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with Maizar Rahman, Governor, Organization of Petroleum Exporting Countries – Indonesian

20.09.2007 / Energyboardroom

What is the mix of politics and science that you require in a position as high-profile as Indonesian Governor for OPEC?

For most of my life I have been a man of science. During my time as chairman of Lemigas I was dedicated to the research and technical issues for the oil and gas industry, but this all changed in 2002 when Minister Purnomo appointed me as Secretary of the Board of Commissioners at Pertamina. At that point, I began to get more involved with the politics which are so important in this industry. I would say that as Governor for OPEC you need to have a good mix of both, let’s say 40% science and 60% politics. There is definitely a great deal of geopolitics that goes with the job.

What are some of the other ‘ingredients’ that OPEC leaders have to take into account?

There are many other important aspects that are essential to OPEC. These include economics, environment, climate change, technology, trade regulations, and geopolitics, among others. All of these matters affect the oil industry, energy, oil market and oil prices, and we have to take them into consideration for the present and future success of OPEC.

How would you rate OPEC’s performance over the last several years of soaring oil prices in assuring market stability? Is the current price of over $70 per barrel sustainable?

OPEC has a clear mandate which is to work towards creating stability in the oil market. Our objective is not relative to the oil price itself, as many people think, but rather to make sure that there is a balance between demand and supply on the world market. The current phase of rising oil prices began in 2004 due to strong demand, particularly from countries like China and the United States. OPEC actually responded by increasing production quotas four times, and at a point even suspended them so that members could produce at their desired capacity to respond to demand. Despite these efforts to stabilize the market, which many people tend to forget, the price kept on going up. It soon became clear that there were other forces besides supply and demand that were at work, such as geopolitics and weather concerns.

The main problem is that the additional oil supply that OPEC was putting out on the market was not being consumed, but being kept for storage. We have been seeing an anomaly, because our historical correlations show that when stocks levels are high prices go down. Now we are experiencing elevated stocks and increasing oil prices at the same time. As I said, geopolitical concerns are in part to blame for this, but there are also other factors like the bottleneck in refining. This is not a variable over which OPEC has control, and it is consuming countries have much of the responsibility to increase refining capacity. So from OPEC’s perspective, any additional supply will be going to continue filling up stocks and not to fulfil the demand. This is why in December 2006 we decided to cut production by 1.7 million bpd, although in reality it has meant a reduction of about 1 million bpd (60% compliance by members). OPEC considers that the market is well supplied, and that it will consider raising production again only when stocks are at normal levels and demand is really outgrowing supply. It is not in the world’s or in OPEC’s interest to see the price of the barrel go up to $100 US.

What do you think about the FT article about the ‘New 7 Sisters’, referring to the big National Oil Companies (NOC)s which are playing a more active and influential role in today’s oil industry?

It is a fact that some of the big NOCS have become more powerful over the last several years, especially in financial terms. Nonetheless, I believe that in the long term they have political and regulatory restraints that don’t allow them to fully reinvest their profits, and therefore will still be very dependant on IOCs for technology and know-how. Even in countries where the oil industry is very closed to foreign companies, there is still a big need for the services they provide.

Indonesia is in quite a different situation. Here, the law allows foreign companies to invest and participate in exploration and production. I see this as a very big strength for Indonesia.
Even though the current panorama of reserves is not the best in the world, I believe there is still good potential in the country. What needs to be done is encourage investors so that they come and do more exploration. There still may even be big new fields waiting to be discovered in more remote areas. Indonesia is in need of foreign capital and technology, which is why the PSC is still the best system for the country’s O&G industry to flourish.

I like the link you establish between NOCs, who own the oil, and the IOCs which supply the services and technology. Maybe you should write an article on the ’14 sisters’ working together.

What is the significance of non-OPEC oil producers for market stability? Does OPEC cooperate with big players like Russia and Norway?

First of all, it is important to remember that over 70% of global reserves are located in OPEC countries. Our studies also show that by the year 2015 non-OPEC oil production will slow down and it will be up to OPEC to satisfy growing world demand. This being said, OPEC has paid attention to non-OPEC oil producing countries for a very long time, and in general we all share a common interest to stabilize the oil market. The degree of cooperation varies in time, and we tend to be closer in times of lower oil prices. This, of course, is not the case today. This a time characterized by each non-OPEC country following its own strategy to maximize the benefits of the oil boom; this is quite natural. But whatever the context, we have regular meetings between OPEC and non-OPEC countries. We hold expert meetings once a year and can also arrange ad hoc events when necessary. This is true not only for OPEC relations with non-OPEC producing countries, but also with representatives of consuming countries. We are also in close communication with them and other stakeholders in the industry. We do not act as a separate island from the rest of the world as some would believe.

How active is Indonesia in reducing carbon emissions and in enhancing oil recovery appliances? Is there a regulatory framework for a more sustainable development?

The issue of CO2 emissions has two sides in Indonesia. On one hand, there is the role of the country’s industry in emitting harmful CO2 in the atmosphere. In Indonesia, these levels are not significant and the country is under no obligation from the Kyoto Protocol to reduce emissions. This is likely to continue being the case for a long time. On the other hand, there is the issue of deforestation which also has an effect on the levels of CO2 in the atmosphere. Indonesia is often reproached for allowing massive deforestation, and this is truly a challenge we have to face. I think it is a phenomena caused mainly by poverty. The government is aware of this and will implement sustainable forestry management and also is making sure, for example, that the development of biofuels will be done on unused land and not by replacing forests. We are also hoping that the world will become more aware of the importance of tropical forest for carbon sinks and will participate in assisting our initiatives.

How important is the issue of gas flaring?

It is not such a major problem in Indonesia, because we have small flaring centres very spread out over our vast territory. So it’s not like in other countries. Still, it is our policy to reduce flaring as much as possible, and we are very active in using gas for LNG or other purposes. But these projects depend on the economic viability, so if the volumes are too small there will be nobody willing to invest in the transformation because it will not be commercial. We will be happy to buy gas from other producing country at acceptable prices, which can be used, for example, to produce fertilizer at gas sites. This could be an option for us because we could allocate that gas for fertilizer and concentrate our own production on fuel supply.

How much do OPEC member countries cooperate among each other?

OPEC is a forum that allows for discussions on the sidelines of the meetings. Ministers can get together to discuss business opportunities or common concerns. This is a prime example of why OPEC membership is so important for us.

How has the country benefited from membership, and how has OPEC being benefited?

When Indonesia joined the organization in 1962, our objective was basically to stabilize the oil market, like everyone else. Over the years, the organization and its members have evolved, and the topics discussed have expanded to economic and political issues. There are poles of opinion within OPEC, with members having at times diverging views and objectives for the oil industry. Subroto played a very important role in OPEC as mediator, bringing closer radical positions. He was highly regarded because he was a very intelligent yet humble man who helped achieve harmony between members. He also created bridges between OPEC and consuming countries. This is a very valuable Indonesian contribution to the organization, and it is greatly appreciated by its members.

How do you convince government and people in Indonesia about the importance of remaining a part of OPEC?

There was a seminar held in Bali in 2005, exclusively dedicated to the OPEC membership discussion. It included not only government officials, but also academics and other personalities who expressed their opinions on the issue. In the end, the conclusion was that Indonesia should remain a member of OPEC, for several reasons. As I have already mentioned, it is a forum that enables us to talk directly with other members about economic cooperation. OPEC is also of great support to its members on foreign policy matters. For our oil security supply in the future, OPEC member countries will become appropriate partners. The OPEC Secretariat is our window to the world, and they also want for us to remain a part of the organization. At the time of the controversy, we received a letter signed by OPEC President asking us to not leave OPEC. It is important for them to have diversity in its membership. As for the contribution for the annual budget of this organization, we consider it as acceptable since the big part of the fund is used for research activities, of which the results are also useful for supporting our country policy studies.

Indonesia is importing a lot of processed oil and is interested in lower prices, but most members of OPEC are quite happy to have high prices. How do you handle this situation?

Oil prices are global, so when they rise they affect any developing countries such as Malaysia and the Phillipines just as much as us. So, it does not hurt us much in terms of competitiveness. But it does have an effect on industries which produces goods for domestic markets since they buy petroleum fuel at international price, whereas the domestic purchasing power could not afford such change. From another perspective, the rise in oil prices benefits us because of its effect on the market of other fossil fuels like gas and coal, which we are also big producers of. An increase in the oil price generates an increase in these resources’ price as well, which is good for our export revenues. What we do need is to improve our energy efficiency, because Indonesia very behind on this and it is having an effect on our overall competitiveness.

In the long-term, in order to continue being an important producer of oil new explorations have to be made. What is it going to take to get the oil industry back on track?

Indonesia has faced a great deal of challenges over the last 10 years. Besides the economic collapse of the late nineties, we also underwent a substantial political transformation. Many things have improved on this front and we are moving towards a true democracy, but the economic situation has been slower to react. The institutional context has changed a lot and this has discouraged potential investors. They now have to deal, for example, with the decentralized authorities who are just starting to understand how they have to work. In the O&G sector, regulations and policy are still domain of the central government, but certain decisions pertaining to licences and authorizations are under the local powers. The federal government now also has to share the revenues with the provinces, so this creates new dynamics as well. We are progressing in improving the system and I am very optimistic that in the near future our oil industry will be back on track.

What do you think about the talk of a need for a Strategic Petroleum Reserve (SPR)?

The stockpile reserves are expensive, therefore our country does consider the importance of SPR. For that reason, our parliament has approved in July this year (2007) energy law which stipulates the creation of energy stockpile reserves. The type and amount of the reserves to be made available will be evaluated by national energy council.

What do you think about the debate on the currency to use in OPEC, with the weakening dollar?

Each country is free to decide, some countries have already moved to the euro. It is also a political issue. In OPEC we are constantly monitoring the loss of dollar purchasing power which has affected our revenues in real terms considerably.

Do you see any country, OPEC or non-OPEC, that could serve as a model for Indonesia?

I think that our PSC system is good, but we need to encourage investment. In Indonesia we will not be nationalizing like you see in other countries. We have to make the environment more investor-friendly, by offering less bureaucracy, better security and a consistent regulatory system. This is the most important challenge, not only for the oil and gas industry but for the whole economy. Indonesia is a huge country, over 5000 km from one end to the other, so implementing national policies is always an enormous undertaking.

How frequently does OPEC adjust the quota in terms of the production reality?

We change our production level as asked as each member’s quota if it is needed to stabilize the oil market at reasonable prices, both for producers and consumers. During the year 2004 ?2005 the change has been done four times towards higher production level and during 2007 we did it twice in order to reduce the excessive level of world’s oil stock. For Indonesia, we are producing below our quota, so that is not an issue. The problem is when output possibilities are beyond the established quota, and you have to bring it back down to comply with OPEC rules.

What about the feasibility of an ‘OPEC for gas’ in the future? Would it interest Indonesia?

There are already meetings between the big gas producing countries, and certainly I think that in the future gas will be a global commodity like oil. The biggest players like Russia, Qatar, Iran and Algeria have an interest to stabilize gas prices and sort out distribution issues. At present, there is still no concrete plan of creating an organization similar to OPEC for gas producing nations. For Indonesia, with our current level of reserves and needs for the domestic markets, it is not such a relevant issue. This could always change in the future, with promising sources such as coal bed methane, but it’s really difficult to know what will happen at this point.



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