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Interview

Satya Widya Yudha – Vice Chairman, Commission VII, House of Representatives of Indonesia

21.08.2015 / Energyboardroom

The vice-chairman of the Indonesian parliament’s influential energy commission voices his opinions on a whole host of topical issues affecting the local hydrocarbons industry for the nation’s return to OPEC to the new oil and gas law in the making. He also puts forward the case for substituting oil usage with gas and for a diversification into nuclear power.

What’s been keeping Commission VII most busy in recent months?

One of the biggest milestones has been the reduction of fuel subsidies. This is something that we have spent many years striving to achieve and which had always been difficult politically, especially when the price of oil was trading at the USD 100 mark. The new administration, however, has been bold in delivering upon pre-election promises and the determination and conviction displayed in its decision-making on this particular issue augurs well.

Parliamentarians have long been arguing that massive state expenditure on fuel subsidies is too burdensome for state coffers when the era of easy oil production has decisively passed. Previous presidents, however, were unwilling to take unpopular but necessary decisions and confront vested interest groups on this matter. Now, finally, we are seeing some progress.

This is essentially about switching the paradigm away from blanket subsidies and cheap fuel for all to a more means-tested and targeted approach. It’s about dispelling the illusion that we are hydrocarbon resource rich and about overturning the notion that cheap fuel should be taken for granted. Subsidies are for the needy not for those more than able to pay. The logical next step should be to review the electricity subsidy as well.

So you’re saying that, aside from the budgetary necessity to align with economic realities, it’s also about challenging mindsets and reconfiguring Indonesia’s energy identity?

Absolutely. The government needs to be proactive in leading perceptions and explaining the realities to the Indonesian citizen. Our country is a historic energy producer once rich in fossil fuels, but today we witness energy consumption outstripping supply so we are no longer on a sustainable footing. We are endowed with alternative energy resources, but the pathway to activating them is long and tortuous. There’s no silver bullet to rectifying the conundrum we find ourselves in and certain structural changes will have to be implemented both on the demand and supply sides.

The time has come to educate the nation to the fact that our fossil fuels are depleting and that our energy resources have to be much better managed. The political class need to transition from a mindset in which they consider oil and gas as extractive commodities to be traded to a perspective in which they understand these resources as drivers of economic development. The new watchword should be ‘energy security’ and the task at hand should be to analyze which energy types should be prioritized based on national reserves and the country’s growth needs.

Meanwhile the people need to comprehend the importance of energy efficiency and not letting consumption patterns spiral to levels that would be frankly unsustainable. The beauty of slashing the subsidy is that it restores the linkages between provision and consumption by assigning a cost on supply in relation to evolving levels of demand. Technological innovation should also be leveraged to play a catalytic role in optimizing energy usage.

What sort of national energy mix would you be advocating?

It’s a question of rigorously calculating what we have at our disposal and matching that to what the country needs to enjoy a healthy growth rate and well cared for population. Our oil replacement ratio is low at under 50 percent. On the gas side, conditions are far more favorable and we enjoy a reserve replacement ratio of between 90 and 100 percent. When we factor in these figures it is abundantly clear that we need to transition away from oil usage to gas usage. This is easier said than done, however, due to a host of reasons from fuel import arrangements to an absence of supporting infrastructure and lack of refinery space to vested interest groups that hinder the implementation of projects.

Certain constituent groups have a clear incentive to maintain Indonesia as a fuel importer rather than as a nation self sufficient on gas because they reap an economic windfall on the trade transactions. Parliament and the government alike need to stand their ground and vigorously advocate gas as substitute to oil and to promote construction of the sort of transportation infrastructure such as pipelines that can bring this about. To date, progress in upgrading and building afresh the supporting infrastructure has been far too slow despite repeated promises from a succession of finance and energy ministries.

How much of the savings generated by slashing the fuel subsides should be channeled back into the energy sector?

I see there being great scope for reallocating the money recouped from the fuel subsidy towards other public services such as public health and free schooling. This isn’t about reducing public expenditure, but about targeting it better towards the have-nots. In the past, fuel subsidies haven’t targeted the most needy. Let’s not forget the primary beneficiaries have been car owners. Nor is it desirable that people erroneously think that fuel is plentiful to the point that they can be wasteful.

The energy sector does indeed need more investment and there are some proposals for ensuring this. I personally also sit on the budget committee so understand the cross-linkages between having a performing energy sector and investing in that industry. Right now there is a forward plan as part of the new oil and gas law for the establishment of a petroleum fund, the particulars of which have yet to be mapped out. The general idea would be to deploy this fund as a catalyst for action. Obviously the state cannot alone pay for the bridging infrastructure necessary for a national reconversion to gas usage, but it the fund could finance pilot projects of that nature that could entice in private sector participation.

The fund could also be leveraged to sponsor the training up of Indonesian oil and gas specialists by sending the overseas. It could also be used to finance seismic data acquisition and building up a national database enabling us to better understand the extent and nature of nation’s energy resource endowments.

We understand the incumbent government has outlined ambitious infrastructure products for the downstream segment of the oil and gas value chain. How welcome is this?

If you’re referring to all the noise about building oil refineries, then that could well prove a distraction. Opinions are split on whether a drive to construct more refineries would be economically viable given existing capacity across the region. It could possibly be made so if the fiscal terms were made more palatable and if we focused more on repatriating some of our overseas facilities and upgrading outdated ones rather than building afresh. Ultimately all of this harks back to the old oil-centric way of thinking that we need to move away from.

As a parliamentarian, the key question is how can we best secure cheap energy to feed a fast-growth and thirsty economy. We need to look beyond oil and start directing or investment towards developing and connecting alternative sources such natural gas, coal bed methane and nuclear power. If the Chinese economy rebounds then we can expect the oil price to do so too and our economy will risk being hamstrung. Right now, when oil prices are depressed, is a good window of opportunity to but in place the terminals and pipelines so that the nation can enjoy cheaper gas rather than expensive oil when world prices rebound.

I notice you haven’t mentioned renewables when considering alternative forms…

Renewables remain challenging to monetize from an economic standpoint. When you conduct a comparative analysis, oil still wins against renewables, but gas would win over oil. I know that the National Energy Council (DEN) promotes biofuel, geothermal and solar as Indonesia’s energy future, but they have a tendency to wander the realm of idealism. Though we would love to produce renewables more cheaply than fossil fuels the technology doesn’t appear advanced enough yet to be able to realize this on a mass scale.

What I and other members of Commission VII are pushing for is for more emphasis on building nuclear power plants which would present a great energy diversification solution. Countries like Singapore and Vietnam are forging ahead in developing their nuclear energy footprints and there is absolutely no reason why we shouldn’t follow suit. Some say there is a geographical risk in following this path given the natural disaster profile of the region, but the fact that our neighbors are developing that technology suggests otherwise. If we fail to keep up with the game, then one day the real risk is we will be reduced to importing electricity generated by the nuclear facilities of our neighbors. This is a real opportunity we must not pass up.

In the light of everything you’ve said about the need to move away from an oil-centric energy policy, what do you make of the government’s decision to bring Indonesia back into OPEC.

The rationale is actually quite sound. Technically, it’s not so much a reentry as a reactivation because our membership was never annulled but merely suspended. The logic is to streamline the communication channel between producers and consumers, suppliers and buyers. We hope it will allow us to go straight to the source of the oil that we import. Right now there is an elaborate transaction chain of middlemen and traders that we aspire to short-circuit. It’s about securing the best price for the country. The amount the state expends on importing fuel and crude is considerable and we hope to reduce that by dealing direct with producers rather than through trading companies. From what the ministry has informed us the membership will be reevaluated after the first year because we want to see a clear return on our investment from paying the membership fee. Our deficit account is very much influence by fuel important and we hope to see a positive impact on the national budget.

There’s a new oil and gas law currently being reviewed by Parliament. What can we expect to be the main hallmarks of this new bill?

Firstly the new oil and gas bill should align better with Indonesia’s overall legal framework and offer more clarity in terms of implementation. Certain stakeholders claim that elements of the exiting oil and gas legislation, much of which originates from presidential decree have, over time, drifted away from the overarching spirit of the constitution which mandates that hydrocarbons are the property of the state and must be used to the benefit of the nation. This new oil and gas law seeks to rectify these inconsistencies and thus we should see far fewer legal challenges in the courts.

Secondly, the new legislation will reconfigure the make-up of the oil and gas regulatory apparatus to make it more fit-for-purpose. The aim is to foster much better management of the local industry. We are currently exploring how other countries such as Norway achieve this and which elements could be readily applicable to the Indonesian context.

Thirdly the law will clearly demarcate the role of the regions in oil and gas. Quite naturally, regional authorities want to enjoy a slice of the pie from the proceeds of oil and gas extraction taking place near or inside their territories. This is linked to simplifying and streaming the permitting process which has proliferated at the local level to the point where it is now a significant obstacle to resource development. The hope is by coopting the regions, they will understand the rewards to be reap by playing heir part in incentivizing E&P activity.

Fourthly, there will be a restructuring of the downstream part of the value chain. Whether this will entail further liberalization or a consolidation around state companies is unclear right now and will require extensive discussion. The fifth and final feature will be defining the scope and function of the new petroleum fund.

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