Indonesia will once again be a net oil exporter

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.