24 January 2020 (closed)
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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 CO2². Oil spills from tanker ships have also caused severe damage to the earth's environment.
The top oil producing countries, that together account for nearly 45 percent of total global crude oil production, are the United States, Saudi Arabia, Russia, and China.
World's Top Oil Producing Countries in 2015:
|1. USA||12,704,000 bpd|
|2. Saudi Arabia||12,014,000 bpd|
|3. Russia||10,980,000 bpd|
|4. Canada||4,385,000 bpd|
|5. China||4,309,000 bpd|
|24. Indonesia|| 825,000 bpd
bpd = barrels per day
Source: BP Statistical Review of World Energy 2016
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 highs. Although this rising trend was temporarily interrupted by the global financial crisis of 2008-2009, global oil demand rose substantially after 2009 (and thus the price rose accordingly), 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 and therefore affects world market prices for primary energy sources.
However, from mid-2014 global oil prices started to decline sharply on sluggish global economic activity (particularly due to rapidly falling economic growth in China as its government has been trying to shift the economy from export-oriented to become consumption-oriented) and an increase in US shale production, while the Organization of Petroleum Exporting Countries (OPEC) decided not to curb production rates. In February 2016 oil prices touched 13-year lows. After this recent low, prices somewhat started to recover.
Crude Oil Price:
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 onward, implying that it had to terminate its long-term membership (1962-2008) in the OPEC. However, Indonesia will re-join the OPEC in December 2015.
The table below exhibits Indonesia's declining oil production over the last decade. The table is divided in two production figures; one taken from multinational oil and gas company BP Global (of which the figures constitute crude oil, shale oil, oil sands and natural gas liquids), and the other figures are taken from Indonesian state oil and gas regulator SKKMigas (these figures constitute crude oil and condensate).
Indonesia's Oil Production¹:
¹ in thousand barrels per day (bpd)
Sources: BP Statistical Review of World Energy 2016 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. This creates an investment climate that is not appealing to investors, particularly if it involves costly, long-term investment.
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. As domestic production cannot meet domestic demand, Indonesia imports about 350,000 bpd and 500,000 barrels of fuel per day from several countries.
Indonesia's Oil Consumption:
¹ in thousands
Source: BP Statistical Review of World Energy 2016
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 2014. 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 heavily criticized government policy of Indonesia was the decade-long fuel subsidy policy which - to a large extent - was subsidized by the state budget. Although this policy aimed at supporting the poorer segments of Indonesian society, it were mostly the richer segments (including the middle class) who were the ones benefiting the most from subsidized fuel. Moreover, the policy led to a significant increase in fuel demand, thus placing serious stress on the government's budget deficit (in fact it implied that the state budget was dangerously linked to the volatile oil price). Extra allocations to meet rising subsidized fuel demand were made annually, while the artificial low price of fuel caused market distortions. Reduction of removal of fuel subsidies are a highly sensitive issue in Indonesia as it causes mass demonstrations across the country (implying political risks for the ruling elite). After two subsidized fuel price hikes in June 2013 and November 2014 (triggering high inflation and demonstrations), the Indonesian government finally decided to scrap gasoline subsidies in January 2015 (a relatively easy move amid the globe's low petroleum prices at the start of 2015) while introducing a fixed IDR 1,000 per liter subsidy for diesel. This move was supported by international organizations such as the World Bank and the International Monetary Fund (IMF).
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 account 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 and Mineral Resources, 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 table above shows that Indonesia's oil production has been in a state of decline. However, despite several oil & gas contractors in Indonesia have reduced their drilling activities due to low oil prices, there exists expectation of a rebound as several large Indonesian oil fields are to become operational. 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 volume. This USD $2.5 billion project in which Exxon Mobil and Pertamina each hold a 45 percent stake (through subsidiaries Mobil Cepu and Pertamina EP Cepu) came online in 2015. Production is estimated to reach a peak rate of 165,000 bpd in 2016.
Furthermore, the Bukit Tua oil field (part of the Ketapang block in East Java, operated by Petronas Carigali) came online in March 2015 and production may rise to 20,000 bpd in late 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
| Energy Mix
Source: Ministry of Energy and Mineral Resources
The Indonesian government still has high hopes to restore the power of its oil sector as the country still contains large oil reserves, and oil demand (in particular domestic) is increasing. Meanwhile, the oil industry remains a lucrative industry (although prices have hit severe lows in 2015) as is evidenced by Pertamina's net profit figures. However, it will require serious effort from all stakeholders (particularly the Indonesian government) to achieve production quantities of more than one million barrels per day again (an ambitious target that is still desired by the government). In order to achieve this target, 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.
Updated on 4 July 2016