with Widjajono Partowidagdo, vice ministe, Ministry of Energy & Mineral Resources Indonesia
When president Susilo Bambang Yudhoyono appointed you as vice minister of energy and natural resources in autumn last year, what were the principal tasks given to you and what steps are you are taking in 2012 to carry them out?
When president SBY asked me to become vice-minister, the first thing I told him was that “I am a teacher”. Before taking this position, I was only a teacher on my campus at the Bandung Institute of Technology. I could see that what I was teaching was not being implemented properly at a national level and I therefore applied to the National Energy Council, which includes 8 non-ministers and 8 ministers and the heads of the council are the president and vice-president of Indonesia. A parliamentary energy commission elected me to this council with 44 votes out of 48. In becoming a member I could become a better teacher because now I can teach the country. However, when president SBY appointed me the second thing I told him was that I would not only be teaching but may have an active role in advising and implementing policy and making decisions.
The president accepted and set me three principal tasks. The first was to increase the production of oil and gas in Indonesia. Oil production currently stands at 900 thousand bpd, the production of gas equates to 1.5 million bpd of oil equivalent, whilst coal is around 3.4 million bpd of oil equivalent. 40% of our oil is exported because of the PSCs. For example if the cost is 30% then the equity to be split is 70%. The government take is 85% of this 70% which is 60% and Indonesia is therefore exporting around 40% of its oil because it belongs to the contractors. The government take for gas is 70% which means that around 50% is exported. In the case of coal, 70% is exported. Indonesia consequently is one of the 5 largest coal exporters in the world. The task ahead is therefore a matter of increasing the use of coal and gas for the domestic market.
Financially this would make a lot of sense as then coal could be used for Indonesia’s electricity supply and gas could be used for transportation. The electricity price from coal is 8 cents per kWh which is much better than the price of diesel oil at around 35cents. Indonesia’s reliance on oil should therefore be reduced.
The problem is if we are still subsidizing the fuel (gasoline) price to maintain it at 50cents dollar per liter. Cheap fuel inhibits conversion to other forms of energy and prevents the industry expanding. In Vietnam the price of gasoline is twice as much as in Indonesia, at $1. Vietnam subsidizes its public transport whereas Indonesians are very proud car owners and public transport is underdeveloped; in fact Indonesia has the fastest growing car market in Southeast Asia. This is not a good trend because gasoline price is subsidized.
How do you resolve this problem?
The Indonesian government must tell the people the truth about the situation to allow them to adjust. Last year, the fuel and electricity (caused also by using diesel oil) subsidy amounted to 255 trillion rupiah ($28 billion), whilst the revenues from oil and gas are only 270 trillion ($30billion). Therefore almost all of Indonesia’s oil and gas income is being used as subsidy and benefiting only those who have cars. I believe it is far better to use this money to offset costs incurred by the poor, to develop infrastructure and public transportation and to help the national industry to grow. Diversification towards gas and away from subsidized fuel is very important for Indonesia so that it can become a developed country over a short period of time.
It is clear that Indonesia must change its policies and make the right choice. Ultimately, economics is a science concerned with making choices but it only reveals the consequences of those choices. Politics on the other hand is about deciding which decision is implemented. Therefore there are only two reasons for bad policy. The first is if the politician does not understand the implications of a policy i.e. the economics and the second is if the politician has special interests.
Unfortunately there are still politicians who declare that Indonesia is an oil rich country and therefore the price of gasoline should be low. This is simply not true. Last year, Indonesia produced 345 million barrels of oil, and consumed 423 million barrels creating a deficit. Indonesia’s proven oil reserves are only at 3.93 billion barrels. Therefore, as an oil net-importer country and one that has limited quantity of proven reserves, it is very unwise if we blindly follow the policy of cheap oil fuel typifying countries whose oil reserves are abundant.
Today Indonesia has proven reserves less than those of Malaysia and is misleading if Indonesia is compared with countries like Nigeria. Nigeria has 9 times more oil than Indonesia; it produces 2.5 times more than Indonesia, and consumes only half the amount of fuel of Indonesia.
What do you see your role in changing these assumptions?
As a teacher my job is to tell the truth but politics is a difficult business. When I was interviewed by the parliament to become a member of the National Energy Council’s I was asked the question: “You seems to be an idealist but what will you do if your idea is not implemented by the government?” I answered: “I will tell the stakeholders, including the business community, the media and academics about the idea and hopefully the people will ask the government to reconsider implementing it. I see my job as informing the people about the right path for Indonesia’s energy strategy.
Taking the current subsidy issue as an example, last year we proposed that Indonesia should increase gasoline prices, but this was not implemented. Currently the 2012 budget law only permits a restriction of the use of subsidized gasoline (ron 88) and not an increase in its price. However, most of car owners object to the jump from 4,500 subsidized fuel (50cents) to 8,500 rupiah (95cents) for non-subsidized (ron 93). Indonesia is still not ready with good public transportation or gas conversion kits. In developed cities such as Tokyo, Paris or New York people do not use cars everyday but use public transport for most commutes in their working days. However, Indonesia does not have the good public transportation yet. Therefore the process needs to be a gradual, for example increasing to 6,000 first and then 7,000 rupiah next year etc. This will allow those who do not want to use unsubsidized petrol to convert to gas. Increasing price is therefore more reasonable and parliament and the media are coming round to this way of thinking and are petitioning government to increase the price. This can all be achieved we revise the 2012 budget law.
If Indonesia can use cheaper energy in order to replace oil-fuel (which is more expensive), we can turn the fuel and electricity subsidy fund into a development fund in order to create a better Indonesia.
You mention that investment needs to go into metropolitan transport infrastructure. What do you see as the overall role of infrastructure development in Indonesia’s energy policy?
Infrastructure is needed to develop the domestic market but has a very broad meaning. It is a combination of better roads, gas stations, public transportation infrastructure, pipelines, and gas receiving terminals among others. The projects should be able to get funds from the bank in advance of increasing the price of petrol in order to invest in infrastructure projects, then be paid by revised national budget of 2012. This will give people the choice to move to public transport when the fuel price increases.
Outside of Java there are huge energy reserves including coal, gas, geothermal and biodiesel. The money saved on subsidies can therefore be used for investing in infrastructure outside of Java which is attractive for investors given the energy wealth of these regions. However, Indonesia needs to nurture demand outside of Java by inviting industry to establish itself in these other regions. At the moment, development is only occurring in Java so there is migration towards Java rather than away. Indonesia will develop fast only if these other areas are developed. This will create a good environment for foreign investors.
Why should investors see Indonesia as a good place to invest now?
The climate for investment is better than it was previously thanks to the decentralization and democratization of the country. There are no doubt issues in creating a cohesive environment for the industry between central and regional government. I have many contacts in the People’s Consultative Assembly and regional government; in fact, I am still their advisor for oil and gas. I have a book discussing the strategy of Indonesia’s oil and gas and energy industry and I give this book to the political figures I meet from the regions. I hope that they will read and understand what is needed. Through this book people understand my perspective. You have to be close to all the stakeholders because ultimately it is not about winning debates but creating solutions for everyone.
What other steps should be taken to improve the investment climate for industry?
The government needs to take steps to develop the fiscal culture in Indonesia, which currently is not good. The government imposes the same fiscal burden regardless of economic conditions. It does not matter if the economic condition is good or bad, the government take will remain for example at 85% for oil. In Malaysia the tax is calculated on the basis of revenue over cost. The government take is proportional to the prosperity of the industry. Creating this fiscal environment would reduce risk for investors and be altogether more attractive.
However there are still many other challenges relating to the investment climate which need to be addressed including permits. Unfortunately, there is a saying in Indonesia: “if you can make things more difficult, why make them easier?” Clearly there is also still work to be done on improving the investment climate through better regulation and reducing bureaucracy as well as improved inter-agency coordination. Problems occurring in the operation areas have to be solved, namely: 1. land acquisition; 2. forestry issues; 3. licensing and bureaucracy problems; 4. decentralization; 5. coordination.
The government also needs to look at improving auction quality and the working area information being offered (through better geophysical and geological study) to improve the attractiveness for companies to invest in E&P operations.
It is necessary to improve the overall quality of legal rules, political stability, regulatory certainty, bureaucracy and information systems in the Energy and Natural Resources sector and coordination among the concerned agencies (Ministry of Finance, Ministry of Energy and Natural Resources, National Development Planning Agency, Ministry of Forestry, Ministry of Environment, Ministry of Home Affairs, etc.) as well as between Central and Regional Governments.
I am very close to the industry because I am from an academic background and they were happy when I was appointed. They hope that I can convince the government and parliament to create a better operational environment and that I can make a change; this is what I intend to do.
What would be your final message to the readers of Oil & Gas Financial Journal?
Indonesia needs to be friendly to foreigners and their interests in Indonesia’s oil and gas industry as well as providing for its own people. If you have ever seen the film “We are no angels” there is a scene where two fugitives plan to cross Canadian border over Niagara’s bridge dressed as priests. They tell two real priests in the church: “be nice to strangers because sometimes you are a stranger too”.