Indonesian Crude Will Do More to Help the Country Than Foreign Oil

Idries de Vries

Since 1996, Indonesia’s crude oil production has seen a steady decline. Back in 1980, the nation was producing more than 1.7 million barrels per day. In 2012, the government expects production to be just over half that amount, at 900,000 barrels

The government’s concern about this is understandable. The royalties from domestic crude oil production make up a large part of the state budget. But there is also the fact that no economy can function without the availability of energy, and that the future growth of any economy is to a large extent determined by the price at which this energy is available.

To address this concern, the national oil company, Pertamina, has developed a strategy to expand its portfolio of oil and gas production operations abroad. An acquisition in Venezuela was recently confirmed. Negotiations on the acquisition of fields in Iraq are reportedly at an advanced stage. And further acquisitions, in countries such as Kazakhstan and Algeria are rumored to be under consideration.

But while this will help Pertamina to grow its crude oil production and reserves, it will not address the energy issues of the country as a whole.

First, this strategy will not properly address the budgetary concerns of the government. The government claims to receive around 65 percent of the profit from domestic crude oil production through its oil and gas regulations. For its planned investments outside of Indonesia, Pertamina will have to settle for much less than this — a 20 to 30 percent “take” for oil companies is the international average.

To keep the government whole, therefore, Pertamina will have to expand its holdings of foreign crude oil production by two to three barrels for every barrel of domestic crude production lost. Since crude oil production in Indonesia is declining by an average 4.1 percent annually, or around 40,000 barrels per day, this means Pertamina will have to buy about 100,000 barrels per day of foreign crude oil every year. It does not have the cash on hand to meet that kind of target in the long run. So under this strategy, eventually the state budget will become squeezed.

Second, despite Pertamina’s claims to the contrary, this strategy of growing holdings of foreign crude oil production will not help ensure “energy security” for Indonesia. “Energy security” is a strategic concept. It means that a country will be able to meet the energy needs of its domestic economy irrespective of events that might take place in the world, and at prices that keep the domestic economy competitive in the global marketplace. When back in 2010 NATO made “ensuring energy security” for its member states a pillar of its overall strategy, it explained that this energy security required control over both the energy infrastructure and transportation lines.

Obviously, in the real world Pertamina’s “paper control” over some foreign crude oil production operations is not remotely the same as the Indonesian government’s control over domestic crude oil operations.

In the event of a real crisis in any of the countries Pertamina is investing in, such as a major natural disaster or a war, Pertamina would find that the governments there would quickly take full control of the crude oil operations — just as the Indonesian government would in the event of a major crisis here. In other words, Pertamina’s strategy will fall apart once energy security becomes a real issue, which is in times of insecurity.

Indonesia needs an energy policy that focuses on domestic crude oil potential and maximizes the benefits of production for the country.

Despite close to a century of crude oil production in Indonesia, this potential remains substantial. Of Indonesia’s 60 crude oil and natural gas basins, fewer than 20 are producing. Around 15 have seen some preliminary exploration efforts but more than 20 remain fully unexplored with only minimal seismic data being available.

Furthermore, developments in crude oil and natural gas technologies such as horizontal drilling and “fracking” have opened up the possibility of developing reserves that until recently were considered unrecoverable. According to the oil and gas consultancy firm McKinsey, Indonesia possesses a “significant” amount of these “tight oil” and “shale gas” reserves.

Unlike buying a stake in mature and producing fields abroad, a strategy that focuses on the development of this domestic potential is not easy. Most of Indonesia’s unexplored basins are in deepwater (150 to 1,500 meters) or even ultra-deepwater (more than 1,500 meters). Developing the potential in such terrain requires state-of-the art technologies and highly sophisticated project execution skills. The same applies for the development of “tight oil” and “shale gas” reserves. Indonesia lacks both the technologies and skills for this, but with the right policies this can be overcome.

Right now the international “super-majors” manage most crude oil production operations in Indonesia without involvement of Pertamina. But Chevron, Total, ConocoPhillips, Exxon and BP are all renowned for the technology they posses and the discipline with which they utilize this technology. So if Pertamina were to be actively engaged in these operations, perhaps as a junior partner, it would develop practical experience in utilizing the latest and best technologies efficiently.

Seconding some of Pertamina’s most-talented engineers and managers at the international super-majors for a period of time, not unlike an internship, would further help Pertamina strengthen its knowledge base.

These steps would be nothing new in the oil and gas industry, so government policy could make them happen. If the access to technology and practical experience was managed well, with honesty, dedication and hard work that puts national interests ahead of personal ones, armed with the budget it has reserved for buying third-class crude oil production assets abroad, Pertamina could make a difference to Indonesia’s public finance and energy security.

Idries de Vries is an analyst of economic and geopolitical affairs. He can be reached at Idries_devries@yahoo.com.