By around 2000, Indonesia’s domestic oil consumption had exceeded refining capacity, and by 2004, consumption had exceeded production, BP Statistical Review data show.

 

The country began importing crude oil and fuel, straining its trade balance, to meet domestic oil demand. Having become a net oil importer, Indonesia left the powerful Organization of the Petroleum Exporting Countries (OPEC) in 2009.

 

Meanwhile, state-owned oil giant Pertamina, the government’s cash cow during the industry’s golden years, is now operating aging refineries and depleting oil wells. Compared to the late 1900s, the company’s progress in the new millennium has been modest.

 

“The oil industry isn’t there anymore,” quipped former Pertamina president director Ari Soemarno, with a chuckle, during a phone call with The Jakarta Post on July 21.

 

 “We have to be honest; there’s been a shift in Indonesia’s oil and gas reserves. A shift from oil in our reserves to new discoveries dominated by gas,” said Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) special adviser Satya Widya Yudha, signaling the industry’s future direction. 

 

Fossil fuel subsidy reform on its way

Rising oil consumption was largely driven by Indonesia’s rapid motorization and by the government’s age-old fuel subsidy program.

 

Vehicle volumes steadily rose since 1949 with a sharp boom starting in 2000, led by new motorcycle sales after automakers popularized cheap motorcycle loans, Statistics Indonesia (BPS) data show. 

 

However, it was higher car and commercial vehicle sales, not motorcycle sales, that raised domestic crude oil consumption.

 

“If it were motorbikes, they wouldn’t have had a big effect on oil consumption, because they are more fuel efficient,” said energy and auto analyst Alloysius Joko Purwanto of the Economic Research Institute for ASEAN and East Asia (ERIA).

Meanwhile, fuel subsidies, an incentive greatly expanded under the Soeharto administration, have also locked Indonesia into a heavy oil dependence. Such subsidies were particularly burdensome on state coffers when oil prices reached record highs post-2000.

 

Successive presidents have gradually raised subsidized fuel prices but were met with public protests each time, making the issue politically sensitive. In 2015, President Joko “Jokowi” Widodo backtracked on a first-ever promise to rid Indonesia of fuel subsidies.

 

Instead, the Jokowi administration began to gradually reduce fossil fuel subsidies. Electricity subsidies were cut by half between 2014 to 2017, prices of the RON 88 subsidized fuel were raised, with a new system to follow international oil prices. A new unified database system was introduced to better capture people in poverty who deserve electricity and liquefied petroleum gas (LPG) subsidies.

 

Many economists and energy analysts continue urging the government to cut fuel subsidies, citing various concerns, such as health, environment, quality of state spending and trade deficit.

 

“Healthy energy prices are a signal for investments and development into downstream energy infrastructure,” said energy researcher Pri Agung Rahardjo of natural resources think tank Reforminer Institute to the Post.

 

The rise and fall of upstream oil production

Upstream oil production rose starting in the 1960s, peaked in the 1970-1990s, then declined at the turn of the millennium until today, BP data show.

 

Early productivity was greatly driven by the celebrated Rokan Block in Riau, which is currently Indonesia’s second-most productive oil block, despite being 70 years old. The country has yet to make such another giant discovery.

 

Production peaked in 1977 when Indonesia produced 1.685 million barrels of oil per day (bopd), around 1 million bopd of which came from the Rokan Block. During the golden years, two energy ministers served as OPEC secretary-general.

 

“Indonesia went from a country that counts as very competitive in attracting Asia Pacific investments to a low rank in terms of investment competitiveness,” said Pri Agung.

 

The oil and gas industry’s contribution to the state revenue (APBN) also fell from 70 percent in the 1970s to less than 5 percent today, he added.

 

Since 2000, Indonesia’s chief oil strategy has been decelerating production decline. Implementing the policy was a task given to the Upstream Oil and Gas Regulatory Agency (BP Migas), founded in 2002, but renamed SKK Migas in 2013.

 

“If we didn’t do anything then, by 2030, our production would be 334,000 barrels per day [bpd],” said SKKMigas’s Yudha.

 

The task force officially announced in 2020 an ambitious plan of shoring up oil production to 1 million bpd by 2030 through efficiency measures and smaller oil discoveries.

 

Refineries hiatus: 30 years and counting

“It’s been 30 years since we’ve developed refineries to raise capacity,” said Ignatius Tallulembang of state-owned refiner PT Kilang Pertamina Internasional (PT KPI) on July 15.

 

Ignatius, speaking before legislators at a hearing in Jakarta, was explaining the urgency of several ongoing refinery projects but his words also captured Indonesia’s oil refining history.

 

Indonesia expanded its refining capacity in the 1970-1980s when the country, then a major oil exporter, bathed in foreign exchange earnings amid high global crude oil prices.

 

Expansion slowed into the 1990s due to weak investor appetite in refineries and stopped by the 2000s when Indonesia’s oil production began to falter, drying up coffers, said former Pertamina boss Ari Soemarno.

 

“There was a global refinery oversupply but people kept building them. They considered refineries a matter of energy security,” he said.

 

Pertamina’s last major refinery project was the Balongan refinery in West Java that kicked to life in 1994, he added.

 

In 2013 and 2014, Pertamina announced plans to upgrade four existing refineries and build two new ones. The six projects, which promise to double domestic refining capacity to 2 million bopd, have been facing financing and land-related problems.

 

Environmental concerns and greener alternatives

Oil, the second-dirtiest fossil fuel behind coal, has been a consistently rising contributor to Indonesia’s carbon dioxide (CO2) emissions over the past few decades following higher fuel consumption.

 

Coal had a late start but quickly overtook oil in terms of emissions starting in the 2000s, when market liberalization policies paved the way for privately-owned giant coal plants (PLTU) to enter Indonesia. Gas had the most modest contribution.

 

Rising oil consumption has also been linked to rising pollution levels in Indonesia’s major cities, especially Greater Jakarta. Over 70 percent of the capital’s pollution comes from vehicle emissions, according to the city’s environment agency in 2019.

 

“The biggest issue here is breathing problems,” said Indonesian Forum for the Environment (Walhi) campaigner Dwi Saung of vehicle fuels on July 6.

 

The Environment and Forestry Ministry introduced in 2017 a regulation mandating the sale of lower-emission Euro 4 gasoline starting 2018 and Euro 4 diesel starting 2021.

 

But between being neither able to produce nor import Euro 4 fuels, Pertamina, which operates more than 90 percent of Indonesia’s gas stations, will not roll out such fuels until its refinery megaprojects are completed.

 

Instead, Pertamina is now producing its first-ever batch of palm oil-based “green diesel”, locally known as D100, after implementing mandatory 30 percent mix (B30) of palm oil-derived fatty acid methyl ester (FAME) on all diesel fuel.

 

Quo vadis?

Indonesia recorded a $3.55 billion oil and gas trade deficit during the January-June period this year, while non-oil and gas trade booked a surplus of $9.05 billion in the same period, BPS data show.

 

Energy experts interviewed by the Post agree that Indonesia’s trade deficit is a problem but diverge in their recommendations for solving the deficit.

 

Agung argued for boosting oil and gas exploration by cutting back nontax state revenue (PNBP) from the upstream industry.

 

“What’s more important than revenue is how to attract upstream investment, because investments can turn the economy,” said the Reforminer Institute energy researcher.

 

Yudha emphasized gas production, arguing that Indonesia was already on track to become a predominantly gas-producing economy. The SKKMigas aims to double domestic gas production to 12,300 million cubic feet per day (mmscfd) by 2030.

 

“What about oil? Well, Indonesia’s position is unlucky in that most of its reserves are gas,” the task force’s special adviser said.

 

Joko focused on the transportation sector. He argued that Indonesia could significantly cut oil consumption by developing public transportation systems and by substituting gasoline, whether by developing biogasoline or by promoting diesel-based vehicles.

 

“What we should focus on is: Where do we go from here? Quo vadis?” said the ERIA energy and auto analyst.