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 2013:

  1. Saudi Arabia   11,525,000 bpd
  2. Russia   10,788,000 bpd
  3. United States   10,003,000 bpd
  4. China    4,180,000 bpd
  5. United Arab Emirates    3,646,000 bpd
23. Indonesia     882,000 bpd

bpd = barrels per day
Source: BP Statistical Review of World Energy 2014

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 economic 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 the country's oil and gas sector actually hampered national GDP growth. Oil production targets, set by the government at the start of each year, have not been achieved 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 SKKMigas in 2012 after the Indonesian Constitutional Court ordered to disband the regulator.


Indonesia's Oil Production¹

   2004  2005  2006  2007  2008  2009  2010  2011  2012  2013
BP Global
1,130 1,090   996   972 1,003   990 1,003    942   918   882
SKKMigas 1,096 1,062 1,006   954   977   949   945   902   860   825

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

Sources: BP Statistical Review of World Energy 2014 and SKKMigas

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 a growing population, an expanding middle class and a growing economy, demand for fuel is increasing continuously.


Indonesia's Oil Consumption

   2003 
 2004
 2005 
 2006 
 2007 
 2008 
 2009 
 2010 
 2011
 2012  2013
Bpd¹
1,222 1,299 1,285 1,247 1,299 1,294 1,334 1,449 1,572 1,597 1,623

¹ in thousands
Source: BP Statistical Review of World Energy 2014

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 3.7 at end 2013. 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 has 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 accounts for around 13 percent of domestic revenues (in 1990 this figure was 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. Other major players in Indonesia's oil industry are state-owned Pertamina, Total, ConocoPhillips, PetroChina, CNOOC, Medco, BP, Kodeco, and Exxon Mobil.

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 Indonesia's oil production rates. This USD $2.5 billion project in which Exxon Mobil and state-owned enterprise Pertamina each hold a 45 percent stake (through subsidiaries Mobil Cepu and Pertamina EP Cepu) is expected to commence production in the first quarter of 2015. Production is estimated to reach 165,000 bpd in mid-2015.


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.