Indonesia Country Analysis Brief - October 2015
Indonesia reorienting energy production
Indonesia is reorienting energy production from serving primarily export markets to meeting its growing domestic consumption. Indonesia's energy industry has faced challenges in recent years from regulatory uncertainty and inadequate investment.
Indonesia, with a population of 253 million people in 2014, is the most populous country in Southeast Asia and the fourth most populous country in the world, behind China, India, and the United States.1 Formerly a net oil exporter in the Organization of the Petroleum Exporting Countries (OPEC) for several decades, Indonesia now struggles to attract sufficient investment to meet growing domestic energy consumption because of inadequate infrastructure and a complex regulatory environment. Indonesia encompasses more than 17,000 islands, presenting geographical challenges in matching energy supply in the eastern provinces with demand centers in Java and Sumatra. Also, urbanization and demand in other areas of the country are rising at a faster pace than energy infrastructure development.
After suspending its OPEC membership seven years ago, Indonesia is scheduled to rejoin the cartel by 2016 as the country attempts to secure more crude oil supplies for its swiftly rising demand and greater investment from Middle Eastern members in its downstream infrastructure projects. Despite Indonesia's energy struggles, it was the world's largest exporter of coal by weight and the fifth-largest exporter of liquid natural gas (LNG) in 2014. As Indonesia seeks to meet its energy export obligations and earn revenues through international market sales, the country is also trying to meet energy demand at home.
Indonesia's total primary energy consumption grew by 43% between 2003 and 2013, according to the Indonesian government. The country's petroleum share, although decreasing, continues to account for the highest portion of Indonesia's energy mix at 38% in 2013 (Figure 1). In the past decade, coal consumption more than doubled, surpassing natural gas consumption and becoming the second most consumed fossil fuel as Indonesia turned to less expensive sources of indigenous fuels.2 Indonesia intends to reduce its reliance on petroleum in its energy consumption portfolio to a 25% maximum share while raising the coal and natural gas portions to at least 30% and 22%, respectively, by 2025.3
Indonesia is also a significant consumer of traditional biomass and waste in its residential sector, particularly in the more remote areas that lack connection to the country's energy transmission networks. In 2013, biomass and waste (which includes firewood and charcoal) consisted of nearly 18% of total primary energy consumption, although its share has declined over the past several years.4 As Indonesia industrializes and expands its electricity and transportation sectors, the country is using more fossil fuels, particularly coal and oil products. Indonesia also plans to leverage the country's vast renewable sources of hydroelectricity, geothermal, solar, and biomass and waste, to generate electricity for domestic consumption.
Indonesia's total energy demand is closely linked to the country's economic expansion. According to World Bank data, Indonesia sustained relatively strong economic performance throughout the global recession, with an average gross domestic product (GDP) growth rate of more than 6% per year between 2007 and 2012, with the exception of 2009 when GDP growth dropped to 4.6%. However, GDP growth started declining after 2012 and fell to 5% in 2014 as a result of weaker demand from trade partners, lower exports, lower commodity prices, and a tighter monetary policy following the government's decision to raise interest rates substantially between mid-2013 and late 2014.5
Indonesia's energy sector continues to influence the economy to a large degree, although the decline in oil and natural gas production during the past few years has lowered its impact. Oil and natural gas alone constituted 15% of merchandise exports in 2014, a decline from 23% in 2000.6 In addition, revenues from the oil and gas sector, which historically accounted for about 20% of total state revenues, fell below 20% after 2008 and were less than 12% in 2014, despite high oil prices during most of the year.7 The significant drop in global crude oil prices, which started in June 2014, is expected to reduce Indonesia's oil and gas revenues by at least one-third in 2015.8 A combination of healthy growth, some market reforms, higher hydrocarbon prices, and a stable government encouraged rapid investment, particularly in the commodity sector until around 2010. Factors that have greatly hindered foreign investment in the past few years include more technically challenging oil and natural gas plays, rising domestic energy demand and accompanying limitations on exports, higher taxes on exploration and production, and lengthier processes to procure and renew contracts.
Despite the government's emphasis on more private sector involvement in infrastructure expansion, many infrastructure projects continue to be delayed, because regulatory challenges and uncertainties have reduced predictability for foreign investors.
Indonesia's recently elected government under President Joko Widodo is attempting several energy sector reforms to address the country's regulatory burdens and lack of legal transparency and to attract much-needed foreign investment for its more capital-intensive and technically challenging energy projects. President Widodo's new reforms attempt to address corruption and informal markets, streamline the regulatory process for investors, make domestic prices more competitive with international markets, and reduce upstream oil and natural gas costs for investors. However, Indonesia's energy security policy of retaining more of its hydrocarbon production for domestic use and maintaining local content requirements will continue to hamper investment from international companies.