Indonesia has plenty of oil, but it still has to import it
HoustonChronicle.com - Indonesia has plenty of oil, but it still has to import it
By LYNN J. COOK
Copyright 2005 Houston Chronicle
RESOURCES
A look at estimated net oil export revenues for OPEC member countries in 2005 compared with last year. (In billions)
Country 2005 2004 Change
Saudi Arabia $150.1 $115.6 30%
Iran $41.0 $32.2 27%
United Arab Emirates $39 $30.2 29%
Nigeria $37.7 $29.8 27%
Kuwait $36.9 $27.4 35%
Venezuela $35.5 $29.8 19%
Algeria $29.8 $22.7 31%
Libya $23.9 $18.2 31%
Iraq $19.3 $18.2 6%
Qatar $17.0 $13.5 26%
Indonesia -$0.4 $0.6 -165%
Total $429.8 $338.3 27%
Source: Energy Information Administration
JAKARTA, INDONESIA - Indonesia's teeming capital is a city of glittering skyscrapers and grinding poverty — in other words, a city of contradictions.
Amid such chaos and in a place where things are not always what they seem, many Indonesians are not surprised at the ironic turn their country's oil industry has taken.
Indonesia, Asia's only member of the Organization of the Petroleum Exporting Countries, is now a net importer of crude.
With oil's benchmark price hanging above $60 a barrel, Indonesia should be reaping record profits. Instead, the country is paying through the nose as it buys crude oil and refined products, such as gasoline and diesel, from overseas suppliers.
"This country is so rich in natural resources, but it's failed to manage them. It's crazy," said Dr. Kurtubi, senior economist for Pertamina, the state-controlled oil company that is now semiprivatized.
Kurtubi, who like many Indonesians has one name, has been an outspoken critic of Pertamina's management. Perhaps if Pertamina were the only problem, Indonesia's oil woes would be easily solved. But there's so much more that's hampered the industry:
•The country's energy law, which began to morph in the late 1990s around the time of the Asian financial crisis, levies more taxes than before.
•Fuel subsidies keep gasoline and diesel prices artificially low while encouraging more consumption.
•Violence in Aceh has kept foreign companies that are worried about their workers away from that resource-rich province.
•And, of course, the oil fields in the birthplace of the Royal Dutch Co., which later merged with Shell, are fizzling out after more than 110 years of production.
Put it all together and it's easy to understand why Indonesia has gone from an oil exporting powerhouse to a hobbled importer of crude, Kurtubi says.
According to the United Nations' latest World Investment Report, Indonesia ranked at the bottom in foreign direct investment.
The only nation with a worse track record is Suriname, a small South American country whose main export is alumina, a mineral compound used to make aluminum.
Kicked out of OPEC?
Faced with the possibility of expulsion from OPEC, Indonesia's president, Susilo Bambang Yudhoyono, is trying to make changes to bring Indonesia back into good standing.
It won't be easy. One coup for the president: a tentative agreement with Exxon Mobil Corp. to produce oil from the Cepu field in East Java, which holds at least 500 million barrels of oil and even more natural gas. Peak production is expected to exceed 150,000 barrels per day.
Losers in the deal include Pertamina President Widya Purnama, who wanted his company to operate Cepu, and Pertamina's board of directors. According to Bloomberg News, a government spokesman said all will be fired.
Fuel shortages
The traffic in Jakarta, a city of 12 million, is unparalleled in the United States. When Indonesians from the suburbs and countryside move in each day to work, en masse, Jakarta's population swells to 20 million.
Bajaj, bright orange three-wheeler taxis, jockey for position on the road with cars, trucks and buses. Motorcycles add more confusion — and exhaust — darting in and out of traffic as it snakes along the city's labyrinthine streets.
Much of that traffic time was spent in long lines this summer when the capital city and other big cities were struck with fuel shortages, sparking gridlock at gas stations and heated political debate about the country's fuel subsidies.
As the international price of oil has risen, Indonesia has incrementally taken away some subsidies, but drivers still do not pay market price.
Fereidun Fesharaki, an oil analyst at the East-West Center in Honolulu, said Cepu's development is a success for this political administration, but the best shot Indonesia has for regaining its status as an oil exporter is to eliminate fuel subsidies.
Higher prices will shave off demand, freeing up oil for sale overseas.
In 2004 when the government first cut some subsidies, raising prices, some 90,000 barrels a day of demand were lost, according to Fesharaki. This year demand is expected to fall another 29,000 barrels a day as fuel gets more expensive, but market pricing would dry up 100,000 barrels a day in demand overnight.
A week ago, Indonesia signed a peace agreement with Aceh- nese rebels who have been fighting for independence for three decades. The struggle was fueled, in part, by how the money collected from the region's oil and natural gas revenue was distributed.
Many separatists and human rights workers pointed to corruption within the centralized government in Jakarta as keeping the Acehnese from seeing their fair share.
If the violence stops
If the violence truly stops, some analysts say, international energy companies will be eager to work in Aceh. Fesharaki thinks the production uptick will be slight — hardly enough to make Indonesia a net exporter of oil again.
In fact, he said, that can't happen until Indonesia clearly defines its rules of engagement for energy companies and eliminates the corruption so ingrained in the country's business culture.
"Foreign investors are still leery of investing," he said.
One company testing the waters again is The Woodlands-based Anadarko, which has had Indonesian operations at two points in its history.
Bob Daniels, vice president of exploration and production, said Anadarko has gained access to oil and natural gas acreage through a partnership with Medco, an Indonesian energy company run by members of the politically connected Panigoro family.
The Medco connection is critical, Daniels said, because of that company's low cost of operations and access to drilling rigs in the region.
"Anadarko is recognized for exploration. ... Medco is good at exploiting resources, but putting a new play together isn't something they do particularly well," Daniels said. "We're aligning ourselves to get to some of these big targets."
The incentive Anadarko's after is a new sliding scale for foreign operators. Under the old laws, the government took 85 percent of money generated, leaving 15 percent for investors. Now a company like Anadarko could make up to 40 percent, according to Daniels.
Big role by Chevron
Chevron is, by far, Indonesia's biggest oil producer, pumping more than 10 billion barrels of oil over 50 years from the Duri and Minas fields — and 80 others in central Sumatra. But the mature fields, although they still produce 475,000 barrels per day, are in decline.
George Kirkland, an executive vice president with Chevron, said the Unocal acquisition gives the company some deepwater prospects that could be prolific.
"There's real synergy here," Kirkland said. "Unocal had not done many large projects in the deep water. We're working on lots of them in the Gulf of Mexico, Angola and Nigeria."
But the Unocal assets are geared toward natural gas production, not oil.
Struggles of natural gas
Pertamina's Kurtubi says that while oil should remain important to the government, Indonesia's future is natural gas. That sector is struggling, too.
Even though Indonesia helped pioneer liquefied natural gas — a process that allows gas to be superchilled into a liquid and then shipped around the world much like crude oil — the country looks like it's losing market share, Fesharaki says.
Natural gas production declines are leaving Indonesia short 30 to 40 LNG cargo shipments each month. That means to fill long-term contracts, expensive LNG has to be purchased on the spot market, Fesharaki says. It's a problem leading Taiwan, Japan and others to ditch Indonesian LNG and diversify supply when contracts run out in 2010.
Once again, where Indonesia could be a leader, it is lagging.
BP is trying to change that. It has invested heavily in Indonesian natural gas through the $2.2 billion Tangguh LNG facility in the west Papua region.
Headed for Baja
LNG from this facility is supposed to ship to the LNG regasification plant planned for Baja, Mexico, by Sempra Energy and Shell.
Mark Harris, regional director for Indonesia at IHS Energy, said it's too early to write off the country.
"To say it's broken is entirely too pessimistic," he said. "It's struggled in the last few years, but that's a policy thing. At times the government doesn't seem like it wants change, or there's no urgency. But I honestly think there's still a lot of upside potential.
"People who know Indonesia know they have to be patient."
By LYNN J. COOK
Copyright 2005 Houston Chronicle
RESOURCES
A look at estimated net oil export revenues for OPEC member countries in 2005 compared with last year. (In billions)
Country 2005 2004 Change
Saudi Arabia $150.1 $115.6 30%
Iran $41.0 $32.2 27%
United Arab Emirates $39 $30.2 29%
Nigeria $37.7 $29.8 27%
Kuwait $36.9 $27.4 35%
Venezuela $35.5 $29.8 19%
Algeria $29.8 $22.7 31%
Libya $23.9 $18.2 31%
Iraq $19.3 $18.2 6%
Qatar $17.0 $13.5 26%
Indonesia -$0.4 $0.6 -165%
Total $429.8 $338.3 27%
Source: Energy Information Administration
JAKARTA, INDONESIA - Indonesia's teeming capital is a city of glittering skyscrapers and grinding poverty — in other words, a city of contradictions.
Amid such chaos and in a place where things are not always what they seem, many Indonesians are not surprised at the ironic turn their country's oil industry has taken.
Indonesia, Asia's only member of the Organization of the Petroleum Exporting Countries, is now a net importer of crude.
With oil's benchmark price hanging above $60 a barrel, Indonesia should be reaping record profits. Instead, the country is paying through the nose as it buys crude oil and refined products, such as gasoline and diesel, from overseas suppliers.
"This country is so rich in natural resources, but it's failed to manage them. It's crazy," said Dr. Kurtubi, senior economist for Pertamina, the state-controlled oil company that is now semiprivatized.
Kurtubi, who like many Indonesians has one name, has been an outspoken critic of Pertamina's management. Perhaps if Pertamina were the only problem, Indonesia's oil woes would be easily solved. But there's so much more that's hampered the industry:
•The country's energy law, which began to morph in the late 1990s around the time of the Asian financial crisis, levies more taxes than before.
•Fuel subsidies keep gasoline and diesel prices artificially low while encouraging more consumption.
•Violence in Aceh has kept foreign companies that are worried about their workers away from that resource-rich province.
•And, of course, the oil fields in the birthplace of the Royal Dutch Co., which later merged with Shell, are fizzling out after more than 110 years of production.
Put it all together and it's easy to understand why Indonesia has gone from an oil exporting powerhouse to a hobbled importer of crude, Kurtubi says.
According to the United Nations' latest World Investment Report, Indonesia ranked at the bottom in foreign direct investment.
The only nation with a worse track record is Suriname, a small South American country whose main export is alumina, a mineral compound used to make aluminum.
Kicked out of OPEC?
Faced with the possibility of expulsion from OPEC, Indonesia's president, Susilo Bambang Yudhoyono, is trying to make changes to bring Indonesia back into good standing.
It won't be easy. One coup for the president: a tentative agreement with Exxon Mobil Corp. to produce oil from the Cepu field in East Java, which holds at least 500 million barrels of oil and even more natural gas. Peak production is expected to exceed 150,000 barrels per day.
Losers in the deal include Pertamina President Widya Purnama, who wanted his company to operate Cepu, and Pertamina's board of directors. According to Bloomberg News, a government spokesman said all will be fired.
Fuel shortages
The traffic in Jakarta, a city of 12 million, is unparalleled in the United States. When Indonesians from the suburbs and countryside move in each day to work, en masse, Jakarta's population swells to 20 million.
Bajaj, bright orange three-wheeler taxis, jockey for position on the road with cars, trucks and buses. Motorcycles add more confusion — and exhaust — darting in and out of traffic as it snakes along the city's labyrinthine streets.
Much of that traffic time was spent in long lines this summer when the capital city and other big cities were struck with fuel shortages, sparking gridlock at gas stations and heated political debate about the country's fuel subsidies.
As the international price of oil has risen, Indonesia has incrementally taken away some subsidies, but drivers still do not pay market price.
Fereidun Fesharaki, an oil analyst at the East-West Center in Honolulu, said Cepu's development is a success for this political administration, but the best shot Indonesia has for regaining its status as an oil exporter is to eliminate fuel subsidies.
Higher prices will shave off demand, freeing up oil for sale overseas.
In 2004 when the government first cut some subsidies, raising prices, some 90,000 barrels a day of demand were lost, according to Fesharaki. This year demand is expected to fall another 29,000 barrels a day as fuel gets more expensive, but market pricing would dry up 100,000 barrels a day in demand overnight.
A week ago, Indonesia signed a peace agreement with Aceh- nese rebels who have been fighting for independence for three decades. The struggle was fueled, in part, by how the money collected from the region's oil and natural gas revenue was distributed.
Many separatists and human rights workers pointed to corruption within the centralized government in Jakarta as keeping the Acehnese from seeing their fair share.
If the violence stops
If the violence truly stops, some analysts say, international energy companies will be eager to work in Aceh. Fesharaki thinks the production uptick will be slight — hardly enough to make Indonesia a net exporter of oil again.
In fact, he said, that can't happen until Indonesia clearly defines its rules of engagement for energy companies and eliminates the corruption so ingrained in the country's business culture.
"Foreign investors are still leery of investing," he said.
One company testing the waters again is The Woodlands-based Anadarko, which has had Indonesian operations at two points in its history.
Bob Daniels, vice president of exploration and production, said Anadarko has gained access to oil and natural gas acreage through a partnership with Medco, an Indonesian energy company run by members of the politically connected Panigoro family.
The Medco connection is critical, Daniels said, because of that company's low cost of operations and access to drilling rigs in the region.
"Anadarko is recognized for exploration. ... Medco is good at exploiting resources, but putting a new play together isn't something they do particularly well," Daniels said. "We're aligning ourselves to get to some of these big targets."
The incentive Anadarko's after is a new sliding scale for foreign operators. Under the old laws, the government took 85 percent of money generated, leaving 15 percent for investors. Now a company like Anadarko could make up to 40 percent, according to Daniels.
Big role by Chevron
Chevron is, by far, Indonesia's biggest oil producer, pumping more than 10 billion barrels of oil over 50 years from the Duri and Minas fields — and 80 others in central Sumatra. But the mature fields, although they still produce 475,000 barrels per day, are in decline.
George Kirkland, an executive vice president with Chevron, said the Unocal acquisition gives the company some deepwater prospects that could be prolific.
"There's real synergy here," Kirkland said. "Unocal had not done many large projects in the deep water. We're working on lots of them in the Gulf of Mexico, Angola and Nigeria."
But the Unocal assets are geared toward natural gas production, not oil.
Struggles of natural gas
Pertamina's Kurtubi says that while oil should remain important to the government, Indonesia's future is natural gas. That sector is struggling, too.
Even though Indonesia helped pioneer liquefied natural gas — a process that allows gas to be superchilled into a liquid and then shipped around the world much like crude oil — the country looks like it's losing market share, Fesharaki says.
Natural gas production declines are leaving Indonesia short 30 to 40 LNG cargo shipments each month. That means to fill long-term contracts, expensive LNG has to be purchased on the spot market, Fesharaki says. It's a problem leading Taiwan, Japan and others to ditch Indonesian LNG and diversify supply when contracts run out in 2010.
Once again, where Indonesia could be a leader, it is lagging.
BP is trying to change that. It has invested heavily in Indonesian natural gas through the $2.2 billion Tangguh LNG facility in the west Papua region.
Headed for Baja
LNG from this facility is supposed to ship to the LNG regasification plant planned for Baja, Mexico, by Sempra Energy and Shell.
Mark Harris, regional director for Indonesia at IHS Energy, said it's too early to write off the country.
"To say it's broken is entirely too pessimistic," he said. "It's struggled in the last few years, but that's a policy thing. At times the government doesn't seem like it wants change, or there's no urgency. But I honestly think there's still a lot of upside potential.
"People who know Indonesia know they have to be patient."
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