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Insight: Improving Indonesia’s energy security

  • Karen Agustiawan

Jakarta | Mon, March 11 2013 | 09:36 am

It says much about the nature of global issues today that energy has entered the hitherto hallowed realm of security, which was once reserved for issues of state and war.

This change reflects a broader shift in which economics has become a part of the high politics of war and peace. Energy security has to do with reducing a state’s vulnerability to risks of availability and pricing of a commodity that are crucial to its economic development.

Superficially, Indonesia should not have to worry about energy security because it is blessed with substantial endowments of natural gas and coal, assets that make it a net exporter of energy.

However, its energy security could still be hurt by disruptions to global supplies of energy, sharp spikes in energy prices and the fallout from intensifying competition among nations for ownership and access to strategic energy resources.

Hence, there are several reasons why Indonesia should think seriously about revamping its domestic policies to bolster its energy security.

First, Indonesia’s dependence on imported oil is a vulnerability that affects its energy security. With its current oil consumption of around 1.36 million barrels per day (bpd) against oil production of only 826,000 bpd, of which 30 percent to 40 percent is exported, Indonesia is struggling to satisfy domestic demand for energy.

Compounding this, its limited refinery capacity serves only 70 percent of domestic demand. Thus, it has to rely on imports of refined oil products. Indeed, it imported more than 400,000 bpd of refined products in 2011.

Even though Indonesia is a signi-ficant net exporter of natural gas and coal, its reliance on oil exposes it to pricing and supply risks. This is particularly so because the possibility of geopolitical shocks hangs so heavily over the Middle East.

The situation has worsened in recent years because so many important oil exporters have been hit by political turbulence, or border on politically distressed countries.

Iraq, an important oil producer, is suffering from an upsurge in domestic violence. Iran is at risk of a military attack by nations that will not shy away from a military option to prevent it from gaining nuclear weapons. As if Iraq’s internal troubles were not enough, it borders Syria, which is in extreme distress because of the civil war that appears to have no end in sight.

Second, Indonesia is vulnerable because of the composition of its energy consumption. In 2011, 71 percent of that consumption was accounted for by hydrocarbons, out of which more than 40 percent comprised oil alone. More diversity in the sources of energy would aid its energy security.

If Indonesia is to effectively address energy security, it has to first resolve the problems with its current policy framework.

First, subsidies. Fuel subsidies have increased since their introduction in the 1960s. These subsidies, which delink the price of energy from underlying realities of supply and demand, reduce the degree to which Indonesians are aware of the true costs of the energy they use. This results in consumption that is both excessive and wasteful.

Second, resources. Fuel subsidies take an astonishing and unconscionable 20 percent or so of scarce budgetary resources! Such funds are better channeled into areas that can provide fundamental improvements to Indonesian livelihoods. Take, for instance, the country’s Millennium Development Goals (MDGs) for 2015 where progress has been slow. The proportion of the population with sustainable access to clean water and sanitation has not increased significantly, while the proportion using improved sanitation facilities in urban and rural areas remains far below target. Scarce fiscal resources would be better channeled into conditional cash transfers that directly target the poorest segments or into the building of sanitation and water infrastructure.

Third, policy. As a result of inadequate attention to policy, the Indonesian energy sector has been left under-developed for far too long. Bogged down by outdated energy infrastructure and refining capabilities, this lacuna is trapping Indonesia at the bottom of the value chain and making it miss out on a stable domestic energy supply.

Fourth, decentralization. Since the decentralization of government in 2001, there has been a lack of coordination in energy policy implementation. Despite plans for local governments to invest in renewable energy, there is no framework to align their work with national policy directions set by the central government. This lack of coordination has derailed energy development plans.

These gaps urgently need to be filled.

There are a number of other measures Indonesia could take beyond tackling the policy weaknesses outlined above. The good news is that it is in a better position than most to improve its energy security.

First, it should shift toward greater reliance on natural gas. Natural gas production has increased by more than a third since 2005, making the greater use of coal bed methane (CBM) and liquefied petroleum gas (LPG) a viable proposition.

Second, Indonesia has immense potential to substantially expand its renewable energy supplies. For instance, it can maximize utilization of geothermal resources owing to its location in the Pacific Ring of Fire. The current contribution of about 1,200 megawatts (MW) out of a potential 27,000 MW, as estimated by the National Geological Agency of Indonesia, provides considerable room for improvement. Other alternatives exist in the form of ethanol and offshore wind production. But the government will have to push for change if it is to come.

Third, governments can support technological developments that boost energy security. Brazil, for example, has developed new ethanol production technologies. Indonesia could replicate such innovative approaches to fit its own situation.

Indonesia’s energy security can be improved if there is sufficient government resolve. Jakarta needs to bite the bullet now.

The writer sits on the International Council of Harvard University’s Belfer Center for Science and International Affairs.

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