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Interview

with Dr. Subroto, Founder, BIMASENA

28.03.2012 / Energyboardroom

Much has changed since the last time we interviewed you, Indonesia has switched from being recognized as an international oil exporter to having an energy industry focused on domestic energy security. What is your perspective on the evolution of Indonesia’s energy profile?

Unfortunately, Indonesia’s energy profile is moving in the wrong direction: energy demand is increasing whilst oil production is in decline. Indonesia is now producing less than 1 million bpd and out of Indonesia’s oil production, around 300 thousand bpd is exported so only 600 thousand bpd is kept for domestic consumption. At the same time, consumption is 1.1 million bpd! In other words, around 500 thousand bpd needs to be imported. This is the figure for crude imports, but of course this needs to be refined and Indonesia’s refining capacity stands at only 1 million bpd meaning that petroleum products need to be imported as well.

If the international price of oil remains stable then there is not a significant problem, but the current volatility of oil prices is proving a significant headache for government. This has been particularly clear in the case of Iran closing the Strait of Hormuz as well as the internal tensions in Nigeria which are causing volatility in oil production and price.

The question now is what to do about this situation. Clearly, Indonesia cannot continue with the status quo and consider itself an oil producer. One of the biggest steps henceforth is to tell the population that Indonesia is not a great oil power anymore. The population is still under the illusion that Indonesia is oil rich, therefore we need to be more honest with the people.

Indonesia needs to diversify into new and renewable energies. However, this is easier said than done because of the significant investment required to replace oil. The next step in the transition from reliance on oil is therefore the move towards gas production and usage. Indonesia is not yet at the stage that it can benefit from the shale gas revolution, but the country is moving in the right direction and is exploring the sea and coal bed methane (CBM) opportunities.

The basic strategy of Indonesia is therefore three-fold: 1 the intensification of exploration; 2 the diversification of resources; and 3 improving conservation of energy.

Regarding the first point, Indonesia’s easy oil has already been discovered and extensively produced in the West of Indonesia. The Eastern parts of the country have not been intensively explored because deposits are located in deep water and challenging production areas. Discovering oil in the East of Indonesia is therefore costly and requires high levels of investment and the PSCs should be renegotiated as a consequence of the increased investments required. There are also problems relating to regulatory uncertainty, the lack of infrastructure, overlapping regulation, corruption and so on. These factors inhibit investment in the region and must be overcome.

What should the government do to resolve these issues?

The government must recognize that when oil companies explore difficult areas in search of oil, logically they will want a greater production share. The 85:15 split of oil share will need to be renegotiated. Politicians already recognize this reality but the failure to act comes from the political system inherited from the West which nurtures short-term thinking. Politicians try their utmost to achieve their goals in a 5 year term but this leads to short-term perspectives in government. The government seeks to maximize the revenue from oil but this means that the country will lose out on long-term gains if it cannot persuade companies to commit to long-term sustainable production from Indonesia. Therefore aside from the real problem of falling production there is also a political problem relating to political will.

Reforming the operational environment requires time and burdensome bureaucracy is difficult to remove. Corruption is also a long-term problem to be solved. However, infrastructure is a space where the government can begin to make a difference right now.

To overcome the issue of overlapping regulation there needs to be better communication between the center and the regions. The regions have been enjoying their freedom and to go back to a more centralized system would be a difficult pill to swallow. However, what needs to be told to them is that the natural resources and assets that are found in the regions do not belong to the regions but belong instead to Indonesia as a country. Therefore the mind-set of the regional governments needs to be changed.

Politically, various government officials also need a little more education regarding Indonesia’s oil and gas policy to move them away from short-term objectives and onto long term ones.

What can be done in the short term?

The vice minister is very enthusiastic about tackling the subsidy problem in Indonesia. The population is using the 4,500 rupiah (50 cents) subsidized fuel when the production costs for this fuel are 6,000 rupiah (67 cents). This difference comes out of the government’s budget. There are two ways of eliminating this gap. Firstly, you can increase the price of the domestic fuel; secondly, you can limit the use of this fuel.
However, increasing the price on fuel is a very sensitive political act and the government is still hesitating as to whether to do this or not. Aside from hitting car-owners there would be knock on inflationary pressures on the rest of society.

The government needs the political courage to explain that Indonesia is no longer oil rich and that the subsidy used for fuel is in effect burned when it could be better used for public service infrastructure. There needs to be better communication and dialogue between the government and the public. The government therefore needs to look more long-term rather than concentrating on the short-term unpopularity this measure would bring. Indonesia needs to ultimately move away from oil reliance.

What therefore needs to be done in the second pillar: diversification?

Indonesia has oil, gas, coal, solar power, geothermal, bio power, hydro power, wind power etc. However these alternatives are still quite rudimentary in their development and they require time, capital, political will and cooperation with the people. Out of this mix of energy sources the most practical step in Indonesia’s diversification is to move to gas. Gas is cheaper than crude oil; it is also more in abundance in Indonesia. However, the problem is that Indonesia exports most of its gas, partly because of infrastructure but also because of the need of foreign exchange to buy the necessary equipment for the country’s development.

There is current negotiation with the gas producers as to whether they will sell domestically or internationally. The issue is that gas producers are businessmen and they want to know the price differential between the domestic and international market. If these producers cannot be convinced to sell to the domestic market then Indonesia has created another mechanism which is the domestic market obligation (DMO), which demands that some gas is set aside for domestic use. Naturally, this is not liked by gas producers.

However, with the shale gas revolution making ground thanks to the USA with gas prices going down from $4 to $3 the price differential is lessening. Gas producers must recognize that there is a price movement where international prices are going down whilst domestically, Indonesia may be willing to pay higher prices. This should encourage investments redirecting gas to the domestic market.

A lot of infrastructure is needed in terms of gas stations, pipelines, converters from coal to gas etc. These are the infrastructure projects the government should implement. However, again this will take some years to develop. Right now the government must oblige the people, excluding public transportation and cars used by the government, to switch from oil to gas and the government must work on infrastructure development in parallel. Unfortunately there is a psychological aspect which means that people are not too enthusiastic about moving from oil to gas because of the volatility of gas. Education is therefore needed.

Gas companies will be keen to invest in this direction as they are not short-term in their approach. They look 5 years in advance and by 2020 the use of natural gas will have increased substantially – possibly by 50%.

What do you see as Pertamina’s role in this change in energy profile?

Pertamina will follow government policy. In the past, companies looked for oil and found associated gas. Now, producers are looking for non-associated gas and Pertamina is moving in this direction. However, because Pertamina is empowered for the distribution of domestic crude it has clear oil commitments.

Ari Soemarnon, former CEO of Pertamina told us that he wanted Pertamina to become an international leader in 15 years time. Do you see this as feasible?

You should always begin with an idea; without an idea you have nothing. Some people could view Ari Soemarno’s plans as a pipedream, but there is a saying: “winners are dreamers who do not give up”.

Of course there are many challenges of implementation but there must always be an initial plan. All of the technical, managerial and financial aspects can be overcome once the initial vision is set.

Domestic banks have until recently been reluctant to finance ambitious domestic projects. Right now banks are starting to appreciate local needs and loan to Indonesian companies. This is a crucial aspect in Indonesia’s growth. Another recent bonus is the upgrading of Indonesia’s investment climate by Moody which makes it easier to obtain overseas capital. So the ambitions of local companies are becoming easier to fulfill.

Dr. Subroto, you saw Indonesia on the world stage in your role as Secretary General of OPEC. What will put Indonesia back onto the world stage?

Being on the world stage is not all about oil exports or being a member of OPEC. Naturally, Indonesia had a certain prestige and political status attached to being the only Southeast Asian member of OPEC. However, there are many things that Indonesia can do to be reckoned with in the global arena. Indonesia is already a member of the G20, and Indonesia has moved from a 4% GDP growth to 6.5% in 2012 with 7% or even 8% growth possible in the near future. Indonesia was the only country in the region during the financial crisis of 2008 which was able to increase its rate of growth. These aspects alone confer prestige on the country and help Indonesia to be recognized on the world stage.
Regarding energy specifically, I do not see Indonesia rejoining OPEC because it is still a net importer. Indonesia could make steps towards reducing consumption and increasing production, reducing consumption is however, very difficult because the country is growing.

However, Indonesia can reduce the consumption by switching to alternative energy sources. If the government renews the PSCs for East Indonesia and takes a more long-term approach to energy production from this region then production could also be increased. Therefore it is possible that Indonesia could again become a net exporter again. However, as long as Indonesia’s GDP is growing there is no problem in importing. Japan and South Korea are two examples of how to maintain growth in the economy from a position of net oil imports.
I do not exclude the possibility of Indonesia taking on a more significant role in international gas exports. In the future instead of OPEC there could be an OGEC (Organization of Gas Exporting Countries), in which Indonesia could participate. Countries like Qatar, Algeria, Iran, and Russia would lead the way in forming this organization.

However, Indonesia will not just be known for traditional hydrocarbon production but for unconventional resources as well. Indonesia is now trying to develop its coal bed methane and shale gas deposits with the possibility of increasing gas production by a substantial amount. Geothermal and wind energy will also be very useful in helping to meet domestic consumption and free up gas for export. The development of Indonesia’s energy production is therefore not a frontal attack but a multifaceted approach to secure energy to maintain the country’s rate of growth.

If you had one piece of advice for minister Wacik on leading Indonesia’s oil and gas industry what would it be?

It is no longer the time for me to intervene in telling the minister what he should and should not do. I am 89 and will be 90 in 2013; as a leader, one of the most important things is knowing when it is time to go. However, at the start of his term in office, minister Wacik approached me and I gave him a few ideas about managing the oil and gas community.

The first request that I made of minister Wacik was to recognize that successful management of the industry is not only about acquiring knowledge and a good understanding but leadership. This leadership must create consensus and the first step is to bring all of the stakeholders together and give them an end objective to reach. Minister Wacik has correctly given the industry the objective which is outlined in Indonesia’s 1945 constitution, clause 33, which states that the government must use the natural resources of the country for the maximal benefit of the people.

The second step is to become capable of motivating the stakeholders through the correct rewards and punishments. The third step is to learn to listen to outside opinions because this is the first element of leadership.

What would be your final message about Indonesia’s oil and gas industry?

Through a well-devised energy policy, Indonesia will be able to play a substantial role in the international context. Firstly, Indonesia needs to maintain its GDP growth. Currently this stands at 6.5% but the country is capable of growing 7-8% and if this is achieved over a decade, then the GDP will double making Indonesia’s economy larger than that of Italy or France. Secondly, the middle class will grow as a result of increases in per capita income. This will make the economy more productive.

Indonesia’s growth is sending a message to the West which has in the past degraded the rest of the world. Western countries created their own label “the West” and the remaining countries subsequently became “the rest”. Now the “West” is resting and the “rest” are growing rapidly. Indonesia will play an important part in the shift of power from West to East.

There is currently a revolution in Eastern thinking. For 300 years the economic system has been dictated by the West. The model has been focused on the individual and personal well-being. In this respect there is always a struggle between the strong and the weak and the weak will always lose. The Western system has created a gap between the “haves” and the “have nots”. After 300 years this gap is not narrowing but widening. The East recognizes the error of this system. We do not want to beat the competition but collaborate to maximize the welfare of the group as a whole. This is the defining philosophy of the East.

In Kishore Mahbubani’s book: “Can Asians Think?” he explains that from year 0 to year 1,000 the East: including India and China was more developed in its thinking and technology, indeed the first university was founded in Cairo. From 1000ad to 1600ad Europe experienced the dark ages but the West began to learn from the Arabs, the Chinese and the Indians. This process of learning evolved into the renaissance. This adoption of knowledge and technology extended to Portugal and Spain who learned navigation from the Arabs and this represented the beginning of Western expansion. The East then began to stagnate and in 1800 the West was clearly ahead because of the industrial revolution.
Mahbubani states that Japan in 1868 began the Meiji Restoration which acquired knowledge from the West. This was when the East started to think again and acquire power starting with Hong Kong, Singapore and Korea, Indonesia and Malaysia with a huge push by China and India in the 20th century. In addition, there are now the BRIC countries and Goldman Sachs has highlighted another 11 countries including Turkey and Indonesia who are the emerging nations. The emerging nations now produce more than the West put together. The West which educated us does not like that the East has become more powerful but the West must learn to collaborate with the East for the whole world will benefit. This trend and the revolution in Asian thinking is all occurring in Indonesia.

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