Indonesia’s Commission VII of the House of Representatives (DPR) - the commission that oversees the country’s energy affairs - and the Indonesian Ministry of Energy and Natural Resources agreed on Wednesday (28/01) to set a 825,000 barrels per day (bpd) oil production target for 2015 in the Revised 2015 State Budget (APBN-P 2015), up from an estimated 794,000 bpd of realized production in 2014. Since its peak production of 1.6 million bpd in 1995, oil output of Indonesia (a former OPEC member) has declined drastically.

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Indonesia may achieve its oil target of 900,000 barrels of oil per day (bpd) in 2015 as the Banyu Urip field in Cepu (East Java) is expected to start production in February next year. Indonesian upstream oil and gas regulator SKKMigas stated that the oil field has now been completed for 92.5 percent. The oilfield’s early production facility is already producing 30,000 bpd. This is expected to increase to 165,000 bpd once production has reached its peak in mid-2015. This peak level is estimated to last for three years.

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The sharply depreciated Indonesia rupiah exchange rate in combination with the inability to raise domestic production of crude oil threatens to balloon government subsidy expenditure. Fuel subsidies may increase 20 percent to IDR 252 trillion (USD $20.8 billion) in 2014 as the rupiah currently has about 14 percent less value (based on the Bloomberg Dollar Index) than the value assumed in the 2014 State Budget (APBN 2014). The government assumed a rupiah rate of IDR 10,500 per US dollar in the APBN 2014.

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The macroeconomic assumptions that have been formulated in the 2014 State Budget Draft by the government of Indonesia are not considered too realistic by several analysts. Although it is understood that one should set a high standard in order to maximize efforts, analysts feel that - given the current problematic economic context in Asian emerging economies as well as global economic turmoil - the government is far too optimistic, particularly because the government will have to devote part of its attention to the elections in mid-2014.

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Indonesia’s crude oil production is expected to increase starting from mid-March 2015 as new oil fields will start to come online this month, including the Bukit Tua oil field (part of the Ketapang block in East Java and which is operated by Petronas Carigali). Over the past two decades Indonesia oil output has declined drastically amid maturing oil fields and the lack of exploration as well as other investments in Indonesia’s oil & gas sector. In 2014, Indonesia produced an average of 794,000 barrels of oil per day (bpd).

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It remains difficult for Indonesia to achieve oil production targets that are set by the Indonesian government. In fact, it is unlikely that Indonesia will meet this year’s revised oil lifting target of 818,000 barrels of oil per day (bpd) as set in the Revised 2014 State Budget. In the first half of 2014, Indonesia recorded an oil production rate of 797,000 bpd only. For almost two decades, Indonesia’s oil sector has been in a state of decline, evidenced by falling production rates, due to a lack of investments and aging oil fields.

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General Director of Oil and Gas at the Indonesian Ministry of Energy and Mineral Resources Edy Hermantoro said at the 38th IPA Convention and Exhibition on Friday (23/05) that the Indonesian government plans to tender a total of 21 blocks of oil and gas in a first bidding round in 2014. This involves 13 conventional oil and gas blocks and eight non-conventional (shale) oil and gas blocks. The government expects that these oil and gas blocks will add 3.5 billion barrels of oil and 107.7 trillion cubic (tcf) of gas resources.

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The sharply depreciated Indonesian rupiah exchange rate in the second half of 2013 in combination with the decline in domestic oil lifting has led to a soaring of fuel subsidy spending in 2014. In the 2014 State Budget (APBN 2014), the ceiling of energy subsidy spending for 3-kg LPG and fuels was set at IDR 210.7 billion (USD $18.3 billion). However, in the 2014 Revised State Budget Draft, the government proposes to raise the subsidy ceiling to IDR 285 trillion (USD $24.8 billion), thus swelling IDR 74.3 trillion from the initial ceiling.

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The government of Indonesia will submit a new draft proposal for the 2014 Revised State Budget (APBN-P 2014) on 20 May 2014. Of the seven basic macroeconomic assumptions in the 2014 State Budget (APBN 2014), three assumptions are proposed to be revised. These involve general economic growth, the Indonesian rupiah exchange rate, and crude oil lifting. The government felt that the assumptions need a revision as results in the first quarter of 2014 have not been up to expectation.

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Only 50 days since the start of the fiscal year 2014 have passed and the government has already shown that it is not convinced to meet targets of basic macroeconomic assumptions set in the 2014 State Budget (APBN 2014). Therefore, the Indonesian government has lowered the outlook for all basic macroeconomic assumptions in the 2014 State Budget. On Thursday 19 February 2014, the government formally presented the downward revision of economic targets in the State Budget to the House of Representitative's Budget Agency.

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The government of Indonesia will revise its crude oil production target in 2014 to 820 thousand barrels per day (bpd), down from its previous target of 870 thousand bpd. The main reasons for this downgrade are the country's mature oil fields in combination with a lack of exploration as well as other investments in this sector. Indonesia, once an important oil exporting country and member of the OPEC, has seen its oil output decline drastically over the last decade, thus becoming a net importer as the country's domestic consumption continues to rise.

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Although Indonesia’s government stresses the need to relieve pressure on the state budget (by raising the price of subsidized fuel next month), it plans to allocate an additional IDR 16.1 trillion (USD $1.65 billion) to this year’s fuel subsidy budget. The additional allocation, which covers fuel, LPG and vegetable fuels, will raise government expenditure on fuel subsidies to IDR 209.9 trillion (USD $21.50 billion) from the IDR 193.8 trillion drafted in the original 2013 state budget (APBN 2013). Total energy subsidies will grow to IDR 309.9 trillion this year.

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