Indonesia will once again be a net oil exporter

Indonesia has liberalized the upstream oil industry and is moving to liberalize the downstream sector. The Jakarta Post's Riyadi Suparno interviewed energy expert Soebroto to get a better picture of the situation of the energy sector and its prospects. Soebroto, a former energy minister and secretary-general of the Organization of Petroleum Exporting Countries (OPEC), is currently chairman of the Bima Sena mines and energy society which organized this week's Bima Sena International Energy Conference. The following are the highlights of the interview.

Question: Indonesia has become a net oil importer after years of being a net exporter. How did it happen and what are the implications?

Answer: When we were in the 1980s, oil production was around 1.6 million barrels per day (bpd), and imports were not more than 600,000 bpd -- a position where we were a net exporter. But as time went on, two things happened. First, there was not enough investment for exploration and no new reserves were found, resulting in a decrease in production to the current level of around 900,000 bpd.

Second, the economy grew by 7 percent to 8 percent annually, which resulted in an increase of domestic consumption of fuel. The result was that we had to spend or divide our oil production more for domestic use rather than exports. But this was not enough to supply the increasing domestic demand, and as a result, we had to import both crude and fuel products. This brings us to the present situation as a net importer.

The implications of that are two-fold. First, we receive less in terms of foreign exchange because exports decline, but we have to spend more on importing crude oil and fuel. Second, all of this is happening when the prices of oil are extremely high. So, there is a great effect on, first, the balance of trade -- imports higher than exports -- and secondly, a negative current account.

The government, as well as some experts, project that Indonesia will eventually return to its position as a net oil exporter, especially with this week's signing of some important new contracts. Do you share such a projection? And if so, when do you think it will happen?

Being a net importer is temporary. All the signs such as the signing of the contracts and the entrance of new players such as PetroChina and Petronas indicate that we will soon return to become a net exporter again.

It's possible that with new contracts signed at the conference, in the course of 2005, maybe we will be able to again become a net exporter of oil. For instance, if the Cepu problem (involving ExxonMobil and Pertamina over the Cepu oil field in Central Java) is resolved in about a year, it will increase our production by 200,000 bpd. And that will move us again to a situation as a net exporter.

Moreover, we still have quite a large amount of proven reserves -- about nine billion barrels of proven reserves of oil and gas at the end of 2003 -- of which oil accounted for about half. And we still have probable reserves, particularly in the eastern part of Indonesia. But, that area needs more exploration, and exploration means more investment.

As you said there has been not enough investment for exploration to find new reserves. Some experts say it is because of our investment climate, which is not really conducive to attracting investment in exploration. Is that really true? Or, are there any other factors affecting this?

To create an environment that is conducive to luring investment in exploration depends on many factors. The first factor is the geology. I think we still have good geological prospects.

The second thing is economic risks, which depend on the price of oil. And if we look five or 10 years ahead, I think we are moving into a new plateau that prices will no longer be at US$15 or US$25, but more likely to be in the $30 to $35 per barrel range.

Third is political risks, which depend upon the government. And we are confident that the new government, under President Susilo Bambang Yudhoyono, will be stable and therefore political risks will be at a minimum.

Fourth is the security risks. Yes, we still see problems in Aceh and Papua and elsewhere, but overall, the security situation is better now.

Fifth is the supremacy of law. This is something that cannot be done overnight. And we see that the government is now addressing this problem.

Sixth is problems related to regions, which have been imposing more fees and taxes. And I think President Susilo is already addressing that problem.

Then, we have the problem of taxes. Here again, during the meeting on Sunday evening when the President addressed the conference he promised that this problem (that investors are complaining about) would be addressed by the government.

Those are the factors the investors will consider before investing in Indonesia. But improvement is taking place.

Let's now move into the downstream sector. Some have expressed caution that it should never be liberalized because it directly affects the nation's people. What's your comment?

The thinking is that a monopoly of any kind should be phased out because monopolies in an open economic system are just not advisable. So, the new law deregulates the downstream operation and this means other companies outside Pertamina can take over some of the tasks that Pertamina is doing, such as the distribution of different types of fuel. So, there will be more companies active in the downstream sector. There will be competition, and we hope that the public will benefit from the competition.

The important thing about the deregulation of the downstream sector is that prices of domestic fuels will be determined by economic conditions, and this will also result in natural gas being able to compete with oil.

Instead of only relying on oil, industries such as transportation would be better off using natural gas. There are larger reserves of natural gas than there are of oil, so we can use natural gas longer, and it is also cleaner. So we will have a broader energy base, and this will ensure a more secure supply.

But why has downstream liberalization been moving so very, very slow? Pertamina will likely retain its monopoly until at least November next year, the target date set by the oil and gas law to liberalize the downstream sector. What factors are affecting this slow liberalization process?

The deregulation of the downstream operation needs time. We know that Pertamina will not be ready in 2005 as stipulated in the law. We should be realistic, we should prolong it until such time when everybody is ready to work into the restructured downstream operation.

Do we have to wait for other companies or Pertamina to be ready?

Pertamina has been around in the downstream operation for so many years. So, it has much expertise in the downstream sector, such as with tankers and so on, and I think Pertamina will be a strong competitor for any newcomers.

In the last instance, it will be good for Pertamina. Pertamina can concentrate more on its core business, i.e. in the upstream operation.

Actually you make money in the upstream, and you do not make too much in the downstream because, in the upstream sector prices are going up. In the downstream, you do not make so much money because it has a small profit margin.

So, it is logical that Pertamina should devote more time and expertise to the upstream side when you can become big rather than staying in the downstream operation.

We should have the confidence and face the competition as an opportunity. Pertamina's new management is not complaining, but it is building up the confidence, expertise and professionalism. That, in my view, is an encouraging sign.