Crude Oil

Crude oil or petroleum - a fossil fuel that forms the basis for oil fuel, petrol and many chemical products - is a vital energy resource as oil accounts for a significant percentage of the world's energy consumption. A severe negative feature of oil is that - similar to the burning of coal - petroleum combustion is the largest contributor to the increase in global atmospheric CO2. Oil spills from tanker ships have also caused severe damage to the earth's environment.

The top oil producing countries, that together account for around 40 percent of total global crude oil production, are Saudi Arabia, Russia, the United States, China and Iran.

Top Oil Producing Countries in 2011

  1. Saudi Arabia      11,161,000 bpd
  2. Russia      10,280,000 bpd
  3. United States        7,841,000 bpd
  4. Iran        4,321,000 bpd
  5. China        4,090,000 bpd
20. Indonesia          942,000 bpd

bpd = barrels per day
Source: BP Statistical Review of World Energy 2012

Although currently many countries are delving into the potential of renewable energy, the global importance of - and dependency on - oil cannot be denied, nor neglected. Fossil fuels will remain to be the most important sources of global primary energy, with oil accounting for 33 percent, coal for 28 percent and natural gas for 23 percent of the total (IMF: April 2011). Renewable sources only constitute a fraction of the total global primary energy supply (primary energy includes fossil fuels - oil, coal and natural gas -, nuclear energy and renewable energy - geothermal, hydropower, solar and wind).

Increased demand for crude oil in combination with supply-side concerns during the 2000s caused the oil price to reach historic heights. Although this rising trend was temporarily interrupted by the global financial crisis of 2008-2009, global demand and thus its price rose substantially after 2009, largely due to rising consumption levels of crude oil in those emerging and developing countries that show robust GDP growth. China accounts for a large share of the world's energy consumption, therefore affecting world market prices for primary energy sources. Its consumption is forecast to rise significantly in the foreseeable future, particularly if it can sustain rapid growth.


Crude Oil in Indonesia

Indonesia's Declining Oil Production and Rising Oil Consumption

Starting in the 1990s Indonesia's crude oil production has experienced a steady downward trend due to a lack of exploration and investments in this sector. In recent years it is assumed that Indonesia's oil and gas sector actually even hampered national growth (national growth in 2010 was 6.1 percent but excluding the oil and gas sector this growth would have been 6.6 percent). Oil production targets, set by the government at the start of each year, have not been met for a number of years in a row because most oil production stems from mature oil fields. Today, Indonesia's total of oil refineries have roughly the same combined capacity as a decade ago, indicating that there has been limited progress in oil production, resulting in the current need to import oil to meet domestic demand.

The decline in Indonesia's oil production in combination with increased domestic demand turned Indonesia into a net oil importer from 2004 onwards, implying that it had to terminate its long-term membership (1962-2008) in the Organization of Petroleum Exporting Countries (OPEC). However, Indonesia targets to re-join the OPEC around 2020; an ambitious target that will require more investments as well as a conducive investment climate in the country's oil sector (see below).

The table below exhibits Indonesia's declining oil production in the last decade. It is divided in two production numbers; one taken from multinational oil and gas company BP Global (of which the numbers constitute crude oil, shale oil, oil sands and natural gas liquids), and the other numbers taken from the Indonesian state oil and gas regulator BPMigas (of which the numbers constitute crude oil and condensate). BPMigas was changed to SKK Migas in 2012 after the Indonesian Constitutional Court ordered to disband the regulator.

Indonesia's Oil Production¹

   2003  2004  2005  2006  2007  2008  2009  2010  2011  2012
BP Global
1,176 1,130 1,090   996   972 1,003   990 1,003    942  
BPMigas 1,147 1,096 1,062 1,006   954   977   949   945   902  870²

¹ in thousand barrels per day (bpd)
² projection by BPMigas

Sources: BP Statistical Review of World Energy 2012 and BPMigas

The lack of exploration and other investments in this sector that have resulted in the decline in Indonesia's oil production are due to weak government management, bureaucracy, an unclear regulatory framework and legal uncertainty regarding contracts.

In contrast, Indonesia's oil consumption is showing a steady upward trend. Due to an increasing population, an expanding middle class and a growing economy demand for oil is increasing continuously.

Indonesia's Oil Consumption

    2003 
  2004 
  2005 
  2006 
  2007 
  2008 
  2009 
  2010 
  2011 
Barrels per day¹
 1,210  1,278  1,263  1,234  1,271  1,263  1,316  1,426  1,430

¹ in thousands
Source: BP Statistical Review of World Energy 2012

Most of Indonesia's oil production is concentrated in basins in the western part of the country. But because of few significant new oil discoveries in this western part, the government has shifted its focus towards eastern Indonesia. Proved oil reserves throughout the country, however, have fallen fast according to a publication of oil company BP. In 1991 Indonesia had 5.9 billion barrels of proven oil reserves but this amount has declined to 4.0 at end 2011. Around 60 percent of Indonesia's new oil field potential is located in offshore deep-water that requires advanced technology and large capital investment to start production.

Government Policy that Influences Indonesia's Oil Consumption

One frequently criticized government policy in Indonesia is that fuel - to a large extent - is subsidized by the state budget. Although this measure aims at supporting the poorer segments of Indonesian society, richer segments are in fact the ones benefiting the most from subsidized fuel. Moreover, it results in a significant increase in fuel demand, thus placing serious stress on the government's budget deficit. Extra allocations to meet rising subsidized fuel demand are made annually, while the artificial low price of fuel causes market distortions. The government realizes the importance of reducing these fuel subsidies, a move that would be highly supported by international organizations such as the World Bank and the International Monetary Fund (IMF), but its reduction or removal is, however, a highly sensitive issue in Indonesia and will trigger mass demonstrations across the country, thus implying political risks for the ruling elite.

Contribution of Oil to Indonesia's Domestic Economy

Indonesia's oil and gas sector have traditionally contributed significantly to the Indonesian economy through state export revenues and foreign exchange reserves. However, as the contribution of oil has been declining during the last decades, so has its contribution to state revenue. Currently, oil and gas combined contribute around 13 percent of domestic revenues (in 1990 this number reached 40 percent). As mentioned above the oil sector is currently actually hampering the Indonesian economy from reaching higher levels of growth.

According to information from the Ministry of Energy existing proven reserves of crude oil in Indonesia will last around 23 years. Most oil production is carried out by foreign contractors under production sharing contracts arrangements. Chevron Pacific Indonesia, subsidiary of Chevron Corporation, is the largest producer of crude oil in the country, accounting for around 40 percent of national production.

Cepu Oil Project; Banyu Urip Field

The Banyu Urip oil field in East Java, part of the Cepu block, is the largest oil reserve (containing around 450 million barrels of oil) that Indonesia is yet to exploit and which can contribute significantly to the government's production target of one million barrels per day (bpd) from 2015 onwards. This USD $1.3 billion project in which Exxon Mobil and state-owned enterprise Pertamina each hold a 45 percent stake, is expected to commence production in May 2014. Production is estimated to reach 185,000 bpd starting from late 2014. Whether its production can start in 2014 is still uncertain as there are still issues with regard to permits, human resources and social issues.


Future Outlook of the Oil Sector in Indonesia

Similar to many other countries, Indonesia seeks to lower its dependency on oil as a source for energy due to the high oil price and environmental issues. Currently, approximately 50 percent of the country's energy is derived from oil; a number the government intends to reduce to 23 percent by 2025 by placing more emphasis on renewable sources and coal.

   Energy Mix
      2011
 Energy Mix
      2025
Oil        50%        23%
Coal        24%        30%
Gas        20%        20%
Renewable Energy         6%        26%

Source: Ministry of Energy and Mineral Resources

Despite the current situation, the Indonesian government has high hopes to restore the power of its oil sector as the country still contains large oil reserves, and demand (in particular domestic) is increasing. From 2015 onwards the government targets production quantities of - at least - one million barrels per day, subsequently becoming an oil exporter again as well as re-joining the OPEC by 2020. But in order to achieve these targets, large-scale investments, supported by a transparent and secured regulatory framework (that also foresees in good coordination between the ministry and local governments), are needed. Lack of investments in new oil exploration has resulted in decreasing levels of oil production during the last two decades as the country's oil fields mature. If the government does not provide incentives that stimulate investments in the development of the upstream oil sector, this declining trend is not likely to reverse.


Large Companies Occupied in the Crude Oil Industry of Indonesia

• Chevron Pacific Indonesia
    Company File  |  Website
• Pertamina      Company File  |  Website
• Total     Company File  |  Website
• ConocoPhillips      Company File  |  Website
• PetroChina     Company File  |  Website
• CNOOC      Company File  |  Website
• Medco      Company File  |  Website
• BP      Company File  |  Website
• Kodeco      Company File  |  Website