Indonesia Oil and Gas Industry

As per latest news from Indonesia oil and gas industry, Chevron and ExxonMobil, major oil and gas companies from USA, have entered into a contract for supplying natural gas to domestic industries of Indonesia. This deal would be worth $6.76 million.

In another news from oil and gas industry in Indonesia Inpex from Japan has declared that expenses of a floating liquified natural gas project, proposed by it, have decreased to round about $10 billion. Previously, this project was worth $19.6 billion. This project would be executed at Timor Sea in Indonesia.

Yet another report from oil and gas industry of Indonesia has confirmed that Arrow Energy of Australia has entered into a preliminary deal with PT Energi Pasir Hitam Indonesia, which is a well known energy company of oil and gas industry at Indonesia. This deal would enable Arrow Energy to work at Sangatta coal bed methane block, which is located at East Kalimantan.

In a new development for Indonesian oil and gas industry Sasol, a major synthetic fuels company from South Africa, has declared in January 2009 that it would be mulling over plans for constructing a coal to liquids plant in Indonesia. Proposed value of this project is $10 billion.

As per 14th January 2009 reports of Nikkei, a business daily of Japan, Royal Dutch Shell is thinking about acquiring a certain amount of stake in Inpex’s floating liquified natural gas project at Indonesia. According to reports circulating in Indonesia oil and gas industry, national government has declared a contract with ExxonMobil to be null and void. This contract was about development of an offshore gas field in Indonesia named Natuna-D-Alpha.

Indonesia would be hosting 7th OIL & GAS INDONESIA 2009 from 14th to 17th October 2009. This is a crucial event for Indonesia oil and gas industry and would be an exhibition on exploration, refining and production of oil and gas. This event would be held at Jakarta International Exhibition Centre in Indonesia.

In 2009 Indonesia oil and gas industry has experienced a decrease of over 2 percent in its annual output of liquified natural gas. Much of this crisis has resulted from shortfall in supply of natural gas to Botang, which is leading liquified natural gas facility of Indonesia.

 

Challenges to the Indonesian Economy: Global Oil Price & US Normalization

Governor of Indonesia’s central bank (Bank Indonesia) Agus Martowardojo said that there are two main global challenges that are being faced by Southeast Asia’s largest economy and which can impact negatively on the nation’s economy. These challenges are the low global oil prices (which have fallen below USD $50 per barrel) and the monetary policy normalization of the US Federal Reserve amid the structural economic recovery of the USA. This policy involves higher US interest rates (expected in the second half of 2015) and a bullish US dollar.
Global oil prices have fallen dramatically in recent times (from USD $115 per barrel in June 2014 to below USD $50 per barrel at the start of 2015) on growing oil production – brought about by the ‘US shale gas & oil revolution’, recovering crude oil output in Iraq and Libya, and the reluctance of the OPEC to set a lower collective oil production cap – in combination with slowing economic global activity in China, India, Europe and Japan. The US shale gas & oil revolution, which started around 2009, has triggered speculation that the world’s largest economy may turn from being the world’s biggest energy importer into the world’s biggest energy exporter, hence threatening the position of Saudi Arabia and several other Middle Eastern countries. Therefore, conspiracy theories suggest that the OPEC’s decision to maintain oil production volumes is actually a move to eliminate their new US competitors by pushing the oil price down. Although this strategy would also hurt state income of the OPEC countries, oil production costs in Saudi Arabia and several other Middle Eastern OPEC-member countries are much lower than oil production costs in the US (and Russia). The global average of oil production costs (per barrel) is estimated at USD $51. Whereas it requires USD $65 per barrel to produce shale gas in the USA and USD $50 per barrel of oil in Russia, oil production costs in the major Middle Eastern oil producing countries are estimated at only USD 27 per barrel, thus giving them enough room to push down global oil prices. If indeed the current low oil prices are the result of international competition for (oil) market dominance then oil prices are not expected to swing back into a rising trend anytime soon, particularly not when global economic growth remains sluggish.

Regarding the global economy, markets were not pleased to see the International Monetary Fund (IMF) cutting its economic growth outlook. The Washington-based institution expects the global economy to grow 3.5 percent (y/y) in 2015 and 3.7 percent (y/y) in 2016, down from 3.8 percent (y/y) and 4.0 percent (y/y), respectively, in its previous World Economic Outlook (October 2014), citing weak investment, slowing trade and declining commodity prices as well as poorer economic prospects in China, Russia, the Eurozone, and Japan. On a positive note, the IMF’s growth forecasts imply an acceleration of global economic growth from 2014 when the world economy expanded 3.3 percent (y/y). Global economic growth is primarily supported by ongoing improvement in the US economy (which is estimated to grow 3.6 percent in 2015) and therefore it is justified to state that the world economy is currently flying on one engine only.

IMF’s Growth Predictions:

Country/Region    2015F    2016F
World     3.5%     3.7%
USA     3.6%     3.3%
Eurozone     1.2%     1.4%
China     6.8%     6.3%
Japan     0.6%     0.8%
India     6.3%     6.5%

Source: IMF

Being a major oil importer, some would think that Indonesia benefits tremendously from the current low oil prices as it would ease fiscal problems, particularly after the Indonesian government reduced fuel subsidies sharply in November 2014 and January 2015 (scrapping subsidies for low-octane gasoline and introducing a fixed IDR 1,000 per liter diesel subsidy). In recent years, the government was facing ballooning costs for fuel subsidies in the state budget allocation (eating up about 20 percent of the total budget when electricity subsidies are included). This not only caused extreme fiscal problems amid high global oil prices in combination with a depreciating Indonesian rupiah exchange rate but also meant that much-needed public investments in the country’s infrastructure, agriculture, healthcare and education were impossible. Therefore, the structural reforms introduced by President Joko Widodo, who assumed office in October 2014, were highly applauded by domestic and international institutions. Recently, Indonesian Finance Minister Bambang Brodjonegoro announced that the country’s fuel subsidy cuts save up to IDR 230 trillion (USD $18.4 billion) in the Revised 2015 State Budget. A large portion of these saved funds will be spent on infrastructure, transportation and agriculture, implying that government spending will turn from funding oil consumption into funding productive, long-term economic development. As a result, the country’s budget deficit is expected to fall below 2 percent of gross domestic product (GDP) in 2015 (from 2.26 percent of GDP last year). In 2014, the Indonesian government spent IDR 240 trillion on fuel subsidies.

However, low global oil prices also cause weakening global prices of other commodities, for example crude palm oil (used in biofuels) and coal. Being among the world leaders regarding the production and export of crude palm oil (CPO) and coal both these commodities are important foreign exchange earners and therefore the country’s export performance is seriously harmed when CPO and coal prices fall. In combination with a ban on the export of unprocessed minerals (introduced in January 2014 as part of the country’s new mining law) and an expected increase in imports of materials for infrastructure projects, Indonesia’s current account deficit is not expected to improve markedly yet. Although the official figure has not been released, it is expected that the country’s current account deficit stood at 3.0 percent of GDP in 2014, thus improving slightly from 3.3 percent of GDP in the previous year. This wide deficit, which basically signals that the country relies on foreign funding, makes Indonesia vulnerable to capital outflows in times of global shocks (such as the US central bank’s the monetary policy normalization). As such, when IMF Director of Research Olivier Blanchard stated (referring to current low global oil and other commodity prices) that “this makes for a complicated mosaic. It is good news for oil importers, but bad news for oil exporters. And, good news for commodity importers, but bad news for commodity exporters,” Indonesia is one of the countries that face this ‘complicated mosaic’. There are no quick fixes to Indonesia’s export performance as the country basically needs structural reform that is to change from an exporter dependent on (raw) commodities into one that is supported by manufactured exports.

Besides increased output, low global oil prices are also a sign of weak global growth. Economic growth of China, the world’s second-largest economy, declined to a 24-year low at 7.4 percent (y/y) in 2014. Meanwhile, Japan – the world’s third-largest economy – is battling to overcome economic contraction. Both countries are important trading partners of Indonesia and therefore an economic slowdown in China and Japan directly results in a limitation to Indonesia’s export performance and economic growth. As such, Indonesia is currently facing great external challenges. However, economic reforms, implying efficient government spending (prioritizing structural economic growth) while safeguarding the country’s financial stability and seeking more foreign investment by creating a more conducive investment climate, are a great answer to these challenges even though the fruits of these efforts cannot be enjoyed on the short-term. During his first couple of months in office Widodo has shown that he has the courage to take unpopular decisions for the sake of long-term growth and therefore the country’s economic slowdown (which started in 2011) is expected to rebound this year.

Indonesia’s Quarterly GDP Growth 2009–2014 (annual % change):

 Year    Quarter I    Quarter II    Quarter III    Quarter IV
 2014        5.22        5.12         5.01
 2013        6.03        5.89         5.62         5.78
 2012        6.29        6.36         6.16         6.11
 2011        6.45        6.52         6.49         6.50
 2010        5.99        6.29         5.81         6.81
 2009        4.60        4.37         4.31         4.58

Source: Statistics Indonesia (BPS)

Gross Domestic Product of Indonesia 2006-2013:

  2006   2007   2008   2009   2010   2011   2012   2013
GDP
(in billion USD)
 285.9  364.6  432.1  510.2  539.4  706.6  846.8  878.0
GDP
(annual percent change)
   5.5    6.3    6.1    4.6    6.1    6.5    6.2    5.8
GDP per Capita
(in USD)
 1,643  1,923  2,244  2,345  2,984  3,467  3,546  3,468

Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)

 

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