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with Purnomo Yusgiantoro, Minister, Indonesian Ministry of Energy and Mineral Resources (KESDM)

18.10.2007 / Energyboardroom

Based on your long experience in the energy sector, in Indonesia and abroad, how would you assess your country’s place in today’s global energy arena?

Indonesia is strategically located between two oceans and continents which are of vital importance in today’s energy geopolitics. Oil from the Middle East must pass through Indonesia before reaching the Far East markets, and the country is also well connected to fast-growing giants China and India and energy-rich Australia. Moreover, Indonesia itself is an important energy producer, with substantial production of oil, gas and coal. Taking these three energy sources together, in oil equivalent terms, the total production is currently about 4.5 million barrels per day.

Indonesia‘s production levels of gas (1.5 million bpd oil equivalent) and coal (nearly 2 million bpd oil equivalent) more than make up for the drop in oil. For 2008 the total production or oil, gas, and coal is estimated to be of approximately 5.1 million barrels of oil equivalent per day. So compared to many other energy exporting countries, many of which only have important oil reserves for example, Indonesia is in a good position thanks to its abundance of different energy sources.

Besides being Minister of Energy and Mineral Resources for over 7 years, you have also acted as Secretary General of OPEC. How do you see Indonesia‘s evolving role and future in the organization?

One of the most important things about OPEC is that, despite a majority of Middle Eastern members, it also has representatives from different parts of the world like Africa, Latin America, and Indonesia as the only member from the Asia-Pacific region. This allows the organization to have a truly global character and take into account the perspective of not only oil-producing nations, but also oil-consuming ones. In fact, Indonesia‘s situation is very peculiar due to the fact that it is at the same time a big producer and consumer of energy, with a population of over 225 million and a growing economy. My country therefore plays a key role in serving as a bridge between producing and consuming players, and also between members with diverging views within OPEC itself.

The government of Indonesia has announced that it is shifting from a supply side paradigm to a demand side paradigm with regards to the energy sector. What does this change imply concretely in terms of policy?

When we talk about demand-side management, this means primarily diversifying the energy sources in order to reduce the reliance on oil products for domestic energy consumption. The government is therefore encouraging a shift towards non-oil energy sources which are fortunately numerous and abundant in Indonesia. A second component of this policy is the push for greater efficiency and conservation of the energy resources. A complete implementation of these two initiatives, however, requires much more than the government’s commitment. In order to make these changes possible, the community must be aware of their importance and ready to modify things about their lifestile with regards to energy consumption. Of course, such fundamental changes on people’s everyday life take a long time to consolidate.

The third component of this integrated policy is the pricing system which needs to evolve towards something closer to a market-based mechanism. Most developed countries, and even several developing ones like Thailand, have adopted such a model and therefore have a more elastic response to oil price fluctuations because it is the final consumer who pays the bill. The analysis of past energy crisis reveals that the countries most successful in overcoming them were those implementing a policy mix consisting of energy diversification, conservation, and market price mechanisms. This is why these are the basic principles guiding Indonesia‘s current energy policy, though as I mentioned earlier, changing people’s habits and transforming old systems can take a lot of time.

The new Energy Law which was passed in Parliament last July includes the creation of a National Energy Council. Who will be a part of this Council and what will its main objectives be?

The final details for the establishment of the National Energy Council are in the process of being concluded by the government and the different stakeholders of the Indonesian society who will be a part of it. The main objective of the Council is to contribute to a better coordination of energy policy generation and implementation, based on the inputs of its members representing all stakeholders.

The plan for a new energy mix in 2025 indicates a big reduction of oil consumption as a part of the total, with increasing importance of other fossil and non-fossil fuels. What energy sources are priority and what steps are being taken to reach the target?

Based on our current situation and Indonesia‘s natural resources potential, the government has elaborated a target scenario for the national energy mix in 2025 that would consist of: 33% coal, 30% gas, 20% oil, and 17% renewable energies (of which 5% geothermal, 5% biofuels, and the remaining 7% a combination of biomass, nuclear, hydro, solar, and coal liquefaction). That is the goal towards which we are working, through 5 year programs gradually developing the different energy sources in order to make the scenario a reality.

As I mentioned earlier, Indonesia is a country that is rich in fossil fuels but we are encouraging diversification into alternative energy sources. The main obstacle to the development of renewable resources like geothermal ?with a potential for 27 000 MW and current level at only 800 MW ?and biofuels is actually the subsidy system for petroleum products, which makes it very difficult for these alternative energies to be competitive on the market. This is an issue the government is addressing through fiscal incentives and other mechanisms, in order to allow the country to tap into its full range of energy sources.

During your time as Minister of Energy and Mineral Resources, the O&G sector has undergone important changes in its legal and regulatory environment ?Pertamina’s change of status, creation of BP Migas and BPH Migas, etc. How do you assess the sector’s performance under this renewed framework?

Investment in exploration and production activities has been increasing since the year 2000, and I believe that it has a lot to do with the certainty offered by the laws and regulations passed over the last several years in Indonesia. Our investment forecast for the total year 2007 is of about 18 billion dollars in the O&G, and there are already 44 billion dollars committed for projects over the coming years. Moreover, a new round of tenders will be opened with the announcement of 26 blocks to be awarded through a bidding process. The situation with this industry is that companies must be patient and go through all the phases ?exploration, development, and production ?before getting revenues, a process which can take 5-10 years, or even more. But these long time frames are not specific to Indonesia, rather a part of the nature of the O&G sector.

Indonesia‘s long-standing PSC system allows for the involvement of many different kinds of companies in the O&G sector. With which kind of partners are you counting on to help increase production over the coming years?

Indonesia‘s oil and gas sector will grow through a combination of companies foreign and local, big and small. The country is undergoing a similar evolution to what was seen in the United States and other oil producing nations, where an initial domination by the ‘Seven Sisters’ gives way to the emergence of aggressive independent risk takers and eventually to smaller niche players. As a consequence, Indonesia‘s O&G sector has become very competitive and full of companies of different shapes and sizes.

How can Pertamina, as the Indonesian NOC, play a role in the country’s future O&G success?

Pertamina is very important to the government and to the country, not only because of its ability to increase oil and gas production, but because it is a symbol of Indonesia all over the energy sector. I am very satisfied to see that Pertamina is doing well, with high profits and expanding activities overseas. That is something that all Indonesians are proud about, and therefore the government will support Pertamina in any way possible to help it continue succeeding.

The government seems determined to boost gas consumption in the domestic market in order to take advantage of its sizeable reserves and to reduce costly oil imports. What are the most urgent needs in this regard, and what does all this mean for LNG development?

Currently there is somewhat of a balance, with 54% of Indonesia‘s gas production being exported and 46% remaining for the domestic market. These numbers are certainly going to change in favor of more gas for national energy needs over the following years. Gas projects for the domestic market worth 5.5 billion dollars will be signed because what Indonesia requires is new infrastructure for gas transmission and distribution.

In the near future, approximately 4 million tons of LNG-equivalent per year will flow from South Sumatra to Java, and other pipeline projects are underway. However, in order to better supply the densely populated and industrialized island of Java towards the future, LNG receiving terminals should be built there in order to take advantage of the gas resources abundant in remote areas of the archipelago. We are confident about Indonesia‘s gas because the reserves are there, what is essential is obtaining the massive investments necessary for the infrastructure projects that will make it all possible.

To what extent have record high oil prices affected Indonesia‘s ability to maintain such a costly subsidy system for fuel?

Despite being a net importer or oil products, the windfall Indonesia is getting from increasing oil prices through gas and coal revenues is still enough to make up for the higher subsidy that has to be paid out by the government. However, the surplus is allocated to local governments and to cover the electricity subsidies.

What would be your final message to OGFJ’s readers about Indonesia‘s energy sector?

Indonesia has three elements that make it an ideal place for investments in the energy sector: geological potential, a clear regulatory framework, and a long history in the O&G industry. For these reasons I encourage investors to come do business in Indonesia.



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