Indonesia may lose Opec membership
By Abdullah Al Madani, Special to Gulf News
Indonesia, one of the founding members of the Organisation of Petroleum
Exporting Countries (Opec), has been importing oil since 2003 and is
expected to become a net importer very soon.
This could threaten its membership in Opec, as only countries that
export more than they import are eligible for membership in the
organisation.
Nothing reflects Jakarta's anxiousness better than its decision last
month to establish a panel to examine a possible exit from the grouping.
Indonesia's oil problem is so serious that, since 2002, it has not even
been able to fully meet its output quota currently at 1.425 million
barrels a day from Opec.
It is true that oil and gas last year accounted for 26 per cent of the
country's total export revenue or nearly $ 11.8 billion (Dh44 billion),
but this was mainly because of soaring global oil prices.
Therefore, lower output, combined with possible lower prices, would
seriously affect government revenue and consequently create an
additional deficit.
Indonesia's oil industry is one of the oldest in the world. Oil in
commercial quantities was first discovered in northern Sumatra in 1883
by the Royal Dutch Company, which was merged in 1907 with the British
Shell transport and Trading Company to form Royal Dutch Shell.
The latter has dominated nearly all concessions in Sumatra, Java and
Borneo for decades.
However, Indonesia's most important oil fields, namely the Duri and
Minas, were discovered shortly before the Second World War by Caltex, a
joint venture between the American companies, Chevron and Texaco.
The major change took place in the post-independence era, particularly
in the 1950s and 1960s, when Jakarta increased its control over the oil
sector by establishing several state-owned oil companies, which
ultimately were merged to form the National Oil and Natural Gas Mining
Company (Pertamina).
Jakarta's other form of control was the introduction of the
production-sharing contract, which split oil production between the
contractor and Pertamina and allowed Pertamina to assume ownership of
structures and equipment used for exploration and production.
Most oil deals concluded in the 1970s and 1980s, therefore, were made
under 20-year revenue-sharing contracts in which foreign companies kept
a minority stake and Pertamina took the majority of the revenue.
With improved oil market conditions in the late 1980s, and as a step to
stimulate exploration, Jakarta loosened some provisions for new
contracts and partially lifted Pertamina's decades-long oil monopoly.
As a result the number of foreign oil companies operating in the country
increased.
According to international energy sources, Indonesia currently has
proven oil reserves equal to 5.14 billion barrels with probable reserves
of an additional 5 billion barrels, particularly beneath the surface of
territorial waters.
Thus, the steady decline in production and consequently in export from
1.6 million bpd in 1995 to 1.3 million bpd in 2001, 1.2 million bpd in
2003, and 1 million bpd this year is not due to lack of oil. It is
rather due to the following key factors:
First, domestic demand for oil has been increasing by 7 per cent every
year since the 1980s, despite several price increases.
If this continues without new exploration, and annual production remains
at around 1 million bpd, Indonesia's reserves will not last more than 15
years.
This means that Indonesia, which currently imports some half a million
bpd of fuel from Saudi Arabia to meet domestic demand, will need to
import 2 million bpd by 2019.
Second, while oil consumption increases, output is declining due to the
natural fall off of the ageing oilfields. Four-fifths of the country's
production is pumped from depleting resources that are decades old.
What worsens the situation is the absence of clear, decisive government
strategies to develop these ageing fields or to invest in new ones due
to change of administrations and contradictory regulations.
Spending on exploration and development last year, for example, amounted
to less than $500 million (Dh1.835 billion), the lowest since 1981.
Boosting production
Third, incentives offered by the government to boost production in old
fields or to attract foreign investors have been little or poor.
In addition, the government represented by Pertamina, has frightened new
investors by holding a tough position in disputes with several operating
companies.
The best example is the ongoing dispute with ExxonMobil over profit
sharing, period of concession and development of the country's biggest
known untapped oil deposits, the Cepu field in Central Java.
This, despite the fact that the field holds an estimated 2 billion
barrels of oil and 11 trillion cubic of gas and could produce 180,000
bpd, something that would boost Indonesia's current oil output by 18 per
cent.
Fourth, foreign oil companies seem not to be enthusiastic enough to win
concessions or invest in Indonesia. One of the reasons is that new
exploration blocks are small or medium-sized and located in remote
regions with difficult terrain.
This means the cost of exploration will be substantially higher and
profit will be less. Other reasons include corruption and the continuing
threat of insurrection and terrorism.
It is worth recalling that ExxonMobil's employees have been repeatedly
attacked by militants belonging to the separatist Free Aceh Movement and
its operations have been occasionally interrupted by military campaigns.
One may also add the uncertainty of the investor's profits and interests
in the light of the unclear division of authority among the central and
provincial administrations.
Some analysts say that Indonesia's status in Opec is not under threat,
arguing that domestic consumption of oil will moderate over the next
five years as a result of continuing higher fuel prices and Jakarta's
efforts to encourage the use of alternative energy such as gas and coal.
They add that there is no time limit defining how long the net importer
status may prevail before the country is no longer eligible to be an
Opec member.
Moreover, in Opec's history, there has not been a precedent in which a
member has been dismissed. Other analysts, however, maintain that
Indonesia may soon lose its membership or at best become an observer.
Dr Abdullah Al Madani is a Bahrain-based Gulf researcher and writer on
Asian affairs. He can be contacted at [EMAIL PROTECTED]
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