosystems that are not necessarily well harmonized. Policy formulated by the Energy Ministry will only ever make the desired impact if supported by the financial terms emanating from the Ministry of Finance. This is where the role of coordinating minister takes on vital importance. There needs to be a common understanding of the solutions on the part of all relevant ministries otherwise piecemeal policy making will be ineffectual when implemented.

When we spoke to Dr Kuntoro he was disappointed by what he identified as a watering down of the delivery unit that he had set up to harmonize policymaking and unblock bottlenecks. Do you share this concern?

There certainly needs to be systematic monitoring, supervision and verification right down the chain of command. My concern is that policymaking is currently too piecemeal.  There is a law on electricity, another on coal and we are about to get a new one dedicated to oil and gas, but there is no single, holistic regulation that covers energy legislation in its entirety. This is a real oversight. We need to reassess our energy mix from an economic, environmental and societal standpoint and resolve upon which combination is best for the nation and the national economy as a whole. The big picture perspective is absent. We need to rectify this and have a harmonious, streamlined policy targeted towards the greater needs of the country.

With the new oil and gas law promising to establish a new regulator for upstream oil and gas, what do you personally think should happen to SKK Migas?

In the past Pertamina possessed the dual function of being both an operator and the industry regulator. This set-up ultimately ran into difficulty as there was a clear conflict of interests and a risk of corrupt practices taking place. The reaction to this was to vest the regulatory function in a separate institution reporting to the ministry, but the end product was to created another chain of red tape and bureaucracy that slowed down the decision making process and delayed projects. There needs to be a clear reexamination of the virtues and drawbacks of each model and a new model devised that incorporates learnings from past experiences. Maybe SKK Migas and DG-Migas could be fused and the regulatory function incorporated into the Ministry

What about the future of Pertamina?

Politics is the art of possibility. There needs to be a dispassionate study into what works and what doesn’t. Pertamina wants to play a greater part in Indonesian oil and gas and that is a good thing because it means we are taking control of our energy destiny. We now need to consider what constitutes the best set up for Pertamina to take on this enhanced role and that means learning from our own past experiences and the experiences of others. The Chinese keep a tight grip on their own oil and gas endowments and their model separates out different the functions with separate NOCs for domestic and foreign activities and for offshore and onshore E&P. Maybe that is a model worthy of consideration. These are issues that should be examined closely.

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country.

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