INDONESIA’S ENERGY SECTOR: CURRENT ISSUES AND OUTLOOK

OETOMO TRI WINARNO

Center for Energy Policy Studies, Institut Teknologi Bandung
Bandung, Indonesia

Abstract

Main issues on Indonesia’s energy sector in last few years are increasing of oil
fuel subsidy, lack of energy infrastructure, and decreasing of investment. Oil
and gas sector still have large role in Indonesia’s economy. Oil and gas sector
contribution for state revenue was 27% in the last year, but 55% of it was spent
for oil fuel subsidy. Soaring of world oil price and weakened of Indonesian
exchange rate has caused increasing of oil fuel subsidy.

Some disturbances in energy supply has taken place in the last few years, such
as lack of natural gas supply for Jawa and Aceh, lack of coal supply for
Suralaya power plant, and electricity and oil fuel crisis in some part of the
country. Lack of natural gas transmission infrastructure has increased oil fuel
demand for substitute natural gas in the shortage area, as well as increasing of
oil fuel for overcoming electricity crisis. It is predicted that oil fuel consumption in
2005 will higher than 2004, even the domestic oil price increasing. With the
decreasing of oil production, Indonesia should import more oil and oil fuel this
year.

To overcome those energy problems; government plans to increase crude oil

production to 1.3 million barrel per day in 2009, to operate Jawa – Sumatera
natural gas transmission in 2006, to construct new refinery in East Jawa in 2010,
and new power plants in some areas. But during the period of those plans to be
happened, energy demand will still rise and energy crisis will still take a place.

1. Current Issues

Indonesia is known as an oil producer country and a member of OPEC

(Organization of Petroleum Exporting Countries). During 1970s – 1980s, oil was
an important factor for national development. In this period, oil has contributed
around 80% of total Indonesia’s export. Oil production has reached its peak in
1970s, and could be maintained in a relatively constant level until 1997.

Economic crisis in 1998 has made a big problem for energy sector. Energy
subsidy became larger and larger, and hardly burdened the state budget. The
falling of Indonesian exchange rate made a large differentiation between
domestic price and international price, that should be paid by government
(state). Regulated energy price policy that has been done during more than 30
years can not be changed until now. Even, in the law of national development

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program (UU Propenas), it is stipulated that energy price should follow its
economic price.

The crisis also postpones some energy infrastructure project, such as

construction of power generation, refinery, and natural gas transmission pipe.
Currently, the impact of energy infrastructure project postponement has been
taken place. Electricity crisis has occurred in some part of the country, even in
the Jawa Madura Bali (JAMALI) interconnection system. Black out has occurred
in JAMALI system in September 2002 and August 2005. In Sumatera and
Kalimantan, electricity crisis was the worst.

Postponement of natural gas transmission pipe in Jawa has made a natural gas
crisis in East Jawa and West Jawa. Power generation and industry in these
regions were suffering of natural gas shortage. The result is oil fuel usage
increasing for substitute of natural gas.

Uncertainty and rising risk during political and policy transition has worsened
the investment climate. Particularly in oil sector, the investment decreasing after
1998 has made oil production decreasing significantly. As can be seen in Figure
1, oil production is in decreasing trend. Oil production decreasing rate during
the last five years is 9.1% per year in average. Currently, oil production rate is
only around 1.1 million barrel per day.

700

600

Production
500 Export
Million barrel/year

Import
400 Refinery

300

200

100

-
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: DG. Oil and Gas

Figure 1. Oil production, export, import, and domestic refinery intake

In the upstream oil business, Indonesia still has a surplus, even though it is not
much. But in the downstream oil business, Indonesia’s dependency to oil fuel
import is larger and larger. Postponement of refinery project has caused
capacity deficiency for about 40% of the total demand.

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2. Energy Demand

Final energy consumption in the past three decades was very dominated by oil
fuel. The oil fuel consumption share in the 1970 energy mix was 95 % of the
total final energy consumption. Gradually the oil fuel share decreased, and
became 69% of the total energy consumption in 2003. The high of oil fuel share
is resulted by oil fuel subsidy policy, as well as the lack of availability of other
energy form in the market. Electrification ratio in the current days is still 52%,
and the availability of LPG (liquefied petroleum gas), natural gas, and coal
(including in the form of coal briquette) are relatively limited. In Figure 2, it is
shown a picture of final energy use pattern in 1988 – 2003. The oil fuel price
subsidy removal policy that launched in 2000 has shown a result for shifting fuel
oil consumption to the other energy. It can be seen that oil fuel consumption has
been relatively flat after 2000. It seems that the subsidy removal policy will tend
to decrease the oil fuel share in the final energy mix.

500
450 LPG
400 Electricity
Coal
350
Nat. Gas
Million BOE

300
Oil Fuel
250
200
150
100
50
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

Source: DG of Electricity and Energy Utilization, 2004

Figure 2. Final energy consumption in 1988 - 2003

Primary energy mix consumption is shown in Figure 3. Crude oil share in the
energy mix in 1988 – 2003 was 65 % - 54 %. The share of coal and natural gas
has been increasing in that time. In 2003, the share of natural gas and coal
were 23 % and 17 % respectively. Utilization of natural gas and coal in power
generation has been significant in decreasing of oil share in the primary energy
mix. The large consumption of coal for power generation was started in the end
of 1980’s. In 2003, coal power plant was 35 % of total power generation. In the
same time, natural gas power plant was 30 % of total power generation.

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 800

700 Geothermal
Hydro
600
Coal
500 Natural Gas

Million BOE
Oil
400

300

200

100

0
1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003
Source: DG of Electricity and Energy Utilization, 2003

Figure 3. Primary energy consumption in 1988 – 2003

In the Blue Print of National Energy Management (Pengelolaan Energi Nasional,

PEN), it is projected that primary energy consumption in 2003 – 2025 will
increase 5.4% per year in average. It means that primary energy consumption
will tripled in 22 years. In Figure 4, it is shown primary energy mix shifting from
2003 to 2025. Based on that document, primary energy mix in 2025 is targeted
to be 32.7% of coal, 30.6% of natural gas, 25.2% of oil, and 11.5% other energy
(hydro, geothermal, and other renewable energy).

3,000

322.0
2,500 other
oil
705.6
2,000 gas
Million BOE

coal
1,500
856.8

1,000
44.5

484.2
500 915.6
235.9
125.5
-
2003 2025

Figure 4. Projection of primary energy consumption –

National Energy Management target

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3. Oil and Oil Fuel Supply

As mentioned above, important issue in Indonesia’s energy sector in this

decade is the decreasing of oil production. Decreasing of oil production has a
large impact, due to high dependency of Indonesia’s economy to oil. Oil surplus
(export – import) decrease and oil fuel deficit (import – export) increase.
Indonesia has not enjoyed wind fall profit from increasing of world crude oil
price anymore. But now, Indonesia has suffered by increasing of world oil price,
because of high oil fuel subsidy.

In Figure 5, it is illustrated oil business in Indonesia and its outlook to 2020.

“Domestic Supply” is crude oil supply from domestic production to domestic
refinery. “Import” is imported crude oil for domestic refinery. “Domestic Supply”
and “Import” means crude oil intake to domestic refinery. “Production” is crude
oil production, and “Export” is crude oil export. Area between “Production” and
“import” is the net export of crude oil. In 1994 – 2004, it can be seen that total
crude intake for refinery has been relatively constant (there is no capacity
addition), production and net export have decreased.

800

700

600
Million BOE/year

500

400

300
Export
200 Import
Domestic Supply
100 Production

0
1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Figure 5. Oil Business 1994 – 2020

In Figure 6, it is illustrated oil fuel business in Indonesia and its outlook to 2020.
“Total Production” is the total refinery production; consist of oil fuel (gasoline,
kerosene, diesel oil, etc.) and non oil fuel (LPG, lubricant, wax, etc.). “Oil Fuel
Production” is refinery product in the form of oil fuel. “Oil Fuel Consumption” is
total domestic consumption of oil fuel. “Oil Fuel Import” is imported oil fuel to
fulfill domestic demand of oil fuel. During 1997 – 2004, oil fuel production has
been relatively constant. As a result, oil fuel import has increased.

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Before economic crisis, there was a plan to build five refineries in Indonesia. But
the plans have never been done. With the increasing demand, currently the
existing refineries only fill two-third of total domestic oil fuel demand. To
overcome this problem, Pertamina propose to construct a new refinery with
capacity of 200 thousand barrel per day (bpd) in Tuban – East Jawa. This new
refinery is planned to be operated in 2010. It is estimated that the project costs
a billion US dollar.

600

500
Million barrel/year

400

300
Oil Fuel Import
200 Oil Fuel Production
Oil Fuel Consumption
100
Total Production

0
1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020
Figure 6. Oil Fuel Business 1994 - 2020

In figures above, it is shown a scenario of the two new refinery additions in 2010
and 2015 with capacity of 200 thousand bpd each. These two new refineries are
assumed to process domestic crude oil. With these new refineries addition,
Indonesia is still not self sufficient of oil fuel. During 2005 – 2010, oil fuel import
will increase. It means that dependency to other country will increase.

In the upstream oil business, government has a target to produce crude oil 1.3
million bpd in 2009. The addition oil production is planned mainly from Cepu
Block (170 thousand bpd) and Jeruk Block (100 thousand bpd). It means that
the average growth rate of oil production in 2005 – 2009 is 2.2% per year. If this
increasing rate of oil production can be maintained until 2020, oil production in
2020 will be 1.59 million bpd or same as 1997’s oil production.

From Figure 5 and 6, it can be seen that with scenario above, Indonesia is still a
net oil exporter, but Indonesia is a net oil fuel importer. If these two figures are
combined, the result is Figure 7. In this figure, it is shown net oil and oil fuel
export. Net oil and oil fuel export steeply decreased after 1998, and felt below
zero in 2003. It means that Indonesia became a net oil importer country in 2003.
If the increasing oil production target as mentioned above can be achieved,
Indonesia will be a net oil exporter again after 2020.

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 300

250

200

Million barrel/year
150

100

50

-50

-100
1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020
Figure 7. Net Oil and Oil Fuel Export

4. Natural Gas Supply

New discovery rate of natural gas reserve in Indonesia is still high enough.
During the last decade, natural gas reserve has increased 4.2% per year in
average. Total natural gas reserve in 2003 was 178.1 TCF, which 91.2 TCF
was proven reserve. Even natural gas production from some field started to
decline, the total production has still increased. In the last three years, natural
gas production has increased 6 % per year in average. With the new reserves
and new selling contracts of natural gas, natural gas production will keep on
increasing in the future.

But increasing of natural gas production does not mean that domestic natural
gas supply is going well. In the opposite, domestic natural gas supply in the last
few years has been going worse. There were natural gas supply problems in
some areas, such as Aceh, East Jawa, and West Jawa. Some issues rising
related with that problems are the allocation and pricing of natural gas for export
and domestic supply. As we know, some new natural gas selling agreement for
export was signed when the domestic natural gas scarcity has taken place.
Regarding the price, some analyst said that natural gas prices for export do not
make maximum benefit for Indonesia.

The cases above can be understood that natural gas only produced when there
is a market for it and there is a means to transport it. Natural gas scarcity in
Jawa can not be supplied from natural gas production in Sumatera or
Kalimantan if there is no transmission pipe to Jawa or LNG regasification facility
in Jawa. Therefore, integrated natural gas transmission is an important key to
increase domestic natural gas utilization. This infrastructure will increase the
reliability of natural gas supply, encourage natural gas utilization, and
encourage the development of marginal gas field around the transmission pipe.

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Government should have a prioritization of natural gas allocation, between
allocation for domestic supply and export and allocation for energy and
feedstock (for petrochemical industry) supply, that can make maximum benefit
for the country. Government should review the natural gas selling agreement for
export that has a potency to make income loss for the country.

According to National Energy Management Blue Print, natural gas is targeted to

be the second largest primary energy in 2025. Domestic natural gas
consumption in 2025 is targeted to be 2.72 TSCF, increasing 6.06% per year on
average from current consumption. With the current natural gas production of
around 3 TCF (of gross production) per year, it means that almost all of natural
gas production will be absorbed for domestic consumption. Two things that
should be considered to reach the target are to establish integrated natural gas
transmission pipe and to increase natural gas production.

5. LPG Supply

Indonesia is still as a net exporter of LPG (liquefied petroleum gas), but the
export volume has been going less and less. Domestic utilization of LPG has
increased with relatively high growth. In the last ten years, LPG consumption
growth was 10 % per year on average. In the other hand, LPG production has
decreased since 1996. Decreasing of LPG production is mainly caused by
depletion of Arun gas field production, as well as other gas fields.

If the decreasing of LPG production and increasing of LPG consumption is

continued, Indonesia will become a net importer of LPG in the next five years. In
Figure 8, it is shown LPG utilization allocation during five years later and its
projection.

2500

2000

1500
thousand Ton

1000

Production
500
Export
Domestic Supply
0
1999 2001 2003 2005 2007 2009
-500

Figure 8. Production, Export, and Domestic Supply of LPG

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With the condition above, it is not feasible to extend LPG utilization. The recent
issues about shifting energy from natural gas and oil fuel to LPG for PLN’s
power generation do not make a sense due to limitation of domestic LPG supply,
except just for emergency condition when there is a natural gas or oil fuel
scarcity condition.

Indonesia actually has a large potency to increase LPG production. The

potency is come from natural gas and refinery development, where LPG is a by-
product of natural gas plant and refinery. Natural gas reserve is still discovered
and its production is in increasing trend. Development of some new LNG plants
and new oil refinery, such as Tangguh LNG plant and Tuban refinery, can
increase LPG production.

6. Coal Supply

Resource and reserve of coal in Indonesia is relatively large. Total coal reserve
is three times of total oil reserve. From the total coal reserve, half of it is
categorized as low rank coal, quarter of it is middle rank coal, and the rest is
high rank coal.

Coal mining industry in Indonesia is still as a fast-developing business. During

1980 – 2003, coal production has grown spectacularly from 338 thousand ton
per year in 1980 to 132 million ton per year in 2004, with an average growth is
30% per year. The fast growth of coal production is predicted will be continued
in future. Some factors supported this prediction are many coal-mining
companies are still in exploration and exploitation stage and the rising of coal
price since the end of 2003.

Most of Indonesia’s coal production is allocated for export. Domestic coal

consumption in 2003 is only 26% of total production or 30.6 million tons, almost
all of that consumed by power generation and cement industry. With the
increasing of oil fuel price, there is a large opportunity to increase domestic
utilization of coal.

According to National Energy Management Blueprint, coal is planned to be a

major energy in the future. Coal consumption share in 2025 is targeted to be
32.7% of total primary energy mix or 225 million ton per year, and coal
consumption will grow at 9.6% per year on average from 2003 to 2025.

To secure domestic coal supply, Indonesia should increase coal production at

least twice from current production. It means that many coal mines should be
opened, many coal transport infrastructures should be construct, and many
environment problems will occurred.

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7. Electricity Supply

In the last few years, electricity crisis has been a serious problem in Indonesia’s
energy sector. There was a bad electricity crisis occurred in some regions
outside of Jawa Island, that covered almost all of Sumatra and Kalimantan
Island. Even, the reliability electricity supply in Jawa–Madura–Bali electricity
interconnection system has been worsened since 2002.

To overcome that crisis, many power generation and electricity transmission

line should be constructed. Power generation capacity should be increased at
least 5% per year to fulfill the electricity demand. It means that the current
power generation capacity that is 26.7 GW should be doubled to 56 GW in 2020,
in average 2 GW of power generation should be built every year. If it is
assumed that investment for power generation is a thousand USD per kilo watt,
it is required USD 2 billion (Rp 20 trillion) for constructing new power generation
per year, and it need more investment to construct its transmission line. With
the current electricity price, this huge investment is very hard to be obtained.

8. Concluding Remark

From discussion above, it can be concluded that energy supply will become a
serious problem in the future. Energy demand will keep on increasing to support
economic growth. On the other hand, energy resources availability is
decreasing.

A big effort should be done to secure energy supply. Production of oil, natural
gas, and coal should be increased. To meet energy demand in 2025 as
projected in National Energy Management Blueprint, oil production should be
increased to 700 million barrels in 2025 (when production in 2004 is only 425
million barrel) and coal production should be increased to 225 million ton in
2025 (2004 production is 132 million ton). If natural gas production in 2025 is
same as current production, all of natural gas production will be consumed for
domestic use. To substitute fossil fuel use; hydro power, geothermal, and other
renewable energy should be developed.

Scenario above only can be achieved if energy price (especially for oil fuel and
electricity) has already at its economic price. Without energy price deregulation,
energy business will not be attractive for investors. To implement that scenario,
participation of private sector and regional government should be promoted.

9. References

Center of Energy Information – Ministry of Energy and Mineral Resources,

“Handbook of Energy Economy 2004”, 2004.

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Directorate General of Electricity and Energy Utilization, “Statistics of Electricity
and Energy 2003”, 2004.

Directorate of Mineral and Coal Enterprise, “Statistic of Coal 2004”, 2005.

Directorate of Oil and Gas, “Data and Information on Oil and Natural Gas”, 2003.

Oetomo Tri Winarno, “Security of Energy Supply in Indonesia”, a paper

presented in National Energy Congress 2004, World Energy Council – Komite
Nasional Indonesia, Jakarta 23-24 November 2004.

Republik Indonesia, “Blueprint Pengembangan Energi Nasional 2005 -2025”.

Other energy news from Kompas newspaper.

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