Indonesia is important to world energy markets because
of its OPEC membership and substantial, but diminishing, oil production.
Also, Indonesia is the world's largest liquefied natural gas (LNG) exporter.
Through the Natuna and Wiriagar gas field developments, Indonesia will
remain an important energy source for Asia.
After many years of strong economic growth and expansion, Indonesia is now in the midst of an economic crisis that befell Southeast Asia in mid-1997. From 1991-1995, the country's GDP rose an average 8% per year. But in 1998, Indonesia's GDP growth rate became negative at -13.5%, with 1999 expected to see a further decline of 3.9%. According to Indonesian government officials, prices rose nearly 78% in 1998. The economic crisis facing Indonesia has resulted in increased poverty levels. The World Bank believes that by the end of 1998, the number of Indonesians living below the poverty line reached nearly 40% of the population.
With about 75% of Indonesian businesses in technical bankruptcy following the country's economic collapse, the government was forced to turn to the International Monetary Fund for an emergency debt-relief package totaling $43 billion. The IMF has recommended that Indonesia implement an economic reform program in order to help save its economy. IMF recommendations include creating greater transparency in the issuing of government loans and subsidies, and enforcing laws and regulations in the area of government procurement. The government has announced several reform initiatives since receiving the IMF bailout package, including the planned privatization of several sectors of the economy. The liberalization of the economy is coming at a high cost, as it is resulting in lay-offs and price increases. Consequently, policy makers have had to face many political and social hurdles in implementing reforms.
In early January 1999, the IMF approved Indonesia's budget for fiscal years 1999 and 2000, saying it is broadly in line with the aims of the IMF economic reform program. President B. J. Habibie will seek an additional $10 billion in fresh loans from various sources in 1999 to finance the government's 1999 fiscal year budget deficit. Government officials have said the 1999 budget deficit will be larger than 1998's as a result of lower revenue from oil exports and the emerging costs to the government of capitalizing the country's troubled banks by issuing government bonds. In early January 1999, the government lowered its estimated crude oil price for the calculation of the 1999/2000 draft state budget from the current $13.50 a barrel to $10.50 a barrel. Oil and gas exports are Indonesia's largest foreign currency earners, accounting for about 35% of total export earnings and 30% of total government revenues.
Predictions for economic recovery next year are clouded by political uncertainty and the fear of unrest ahead of parliamentary elections scheduled for June 1999.Suharto resigned in May 1998. Vice President B.J. Habibie, 61, succeeded Suharto as president.
Indonesia currently holds proven oil reserves of 5 billion barrels. This represents a 14 % decline in proven reserves since 1994. Much of Indonesia's proven reserve base is located onshore. Central Sumatra is the country's largest oil producing province and the location of the large Duri and Minas oil fields. Other significant oil field development and production is located in accessible areas such as offshore northwestern Java, East Kalimantan, and the Natuna Sea. Indonesian crude oil varies widely in quality, with most streams having gravities in the 28o to 37o API range. Indonesia's two main export crudes are Sumatra Light, or Minas, with a 35o API, and the heavier, 22o API Duri crude.
During the first ten months of 1998, Indonesian crude oil production remained flat at about 1.3 million barrels per day (bbl/d). Crude oil production has ranged between 1.3 and 1.4 million bbl/d since 1990. Indonesia also produces approximately 180,000 bbl/d of natural gas liquids and lease condensate, which are not part of its OPEC quota, bringing the country's total oil production to around 1.6 million bbl/d. Indonesia is the only Southeast Asian member of OPEC. In the wake of a low oil price environment, Indonesia would like the duration of the OPEC oil production cuts agreed to in Vienna in June 1998 to be extended until the end of 1999 to let world oil prices stabilize at a satisfactory level. Under the June OPEC agreement, Indonesia's oil production quota was set at 1.28 million bbl/d.
Indonesia's recent oil production has remained relatively flat as introduction of crude streams from new, smaller fields has helped compensate for declines at many of the country's mature oil fields. To meet its goal of increasing production, Indonesia has stepped up efforts to sign new oil exploration contracts. The vast majority of Indonesia's producing oil fields is located in the central and western sections of the country. Therefore, the focus of new exploration has been on frontier regions, particularly in eastern Indonesia. Sizable, but as of yet unproven, reserves may lie in the numerous, geologically complex, pre-tertiary basins located in eastern Indonesia. These regions are much more remote and the terrain is more difficult to explore than areas of western and central Indonesia. The government has estimated that it will need $3.5 billion or more per year to locate new oil and gas deposits.
In November 1998, Indonesia's state oil company Pertamina announced it had signed ten new oil exploration contracts, seven production sharing contracts (PSCs) and three technical assistance contracts (TACs). Including these contracts, Pertamina has awarded 22 new oil contracts in 1998 compared with 28 in 1997 and 13 in 1996. The seven PSCs include Arco and Indonesia Petroleum Limited for the east and west Arguni blocks onshore and offshore Irian Jaya; Unocal for the offshore Sangkarang block in South Sulawesi and the offshore Lompa block in the Makassar Strait; Conoco for the offshore Tabong block in the Natuna Sea; Inpex for the offshore Masela block in the Timor Sea; the Indonesian firm Namu Niugini for the Rombebai block onshore and offshore Irian Jaya.
Oil Sector Reforms
The liberalization of Indonesia's downstream oil and gas sector has been under discussion for several years. In recent months, a new proposed oil law is creating controversy among the oil industry. The new law introduces the total unbundling principle, which requires separate legal entities for exploration and production, distribution, transportation, and retail. The restructuring of the sector aims to end the monopoly status of Pertamina and introduce competition. The new oil law also aims to transfer control over exploration and production contracts from Pertamina to the Ministry of Mines and Energy. The law is to be voted on in early 1999.
The law, which is in its draft stages, is creating tension between Pertamina and the state government. Pertamina's pressure to reform itself was increased when Soegianto, president of Pertamina for less than a year, was fired by President B.J. Habibie in December 1998. The new president is Martiano Hadianto, the post-Suharto director-general for customs. According to the Far Eastern Economic Review (FEER), the change will aid Kuntoro implement reforms and cost-cutting measures at Pertamina.
The cancellation of fuel subsidies is one of the conditions demanded by the IMF for its $43 billion bailout package. The government is required to abolish fuel subsidies by the end of 1999. However, as removing fuel subsidies results in an increase in fuel prices, such a move is politically unpopular. This was demonstrated by the fuel riots that erupted in the summer of 1998 when Suharto removed fuel subsidies and price increased by approximately 72%. To prevent new riots, the government reinstated fuel subsidies and lowered fuel prices, although not to their original levels. In early January 1999, Kuntoro promised the Indonesian people that the government would not increase the prices of most fuel products on the domestic market during the 1999/2000 fiscal year.
Indonesia has eight refineries with a combined capacity of 930,000 bbl/d. The largest refineries are the 285,000-bbl/d Cilacap in Central Java, the 241,000-bbl/d Balikpapan in Kalimantan, and the 125,000-bbl/d Balongan, in Java.
Financial problems are plaguing the refining sector as a result of the country's economic crisis. According to Platt's Oilgram News, Samto Utomo, Pertamina's director of processing says that Indonesia's refined products demand has fallen by about 10%, while demand for jet fuel is down more than 20% in 1998. Recently, the government granted tax holidays of 10-12 years to investors building new oil refineries outside Java. Local media reports indicate that the Minister of Investment Hamzah Haz announced the issuance of new licenses to 16 investors to build oil refineries worth about $23.42 billion. As of November 1998, none of the projects had been implemented.
In August 1998, plans to float Pertamina's refining division as an independent strategic business in October were announced. Included in the plans was Pertamina's stated intention to merge seven of its oil refineries into one corporate unit. The actual implementation of this program has not been completed at this time.
Indonesia is ranked thirteenth in the world with proven natural gas reserves of 72.3 trillion cubic feet (Tcf). Most of the country's gas reserves are located near the Arun field in North Sumatra, around the Badak field in East Kalimantan, in smaller fields offshore Java, the Kangean Block offshore East Java, a number of blocks in Irian Jaya, and the Natuna D-Alpha field, the largest in Southeast Asia. Despite its significant gas reserves and its position as the world's largest exporter of liquefied natural gas (LNG), Indonesia still relies on oil to supply about 60% of its energy needs. As Indonesia's oil production has flattened in recent years, the country has tried to shift towards using its natural gas resources for power generation. However, the domestic gas market is still considered immature and the country lacks a domestic network and pipeline infrastructure to provide widespread distribution.
Following a decline in demand from Indonesia's main customers of LNG, Japan and South Korea, Pertamina has estimated that its LNG exports decreased by 4.2% in 1998.
A particularly significant Indonesian gas field is the Natuna D-Alpha natural gas field, located in the South China Sea, 683 miles north of Jakarta and 140 miles northeast of Natuna Island. Discovered in 1970 by Italy's Agip, the structure contains an estimated 46 Tcf of recoverable reserves. However, the gas is extremely impure, with carbon dioxide (CO2) content of approximately 71%. Due to the impure nature of the gas and the high costs of development, Agip returned its interests in the field to Pertamina. The field is currently held by a consortium led by Exxon, the operator with a 50% share, Mobil with 26%, and Pertamina with 24%.
The consortium is currently trying to market the gas, but cost estimates for exploiting the field have been placed at more than $40 billion. The project calls for construction of at least 18 offshore platforms, six for drilling, six for treating, four for injection work, and two for staff quarters. The injection work is a major reason for the high cost estimates. Another problem for the Natuna project is how to get the gas to a variety of potential markets. Although no deals have been initiated, a number of proposals have surfaced. The proposals include: a 1,226-mile pipeline from Natuna to the Arun LNG complex in north Sumatra and pipelines to Thailand, Singapore, South Sumatra, and Java. Also adding to the potential costs of developing the field is that part of the field lies within territory claimed by China, and Indonesia has been developing a defense strategy for the area with assistance from Australia.
The recent merger of Exxon and Mobil has raised speculation that Natuna LNG could replace the depleting gas at Mobil's Arun LNG plant at North Sumatra. However, faced with slowing LNG demand in Indonesia's main LNG export markets- Japan and South Korea - the Natuna LNG project was further delayed in early 1998. Meanwhile, Mobil has recently completed a new offshore gas platform to boost supply at Arun. The platform has a processing capacity of 450 Mmcf/d. Production at the platform is expected to start in mid-1999.
The Natuna development project also faces stiff competition from other gas fields within Indonesia. This potential competition includes Atlantic Richfield Company's planned Tangguh LNG project in Irian Jaya, based on over 13 Tcf of natural gas reserves found onshore and offshore the Wiriagar and Berau blocks. Production of 6 million tons of LNG per year is scheduled to commence in 2003. Arco holds a 48% interest in the Berau block with partners Occidental Berau of Indonesia Inc. at 22.87%, Nippon Oil Exploration, 17.14% and KG Berau Petroleum, 12%. For the Wiriagar block, Arco holds an 80% interest and KG Wiriagar Petroleum Ltd. holds the remaining 20%. However, as in the Natuna LNG project, the three major markets for Tangguh LNG are Japan, Korea, and Taiwan and, the ongoing Asian economic crisis could cause delays in securing production plans and sales contracts.
A gas pipeline deal between Pertamina and Singapore's Sembawang Engineering and Construction Corporation is currently in negotiations. The two companies signed a letter of intent (LOI) in May 1997 for Sembawang to purchase 325 Mmcf/d of gas from the West Natuna gas fields for 22 years starting in 2000. The LOI also includes the construction of a 300-mile, underwater pipeline to move the gas from West Natuna to Singapore. The pipeline is estimated to cost between $300-$400 million, with an initial capacity of 150 Mmcf/d, eventually reaching 325 Mmcf/d. The parties are scheduled to finalize the deal sometime in mid January 1999.
The Indonesian government, through the State Gas Company ( PGN), is currently planning to establish a network of pipelines to facilitate distribution of natural gas supplies to consumers. For instance, there is now a plan to optimize the utilization of gas supply by constructing pipelines to transport supply from the South Sumatran gas fields to West Java. Another plan is to lay pipelines from the Asamera Corridor Block, also in South Sumatra, to the Duri oil fields in Central Sumatra to be utilized in the EOR project. This pipeline grid will eventually be extended to Batam Island.
Gas Sector Reforms
Indonesian Energy Minister Kuntoro told delegates at the Asia Pacific Petroleum Conference in September 1998 that Indonesia will privatize Peruum Gas Negara (PGN), the state gas company, by "unbundling the various activities to facilitate open competition". Included in the reform agenda are plans to remove gas pricing subsidies.
Indonesia has 5.75 billion short tons of recoverable coal reserves, of which 85% is lignite and subtuminous and 15% is anthracite and bituminous. Sumatra contains roughly two-thirds of Indonesia's total coal reserves, with the balance located in Kalimantan, West Java, and Sulawesi. In 1996, Indonesia exported 40.2 million short tons (Mmst), or about 76% of its coal production. The majority of these exports are destined for Japan, South Korea, Taiwan, and Hong Kong.
Indonesia's current economic crisis has had a mixed impact on the country's coal industry. On the one hand, Indonesian exports of coal dropped in 1998 due to lower regional demand. More importantly however, mine operators have actually profited from the depreciation of the rupiah because most of their products are exported in dollars while operational costs are paid in rupiah.
Indonesia has electrical generating capacity estimated at 21.3 gigawatts, with 82% coming from thermal sources, 15% from hydro sources, and 3% from geothermal sources. There are at least 26 private power projects totaling 24,751 MW that are at risk of bankruptcy in Indonesia due to the economic crisis and the deteriorating financial position of state-owned electricity utility Perusahaan Listrik Negara (PLN). Before the crisis, there were 39 projects totaling 30,072 MW in development or under construction, according to the Global Power Project Data Disk, published by the McGraw-Hill Companies. Industry sources believe PLN will have to renegotiate almost all of the power-purchase agreements (PPAs) it has signed, as the PPAs are in dollars, which has made them increasingly difficult to pay due to the major decline in value of the Indonesian rupiah. However, in public statements, Kuntoro has said the government will honor all contracts with developers. PLN could experience losses of as much as $1billion to $2 billion this year if it has to meet obligations to purchase electricity from independent power producers (IPPs). Since March, PLN has made only partial payments to the 135-MW Sengkang project owned by Energy Equity Corporation of Perth, Australia, and El Paso Energy International. Hopewell Holdings recently declared force majeure and ceased work in its 1,320 MW Tanjung Jati-B project in central Java. Construction started in 1996 and the plant was due on-line in early 1999. These are just a few examples of canceled or delayed IPP projects in Indonesia.
In September 1998, the Habibie government announced plans to break up PLN and to allow foreign companies to sell electricity directly to the end-users. Until now, PLN has been the sole buyer and seller in the power market, buying from IPPs (mostly in dollars) and selling to the public (mostly in rupiah).
Indonesia has three, small nuclear research reactors at Bandung, Jogjakarta, and Serpong on Java. The National Atomic Energy Agency (Batan) has been tasked with developing plans for the construction of 7-12 nuclear power plants along Java's north coast over the next 25 years. If all 12 are built, the combined capacity would be 7,000 MW. The first is the proposed $1.2-billion plant planned for construction at Mount Muria, an inactive volcano in Central Java. However, in October 1998, the director of the Batan Iyos R. Subki, announced that the construction of the plant has been postponed due to the economic crisis. The nuclear plant project was described as "not profitable".