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with Dr. Subroto, Founder, BIMASENA

28.03.2012 / Energyboardroom

Throughout your career you have been Minister several times in Indonesia and also the longest serving OPEC Secretary General in the organization’s history. When you were a young Economics student could you ever have imagined reaching such high positions?

During my youth, the first question I asked myself about the future was what I could do in order to best serve my country. Initially this meant fighting for liberation from the Dutch colonial power, so I took part in the war of independence between 1945 and 1949. Once the war was over and Indonesia succeeded in becoming an independent nation, I went on a new mission in my life to conclude my studies. I chose to pursue a degree in Economics at the Universitas Indonesia (UI) because I felt that it was an effective vehicle to help bring welfare to the people. It was a somewhat idealistic view of what Economics represents, but it was my true desire.

This focus on the welfare of my fellow Indonesians had further strengthened during my times fighting for independence. Since our strategy was not to confront the Dutch directly, but rather to defeat them through guerrilla warfare, we were required to live among the ordinary people for long periods of time. This gave us a first-hand view of the suffering and hardships they had to go through. This motivated me to vigorously work for the benefit of the common people in Indonesia once the war was over.

Economics during those years was focused on formulating policy in order to increase the purchasing power of people. A new branch was emerging in the area, called Developmental Economics, focusing on the ways a country could rise out from poverty and get on the path towards development. I became very interested in this branch and was an avid student of Professor Sumitro Djojohadikusuma, founder of the Economics Faculty at UI and godfather of development studies in the country. I was also very much involved in the campus life, and even became the chairman of the Indonesian Students Association. This helped me get in contact with a representative from McGill University who was in Indonesia looking for a candidate to be a part of an exchange program at that prestigious institution in Montreal. I was eventually chosen and given a full scholarship to pursue my Masters Degree there in the field of foreign trade, which was my main area of interest at the time. The subject of my thesis was an analysis of the terms of trade through an Indonesian case study. From this early stage in my life it was already evident how important the mineral and fossil fuel resources were to the economy of a country like Indonesia.

After completing my studies at McGill I returned to Indonesia in order to pursue my Doctor’s Degree at the UI. I met a group of talented and like-minded economists there, and we began working together on new and exciting ideas about Indonesia’s economy. The President during those years, Sukarno, paid little attention to the economy and was focused on Indonesia’s politics and its role as a leader among the nations belonging to the ‘third world’. At the same time, my fellow economists and I had been hired as lecturers for the Command and Staff School in Bandung by the progressive-thinking army officer Suwarto, in order to help develop ‘social weapons systems’ based on economics, sociology, anthropology, etc. One of the many generals among our students was a certain Suharto. Several years after teaching him Economics, he came to power and named our group as advisors to his new government.

Our first assignment was to develop a blueprint for the Indonesian economy, which meant that basically we had to come up with a plan on how to run an entire country from an economic point of view. We worked day and night in order to come up with Indonesia’s first 5 year plan, integrating for the first time concepts such as efficiency and allocation of resources. Once we handed it over to President Suharto, who was not very knowledgeable about economics either, he decided that if we developed the plan then we should also be the ones to carry it out, so all of us became Ministers.

My first ministerial duty was in the area of Cooperatives and Transmigration, which was focused on getting people to move from the over-crowded island of Java towards scarcely-populated areas of the Archipelago like Sumatra, Kalimantan and Sulawesi, in order to create new centers of economic development. The strategy was based on offering landless farmers from Java a piece of land in one of the other islands. This was an enormous task with many difficulties, but I consider that we were rather successful in achieving the main objectives. A few years later, my Ministry was also put in charge of the Manpower policy. We achieved enlisting the cooperation of labor movements towards the goal of economic development, while recognizing their right to strike under certain conditions. It was a different time, when the atmosphere was conducive to marshalling economic players.

How did these initial years in the government end up taking you to the energy sector?

The post of Minister of Mines and Energy suddenly became vacant in 1978, and I was named to head this important portfolio in the government. It was a time when the oil and gas sector was of particular relevance to Indonesia, with soaring prices and the push that this gave the country’s economy. In fact, Indonesia was recognized in the world as one of the few oil-exporting countries that made good use of the oil revenues, especially investing in the development of rural areas (education, health, infrastructure, etc.). In that context of record-high oil prices, it was also fundamental to increase production quickly, and the only way to achieve that was through foreign investment. We worked on making the Production Sharing Contract (PSC) system – which is an Indonesian creation – even more attractive and operational. This helped us reach Indonesia’s highest ever production levels, peaking at 1.8 million barrels per day. The environment was favorable in the early 1980s for Indonesia’s oil and gas sector, in terms of the low geological, economical and political risks. Of course this couldn’t last forever, and towards the end of my 10-year run as Minister of Mines and Energy I had to face the crisis that came about in 1987 when both demand and prices for oil crashed.

How was the transition from Minister of Energy to OPEC Secretary General? What were the events that most marked your years at the head of this important international organization?

Very soon I took upon the difficult O&G scenario again, but on a much larger scale, when in 1988 I became Secretary General of the Organization of Petroleum Exporting Countries (OPEC). One of the main reasons that led to my appointment was the struggle between ‘eagle’ members (from Africa and Latin America) and the ‘dove’ members (from the Middle East) who continuously disagreed on whether to push for an always-higher or a more moderate price. The Indonesian Minister traditionally played a role of mediator between these groups, and this made me an ideal candidate in 1988 at a time of heightened tensions among members. Indeed, the Iran-Iraq war was still raging on, and soon afterwards Saddam Hussein decided to invade Kuwait, starting the Gulf War. In such a turbulent environment, the very existence of OPEC was in risk and I had to act carefully in order to ensure its continuity and survival.

The organization also faced the challenge of sliding prices and the emergence of big new production areas out of OPEC countries’ reach, such as the Gulf of Mexico and the North Sea. The rise of non-OPEC oil exporters shifted the balance and, with less than half of the world’s total production, the organization began to lose its leverage on the markets. Eventually, however, non-OPEC countries also realized that it was in their interest to have a stable price, and OPEC increased cooperation with the main players in order to avoid volatility. The idea was also to narrow the gap between industrialized consuming nations who wanted low prices and oil-producing countries with their diverging interests, letting the price evolve within a reasonable band.

Do you see yourself more as a politician or as an economist?

I consider myself to be an economist completely, as someone who is rational and always looking at ways of making things possible. Of course, OPEC is not a purely economic animal, but also a political organization, and therefore you inevitably have to include politics in your calculations.

Who do you think that are the next ‘Subrotos’ in Indonesia, which will drive Indonesia’s Economics studies forward?

In present day Indonesia there are many intelligent people in the field of Economics, but it is more difficult to find people imbued with a sense of service towards the country. Some of the promising figures I see, who also possess the drive to serve the Indonesian people, are Dr. Faisal Basri from UI and Dr. Chatib Basri who is Director of the Indonesian Institute for Economic and Social Research, Faculty of Economics at UI. I would also mention Anggito Abimanyu from Yogyakarta, the Dean of the Economics Faculty at UI Bambang Brodjonegoro, and the lecturer at Cornell University, Iwan Arzak. These personalities possess the qualities which I consider essential for any leader: character, knowledge, interpersonal skills, and the ability to introduce and drive changes in the system.

What is it going to take to get the IOCs to come back and invest in Indonesia, in order to help the country get its production and reserves level up to potential?

The first step is to make a correct assessment of the obstacles we face. In my opinion, one of them is the labor law in the country which is very rigid. It requires a deep reform, but it is unlikely that this will happen any time soon given the explosive social reaction of such a move. There is also a problem related to the taxes and tariffs which the regions are imposing as a result of their increased autonomy and desire to get a bigger piece of the pie. Corruption is unfortunately still a big issue that is being addressed but still needs much improvement. In addition, contract sanctity needs to be better upheld by the government, so that electoral results do not result in changing conditions for investors. In sum, what Indonesia should do is continue cleaning up its act at home in order to reduce the high perception of political risk.

Once the Indonesian government truly overcomes these obstacles, there will be no need for road shows to lure investors; they will come running by themselves to take advantage of the numerous opportunities. They are already there on the sidelines eagerly observing and waiting for improvements on the critical issues I have mentioned. In the meantime, there are many Indonesian companies growing and asserting their place on the O&G arena, such as Medco, Energi Mega Persada and Star Energy. There is also a trend of smaller companies from the country’s different regions making an appearance over different parts of the industry’s value chain.

What do you think about the government initiative to move towards a radically different energy mix, through diversification away from oil?

In my opinion, there are three main reasons that explain why there is such an anxiety in Indonesia and around the world to become less dependant on oil: soaring prices, global warming awareness, and the geopolitical instability in the Middle East. From a merely scientific perspective, oil is still the cheapest and easiest to transport when compared to other energy sources. Then there is natural gas, which faces challenges on the transportation side, in terms of high infrastructure costs and also legal disputes concerning the land where the pipelines are laid. Although turning gas into LNG helps overcome this hurdle, it is still quite an expensive option. Coal constitutes an abundant and cheap energy source, particularly in Indonesia, but there will have to be further breakthroughs in clean coal technologies in order to make it compatible with today’s environmentally-minded world.

Besides these three so-called conventional energy resources, there is a growing interest for new and renewable energy. Biofuels are very much in vogue today all over the world – using crops such as crude palm oil, corn, sugar, cassava – but a negative side-effect is that food prices are being driven up, and this issue will have to be resolved in order to make biofuels development sustainable. Other alternatives are geothermal, hydro-power, and solar, all areas where Indonesia has a good potential. I also believe that nuclear power should not be overlooked, as it makes good economic sense, although this is a very controversial topic which would require a good deal of discussion in order to materialize. In any case, there is a wide array of options to choose from, and I agree that a diversification policy is a positive thing for Indonesia. Nonetheless, we should bear in mind that, according to OPEC and IEA studies, even in the year 2030 about 30% of the world’s energy needs will be fulfilled by hydrocarbons.

Where do you think that the government’s focus should be in terms of establishing a dynamic and sustainable energy sector in Indonesia?

I consider that Indonesia should focus on three strategic policies for the energy sector. The first is the intensification of exploration and production in the O&G sector. Based on the current levels of proven reserves (5 billion barrels) and production (1 million bpd), Indonesia has 13 or 14 years worth of oil. We need investment in exploration in order to turn probable reserves into proven reserves, and thus continue to expand the country’s oil production lifespan. The government needs to offer incentives that will incite companies to operate in Eastern Indonesia, where frontier areas contain high potential but also high risk.

The second policy is concerning diversification towards other energy sources, as I previously mentioned. For Indonesia, the largest opportunities are in the gas, coal, and geothermal sectors. The main obstacle to many of these alternatives is the government’s current pricing policy, which subsidizes oil fuels on the domestic market and therefore hampers others’ competitiveness. Fortunately, the policy-makers are aware of this situation and the subsidy is being gradually reduced.

The third pillar of Indonesia’s energy policy should be an integrated effort to achieve a better level of conservation. Much has to be done in order to become more energy-efficient in areas like electricity, air-conditioning and transportation. This is a real challenge because it involves education and changing certain values imbued in the people’s culture.

How is Indonesia going to differentiate itself from the Asian giants China and India which are robbing the global spotlight?

Indonesia should not aim to compete with China and India on areas where they are very strong, like manufacturing and IT, but rather concentrate on areas where we have absolute comparative advantages. This means developing our huge potential in natural resources such as oil, gas, minerals, agriculture and fishery. Indonesia can benefit greatly from China and India’s growth, by exploiting its own natural resources to meet their growing needs for raw materials and energy. The strategy has to also include knowledge in the equation, in order to acquire competitive advantages through efficiency and productivity.

What final message would you like to send to OGFJ’s readers?

Indonesia has been doing its homework in order to get the country back on track and make the environment conducive for investors. This country has the potential to be one of the 10 biggest economies in the world, but to achieve this vision we need to better utilize our enormous human and natural resources. After overcoming several crises throughout our history, Indonesians are optimistic about their future once again. I invite investors to come to Indonesia to be a part of this tomorrow full of opportunities!



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