INDONESIA: FOREIGN INVESTMENT IN THE OIL SECTOR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00310R000100120002-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: September 7, 2010
• Sequence Number: 2
• Publication Date: June 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Oil Sector
Indonesia: Foreign
Investment in the
M Ltoe Aieesmat
~ea~eatia~
EA 84-/0113
~~y3o~
25X1
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Directorate of ~~ Confidential
Intelligence 25X1
Indonesia: Foreign
Investment in the
Oil Sector
This paper was prepared b~ Office of
East Asian Analysis. Comments and queries are
welcome and may be addressed to the Chief,
Southeast Asia Division, OEA,
Confidential
EA 84-10! l3
June l 984
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Indonesia: Foreign
Investment in the
Oil Sector
Key Judgments Jakarta's favorable financial terms for foreign oil companies and its
/n/ormation available foresight in obtaining long-term exploration commitments in the 50
as of 16 June /984 production-sharing contracts signed since 1978 have paid off in high levels
was used in this report.
of exploration by foreign oil companies during the past two years. Signs of
a slowdown in exploration for oil, however, are becoming increasingly
evident as the soft oil market persists.
The government recognizes its dependence on foreign oil companies for
capital and technology in oil and gas production and its need for foreign as-
sistance in developing alternate energy resources. Although Jakarta hopes
to end this dependence, we believe the government will encourase foreign
investors in the energy sector at least through the 1980s.
On the negative side, Jakarta's efforts to boost Indonesian participation in
the oil industry and former Pertamina President Sumbono's hardline
approach toward the US firms, Caltex and Stanvac, could cause problems.
The ouster of Sumbono should ease oil company fears, but Jakarta will
have to be careful to avoid damaging investor confidence.
Partly financed by Japanese Government funds, Japanese firms are helping
to cushion Indonesia from the global oil exploration slump because of
Tokyo's concern with ensuring the security of its oil imports. The Japanese
seem likely to maintain the level of their activity in the coming years even
if the oil market fails to recover, but they are unlikely to challenge US
dominance in the industry.
Further growth in investment in the oil industry will depend mainly on the
world oil market, although any misstep by Jakarta could further discour-
age exploration. As for alternative energy resources, investment gains will
probably be modest, although Jakarta will continue to seek new markets
for its extensive natural gas resources.
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~onnaennai
Figure 1
Indonesia: Major Energy Resources
Bukit i~sam Cinta K~isna ""'-'
~~~~~~Ar%una Java Sea
Jakanta*
KemO%eidg~ ~.~Dieng ~lateau
Cocus Kce!irry)
Islands
~, (AustlJ
~f'h+is;mcs Istnnd
(Ausu.l
Boundary representation is
not necessarily authoritative.
Banda
Sea
Oil refinery
Oilfield
Garfield
~ Coalfield
,?~+ Potential coalfield
Potential geothermal
field
0 500 Kilometers
r I ' ' I rLT~
0 500 Miles
Ara ru ra
Sea
Papua
New
Guinea
Irian
Jaya
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Indonesia: Foreign
Investment in the
Oil Sector
Developments in the Oil Industry
In the past two years, the soft world oil market has
forced OPEC countries to cut both production and
prices of their crude oil and has caused worldwide oil
exploration to tumble. Although foreign oil companies
in Indonesia have maintained active exploration pro-
grams to satisfy commitments made before the oil
glut, a slowdown in exploration is becoming increas-
ingly evident as the soft market persists and Jakarta
finds fewer companies willing to sign new production-
sharing contracts. Intensive exploration is necessary
just to restore the reserves depleted each year, and a
slowdown raises questions about Indonesia's long-
term production capacity. Because Jakarta's ability to
develop alternate energy resources also will probably
remain limited (see appendix), growth prospects for
the economy as a whole would be weakened
Recent Developments
Indonesian oil output, which peaked at nearly 1.7
million barrels per day in 1977, slipped in the follow-
ing two years before recovering to its long-term
sustainable capacity of about 1.6 million b/d in 1981.
In March 1982, however, Indonesia's production ceil-
ing was set at 1.3 million b/d in accord with OPEC
production quotas aimed at averting a downward
price spiral. Output remained at that level even after
the persistent soft market forced OPEC to cut crude
oil prices by $5 a barrel in March 1983 (see table 1).
Since mid-1983 Jakarta has gradually relaxed the
constraints on oil companies, allowing crude oil output
to rise above its OPEC quota to nearly 1.5 million b/d
by yearend. Even so, oil export earnings, which rose
from $7 billion in 1978 to $16 billion in 1981, fell to
$11 billion in 1983.
Despite reduced earnings, the oil sector has continued
to attract considerable foreign capital as the momen-
tum of the 1979-80 oil price boom and Indonesia's
financially attractive production-sharing terms have
kept oil exploration and development high. According
to the US Embassy, foreign oil companies in 1983
boosted spending on exploration nearly 10 percent to
$1.2 billion. After completing 238 exploratory wells
Table 1
Oil Output, 1982 and
January-June, 1983
Asamera
8,769 4,67
3
Associated Australia
569
Caltex
558,445 583,63
3
Conoco
24,682 19,01
0
Huffco
25,154 21,59
2
I[APCO
110,845 102,70
0
Lemigas
535 69
7
Mobil
75,937 75,56
2
Pertamina
75,003 94,07
9
Petromer Trend
43,351 39,47
2
Phillips
3,406 3,06
5
Stanvac
36,203 34,66
6
Tesoro
6,756 6,54
9
Total/Inpex
164,178 154,65
0
Union/Inpex
75,445 57,11
4
out of 284 budgeted in 1982, companies completed
about 260 exploratory wells out of 323 planned in
1983. Seismic activity in 1983 approached the previ-
ous year's level. In addition, Tokyo's efforts to assure
secure supplies of oil imports by financing Japanese
oil company operations are helping to cushion explo-
ration in Indonesia against a reduction.
Jakarta continues to benefit from its foresight in
obtaining long-term exploration commitments in the
50 production-sharing contracts signed since 1978.
Since the exploration boom began in 1978, Jakarta
has obtained commitments from its contractors to
conduct active exploratory drilling for at least the first
four to six years of their contracts. Notwithstanding
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Confidenrial
Table 2
Indonesia: Production-Sharing Contracts, 1982-83
Company (Country)
Block
_
Exploration
Commitment
Location
Area
(sq. km.)
1982
Tesoro (United States)
Tarakan, East Kalimantan
$8 million
(six years)
Onshore
240
Elf Aquitaine (France)
Ritan, Central Kalimantan
$49.3 million
(10 years)
Onshore
18,260
Elf Aquitaine (France)
Maruwai, Central Kalimantan
$55.5 million
(10 years)
Onshore
19,535
Union Texas (United States)
Cilacap, Central Java
$31.5 million
(six years)
Offshore
13,640
LL&E/Getty (United States)
Pelabuhan Ratu, West Java
$34 million
(six years)
Offshore
9,275
Mobil (United States)
Semayang, East Kalimantan
$149 million
(six years)
Onshore
18,640
Amoco (United States)
Lombok, West Nusa Tenggara
$68.8 million
(six years)
Offshore
26,640
Jackson Kutei Basin (United
States)
Adang, East Kalimantan
$40 million
(six years)
Onshore
10,140
Inpex (Japan)
Banda Aceh, Sumatra
$88 million
(six years)
Offshore
29,905
Sceptre Resources (Canada)
Block A, West Java Sea
$50 million
(six years)
Offshore
13,320
Sceptre Resources (Canada)
Block B, West Java Sea
$47 million
(six years)
Offshore
17,740
Hudbay, Pennzoil, and Husky
(Canada). One-third each.
Northeast Java
$47.85 million
(six years)
Onshore and off-
shore
13,970
Promet (Malaysia)
Southwest Arafura, Irian Jaya
$55 million
(six years)
Onshore and off-
shore
18,315
1983
Total (France)
West Melawi, West Kaliman-
tan
$48.5 million
(eight years)
Onshore
13,295
Elf Aquitaine (France)
East Melawi, West Kalimantan
$25 million
(six years)
Onshore
8,920
Asamera (Canada)
Corridor Block, South Sumatra
$60 million
(six years)
Onshore
11,152
the current high level of investment in the oil sector,
however, the international oil glut is beginning to
threaten exploration and thus earnings prospects of
the mainstay of Indonesia's economy:
companies were drilling
the minimum number of wells required by their
contracts last year and are slowing exploration
further in 1984.
? Companies signed only three new production-shar-
ing contracts' in 1983, compared with 13 in 1982,
raising doubts about Jakarta's ability to sustain its
long-term production capacity (see table 2).
' Since the mid-1960s all new contracts have been production-
sharing agreements under which Pertamina exercises management
authority and obtains a share of each contractor's crude oil output.
Under the older concession-type contracts, the foreign oil compa-
nies exercised decisionmaking authority within their concession
areas and remitted a share of their profits to Jakarta, a practice
that made Jakarta suspicious of oil company accounting methods.
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To make energy planning more ellective, Jakarta
established a 12-member National Energy Planning
Board (Bakoren) in 1980 under the chairmanship oJ'
the Minister of Mining and Energy. The group, which
includes representatives of key industry, energy, and
economic planning ministries, as well as the military,
has become the primary.Jorumlor debating national
energy policy.
The Ministry of Mining and Energy consists of three
directorates responsiblelor petroleum and natural
gas, mining and geothermal energy, and electric
power development. Besides overseeing Pertamina
(the state oil company), P. T. Tambang Batubara (the
state coal mining company), and PLN (the state
electric power company), the directorates supervise
all private~rms operating within their areas of
responsibility.
Pertamina is the centerpiece of Indonesia's energy
policy making because oJ'the dominance of oil and
gas in the economy. The company is Indonesia's
largest employer, with more than 47,000 employees,
? Contractors showed no interest in a number of
blocks put up for bids by the government and paid
only $2 million in signature bonuses for contracts
signed in 1983, down sharply from the $32 million
and $111 million bonuses paid to the government
during the boom years of 1981 and 1982
The View From Jakarta
Jakarta ultimately is seeking to retain a larger share
of oil earnings, advance Indonesian technological ca-
pabilities, and develop its resources on its own and has
established a substantial bureaucracy to advance
these goals (see box). Nonetheless, the government
recognizes its dependence on foreign oil companies
and has sought to maintain an attractive investment
climate by providing financial incentives that would
augment its stable political environment. As a result,
and is responsible for supervising all production
sharing companies and over 200 oil service rms.
Pertamina is headed by President Director Abdul
Rachman Ramly and six other directors, all appoint-
ed by President Soeharto.
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Pertamina is governed oJ~cially by a Board oJ'Com-
missioners, which was established by law in 1971 to
exercise broad policy and operational control over
Pertamina, but past presidents of the company have
exercised ellective control. Besides designating the
Minister o.1'Mining and Energy as Chairman, the law
also specked that the Minister oJ~Finance and the
Head of the National Economic Development Plan-
ning Agency (BappenasJ be members. Two other mem-
bers may be appointed at the discretion of the 25X1
President. In May 1983, President Soeharto named
State Secretary Sudharmono and Minister oJ' Re-
search and Technology Habibie to the Board. Since
his appointment, Sudharmono has made it clear that
he speaks with the President's authority.
Indonesia's oil contracts encourage long-term invest-
ment perspectives by assuring the oil companies of 20
to 30 years of operations if new discoveries prove
commercial. In addition, they allow the operators full
recovery of costs and a generous 15-percent share of
output.
The Indonesianization Push: Some Solt-pedaling. To
encourage employment of Indonesians, government
officials monitor oil companies' personnel practices
and periodically impose new restrictions on hiring
expatriates. In late 1982, the government published a
list of drilling rig jobs that would be restricted to
Indonesians by the end of January 1983. Jakarta
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backed down on the deadline after the foreign oil
companies complained that there were not enough
qualified Indonesians. The government has kept pres-
sure on the oil companies, however, and is continuing
efforts to phase out expatriates.
Although government pronouncements seem tough to
many investors, the government allows oil companies
to retain expatriates if the firms can demonstrate
there are no qualified Indonesians and pay the govern-
ment $100 a month for each expatriate remaining
beyond his expiration date. The funds are used to
provide training for Indonesians. In other industries,
firms must pay $400 a month.
Jakarta continues to permit foreign participation in
the oil service and supply sector while seeking to
encourage Indonesian firms. One presidential'direc-
tive requires that priority in government procure-
ment-including purchases by the state-owned oil
company, Pertamina-be given to indigenous firms.
Another directive requires foreign investors to form
joint ventures with Indonesian partners. The Indone-
sian share in these ventures, furthermore, must rise to
51 percent within 10 years. The Ministry of Mining
and Energy maintains a list of approved oil industry
suppliers and subcontractors, which includes only
those firms that satisfy the government's criteria and
prohibits oil companies from contracting with firms
not on its approved list.
Jakarta's efforts to increase local participation in the
oil industry include expanding the role of Pertamina.
Besides its responsibility for all domestic refining and
marketing, Pertamina produces about 100,000 b/d of
crude oil, exports about 225,000 b/d of its own and
contractors' crude, and oversees all production-shar-
ing contractors. In 1983 the company stepped up its
exploratory drilling to about 25 wells, initiated its first
offshore operations, and expanded its production ca-
pacity by taking over former Stanvac concession
areas. Pertamina's management authority also was
considerably enhanced when it began to exercise
decisionmaking authority over Caltex's operations.
Furthermore, the expansions of the Cilacap refinery
in Central Java and the Balikpapan refinery in East
Kalimantan doubled the country's refining capacity to
about 800,000 b/d, creating a temporary surplus and
spurring Pertamina to seek export markets for prod-
Although willing to compromise in areas where it
depends on the foreign oil companies, Pertamina has
also demonstrated its readiness to risk offending them
on some issues. In determining the commercial poten-
tial of new discoveries, for example, Pertamina exhib-
its the more assertive management style introduced by
Judo Sumbono (see box). Pertamina no longer simply
accepts a foreign oil company's assessment of re-
serves, but makes its own reserve estimates and
applies a stiffer criterion for determining the commer-
cial prospects of a new discovery. Reserves must be
large enough according to Pertamina's calculations to
assure the government at least 51 percent of the
recoverable crude oil after deducting the contractor's
cost recovery and production share. Pertamina on
several occasions has turned down requests for decla-
rations of "commerciality" for new discoveries. Al-
though there is no clear evidence that companies have
declined specific exploration prospects because of
Pertamina's tougher attitude, industry sources indi-
cate that Pertamina's attitude has dampened explora-
tion in frontier areas and has contributed to the focus
on known producing areas.
Hardline Approach to Caltex and Stanvac. Jakarta's
moves to change contract terms at the expense of its
contractors have concerned foreign oil companies.
Negotiations last year for Caltex's new production-
sharing terms and Pertamina's unilateral takeover of
a large portion of Stanvac's former concession area,
however, have had little apparent effect on investment
decisions. The expiration of the concession-type con-
tracts covering most of the area operated by Caltex
and Stanvac, the country's last two concession opera-
tors, renewed suspicions that Jakarta might squeeze
other oil companies for additional revenues, but Indo-
nesian oil officials apparently convinced them Jakarta
had no plans to revise their contract terms.
2 The two US firms have been active in Indonesia since Dutch
colonial times. Caltex, aTexas-based joint venture of Texaco and
Standard Oil of California (Socal), operates worldwide and is
Indonesia's largest crude oil producer. Stanvac, a joint venture of
Mobil and Exxon, was formerly one of Indonesia's largest produc-
ers, but its output has stagnated at 30,000 to 40,000 b/d for many
years while other producers have sharply boosted production.
uctsa
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Energy policy making in Indonesia is largely in the
hands of a small number oj'senior bureaucrats.
Minister of Mining and Energy Subroto, one of
President Soeharto's early technocrat economic ad-
visers, has overall authority within the government
.jor the conduct oj"energy policy. Foreign oil ojJrcials
characterize him as a~gurehead lacking substantive
knowledge oJthe oil industry. Subordinate to him are
three directors general, including Director General of
Oil and Gas Wijarso, often described by oil industry
oj~cials as Indonesia's most knowledgeable and e1-
fective oil ofjicial. Both Subroto and Wijarso deal
regularly with theloreign oil companies operating in
Indonesia and represent Indonesia in such interna-
tionallorums as OPEC.
Pertamina President Abdul Rachman Ramly man-
ages the operations of the state oil company and
oversees all the activities of the,foreign oil companies.
He replaced former Pertamina President Sumbono in
June 1984. Sumbono was ousted after months of
growing criticism from senior Indonesian oj~cials,
and foreign oil company representatives over his
inaccessibility, poor management, and financial mis-
deeds. His successor reportedly has close ties to
Armed Forces Commander Murdani and has earned
a good reputation for his management capability as
head of the state tin corporation. Ramly's appoint-
ment should encourage theloreign oil companies,
which have become increasingly critical of contract
delays and operational difficulties caused by Sum-
bono, to continue to invest in Indonesia's oil industry.
Jakarta's calculated risk in taking over Stanvac's
properties and demanding a larger portion of Caltex's
output than the 85 percent share it receives under all
other production sharing contracts has strengthened
Pertamina's role in the oil industry. Besides gaining
Soeharto's approval jor the takeover of some two-
thirds of Stanvac's production capacity over the
objections of Wijarso, Sumbono took the lead in
demanding a larger share of Caltex's output. The
more cautious Subroto and Wijarso, in our view,
probably played a mediating role by helping to
modify Sumbono's position while convincing Caltex
of the need jor compromise.
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c:ont~aennai
In anticipation of an eventual changeover in its
contract, Caltex in 1971 signed aproduction-sharing
agreement to become effective in 1983. The contract
included a 65/35 split in production in favor of the
government, which was standard in 1971. After Ja-
karta revised all production-sharing contracts in 1976,
Caltex officials recognized they would have to renego-
tiate terms in 1983, but hoped to obtain the new
standard 85/ 15 production split. After protracted
talks in 1983, the two sides finally agreed on an 88-
percent share for the government, but negotiations
dragged on for a month beyond the expiration date
while Caltex sought some financial incentives for its
enhanced recovery projects. The new contract terms
assure a role for Caltex in the Indonesian oil industry
beyond the end of the century
Jakarta took a much more uncompromising line with
Stanvac, whose output of about 35,000 b/d represents
only 5 percent of Caltex's production capacity. Unlike
Caltex, Stanvac had not signed a prior agreement to
replace its concession-type contract. Stanvac officials
had hoped to sign a contract modeled on Caltex's new
terms, but Pertamina officials notified Stanvac in
April 1983 that the Indonesians would take over the
concession area when the contract expired.
Stanvac attempted to negotiate a compromise, but in
November Pertamina took over a concession area that
accounted for about two-thirds of Stanvac's output.
Pertamina officials had complained that Stanvac had
not developed its concession aggressively enough and,
in our view, probably believe they can operate the
Stanvac concession successfully. Furthermore, Perta-
mina President Sumbono probably faced less opposi-
tion within the government over the Stanvac takeover
than over his hardline approach to Caltex, where the
financial risk was much greater.
The Japanese Factor
Tokyo's strategic interests are helping to maintain a
high level of exploration in Indonesia and to some
degree bolstering Jakarta's leverage with other for-
eign investors. Japanese firms in Indonesia benefit
from the financial backing of their government, which
enables them to take along-term investment approach
rather than react to short-term market fluctuations.
'Since 1979, Tokyo has furnished nearly $250 million
in loans to finance exploration by Pertamina in part-
nership with Inoco (Indonesia Nippon Oil Company)
and another $110 million for the development of fields
previously reserved for Pertamina. Pertamina is to
repay the loans by supplying 40 percent of the output
from the program within 10 years. If the program
does not result in commercial production within 10
years, Pertamina is not obliged to repay the balance.
Four Japanese firms-Inoco, Inpex, Japex, and Jambi
Oil-are operating in Indonesia, either in partnership
with other foreign firms or with Pertamina. Although
technically independent, all four own shares of each
other and all are partly owned by the Japan National
Oil Company (JNOC). JNOC usually acts more as a
holding company than an operating company, but
reportedly is considering establishing its own opera-
tion in Indonesia. In our view, Tokyo considers all
these firms key links in its efforts to assure secure oil
imports, 15 percent of which come from Indonesia:
? In partnership with Union Oil and Total, Inpex
(Indonesia Petroleum, Ltd) now has a 50-percent
share in three of Indonesia's largest oilfields-
Attaka, Handil, and Bekapai-and smaller shares
of Huffco's Badak gasfield and the Nilam oil and
gas field. Although not the principal operator of any
of these fields, Inpex's share of output makes it the
second-largest crude oil producer in Indonesia.
? Japex (Japan Petroleum Exploration Company) has
been less successful in exploration in Lampung
Province in southern Sumatra, but company offi-
cials remain interested in other areas in Indonesia.
Japex remains engaged in a secondary recovery
project at Pertamina's Rantau field in North Suma-
tra. It plans to spend $85-125 million in a water-
injection project and had already drilled 20 out of a
planned 90 wells by late 1983. Water injection is
scheduled to begin in late 1984 under aproduction-
sharing contract.
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? Jambi Oil drilled a number of exploratory wells
during 1981-83 that indicated the presence of hy-
drocarbons, but none has yet been declared com-
mercial. Company officials reported spending $10
million on exploration in 1983 and plan a similar
amount in 1984
The Japanese do not threaten the dominant role of US
oil companies in the Indonesian oil industry, although
they will probably exert increasing influence. Inpex,
for example, signed aproduction-sharing contract in
June 1982 fora 29,900-square-kilometer block off-
shore Banda Aceh, northern Sumatra, which could
become one of the country's largest fields. The Indo-
nesian Government, however, is already sensitive to
the dominance of Japanese investment in nonoil sec-
tors and would be concerned over the public reaction
should Japanese firms attain a similar position in the
oil industry
Looking Ahead
Given the current soft oil market, we expect explor-
atory drilling to level off or decline slightly this year,
although reductions in drilling costs during the cur-
rent exploration slump will help to soften any down-
swing. Most companies probably will continue drilling
in known producing areas or concentrate on develop-
ment wells but will refrain from high-risk exploration
in frontier areas. US and other foreign firms depend-
ent on private financing are more likely than the
Japanese firms to cut back drilling in response to
market softness. In our view, Tokyo probably will
encourage the Japanese firms to avoid sharp cutbacks.
A Potential Pitfall
We expect the government to continue pressing for an
expanded Indonesian role in all phases of the energy
sector, but not so vigorously that it would deter
investment. Even so, Jakarta will have to restrain the
hardline nationalism introduced by former Pertamina
President Sumbono in asserting the company's inter-
ests against foreign oil firms. Indonesia's attrac-
tions-numerous oil-bearing basins, a stable political
environment, and generous financial incentives-still
outweigh its drawbacks for most foreign oil compa-
nies. Acontinuing tough line, however, could easily
dampen enthusiasm for exploration in Indonesia, par-
ticularly if companies are prevented from recovering
their costs by stiffer operating rules, such as the
current criteria for declaring fields commercial The
government will also have to refrain from significant
changes in the standard production-sharing terms.
Jakarta's economic planners are forecasting growth
rates of 5 percent annually for the 1984-89 Five-Year
Plan, down from the 7.6-percent average of the 1970s,
based on a gradual recovery of oil exports. Any move
by the government that would discourage oil company
exploration would reduce the country's economic
growth prospects below even these modest expecta-
Pertamina's dealings with Caltex could still discour-
age investment by Caltex and other foreign firms.
Even under the most favorable circumstances, Perta-
mina's new management role will cause occasional
frictions between Pertamina and Caltex. Although we
do not foresee any drastic move by Caltex in the near
future, excessive intervention by Pertamina in Cal-
tex's operations could well dampen exploration.~~
The World Market: A Wild Card
Changing world oil market conditions are a more
likely cause of fluctuating investment prospects in the
Indonesian oil sector. A downward price spiral
sparked by competitive price cutting among financial-
ly hard-pressed oil-producing countries would force
the oil companies to cut spending plans worldwide.
Although we would expect companies to continue
producing crude oil in Indonesia, under these circum-
stances export earnings would fall, economic growth
would slow, and we would expect a sharp drop in oil
exploration.
Almost equally likely would be a disruption in world
oil supplies of sufficient size and duration to spark
substantial price increases. Should a closure of the
Strait of Hormuz or stepped-up attacks on tankers in
the Persian Gulf lead to a round of price increases, for
example, Jakarta could enjoy a replay of the 1979-81
oil price boom. Oil companies would quickly boost
output and step up exploration, further improving
Indonesia's financial situation and growth prospects.
Accelerated exploration would also restore the coun-
try's sustainable oil production capacity, which has
fallen slightly in the past two years as depletion of
reserves outstripped additions from new discoveries.
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Appendix A
The Push for Alter-
native Energy
Natural Gas on a Plateau
Jakarta's ambitious plans to develop alternative ener-
gy resources to conserve oil for export show mixed
results, as Indonesia's finances have tightened and the
government has cut back its investment spending
plans. On the positive side, liquefied natural gas has
reached a new plateau as four new trains (production
lines) were added last year to the five existing trains at
the country's two LNG plants, boosting capacity from
7.5 million tons of LNG a year to nearly 14 million
tons. LNG continues to hold the strongest attraction
for foreign investors because of profitable market
opportunities in Japan under existing contracts. Earn-
ings probably will rise nearly 50 percent to more than
$3.5 billion in 1985 if the purchasers take only the
contracted amounts and will rise further if Jakarta
can make additional spot market sales. Estimated
reserves in the country's two producing gasfields-9
trillion cubic feet in the Badak field in East Kaliman-
tan and 17 trillion cubic feet in the Arun gasfield in
northern Sumatra-place Indonesia among the
world's 10 leading sources of natural gas and assure
sufficient supplies for expected growth in demand in
the 1980s. Because of the high cost of LNG facilities,
Jakarta has needed both the foreign producing com-
panies and consumers to help in financing-mover $300
million each for the first five trains at Arun and
Badak, and some $500 million each for the four new
trains, plus $125-150 million for each of the seven
original LNG carriers.
The soft market and the presence of commercial
gasfields in neighboring countries are dampening
prospects for further expansion of Indonesian LNG
facilities. Jakarta has signed a contract to begin
supplying 2 million tons of LNG a year to South
Korea in late 1986 and is seeking additional sales to
Taiwan and Kuwait. Earlier grandiose plans for fur-
ther expansion of LNG exports have been scaled down
as a result of Tokyo's downward revision of Japan's
projecte3 energy demand in the 1990s. Development
of the giant Natuna gasfield in the South China
Sea-with estimated reserves of 35 trillion cubic feet
of natural gas and 80-90 trillion cubic feet of carbon
dioxide is delayed indefinitely because of poor market
prospects. Pertamina agreed to `stop the clock' on
Exxon's contract, which called for relinquishing the
field by 1990 if development were not under way.
Even if Exxon were able to find a market for the
natural gas, the company would still have to find an
economical way to dispose of the large quantity of
carbon dioxide. In addition, other firms have made
gas discoveries in various parts of Indonesia, but have
refrained from developing them because of poor mar-
ket prospects.
Coal and Other Resources-Longer Term Prospects
Indonesia's plentiful coal, hydro, and geothermal re-
sources remain relatively untapped because the do-
mestic market offers less lucrative sales prospects and
development requires massive infusions of scarce fi-
nancial, managerial, and technical resources. Reha-
bilitation of coal mines and expansion of electric
power capacity have made very limited progress.
Jakarta has made a start in reviving coal output from
the traditional coal mining areas of South and West
Sumatra to fuel new power plants, but financial
stringency and bureaucratic ineptitude have already
pushed development two years behind schedule.
The state coal company, P. T. Tambang Batubara,
with financial and technical assistance from the
World Bank and other aid donors, is undertaking the
rehabilitation of the coal regions in Sumatra where
mines have been operating for more than half a
century. Plans call for Jakarta to finance half the $1.2
billion cost of the expansion of the southern Sumatra
mining region. In East and South Kalimantan, where
reserves have not been delineated, Jakarta has turned
to the private sector and signed seven production-
sharing contracts with foreign mining companies to
explore over 50,000 square kilometers, as shown in
table 3.
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Table 3
Indonesia: Coal Production Sharing Contracts
Company (Country)
Block
Area (hectares)
Comments
P. T. Arutmin
South Kalimantan
1,260,000
Joint venture: Arco/Utah Exploration
P. T. Utah Indonesia
East Kalimantan
797,200
Utah Mining
AGIP (Italy) Consolidation Coal
(United States)
East Kalimantan
774,200
Joint venture
P. T. Kaltim Prima
East Kalimantan
790,000
Joint venture: Conzinc Rio Tinto
(Australia) and BP (United Kingdom)
P. T. Kideco Jaya (South Korea)
South Kalimantan
255,000
P. T. Adara Indonesia (Spain)
South Kalimantan
150,000
P. T. Berau Coal (United States
and Japan)
East Kalimantan
497,625
Joint venture: Mobil (United States)
and Nissho Iwai (Japan)
Jakarta is assured a minimum level of spending by
foreign mining companies in Kalimantan for several
years because the production-sharing contracts speci-
fy that the companies must spend $120 per square
kilometer for general surveys and $500 per square
kilometer for exploration. Nonetheless, development
of coal resources offers little promise before 1990. The
timetables and spending commitments allow nearly a
decade of preliminary work and the companies are
just beginning. Furthermore, given the soft market for
oil and other energy resources and the cost of coal
development, companies will postpone decisions on
actual mining operations as long as possible. Com-
pounding the problem will be Jakarta's probable
continuing financial stringency in the 1980s, which
will impede development of transportation and other
infrastructure.
The Indonesians are moving ahead on developing
nonexportable resources such as geothermal and hy-
droelectric power to conserve crude oil for export, but
progress is slow. Jakarta is turning to foreign investors
to develop geothermal projects and is relying on the
World Bank and other aid donors for assistance in
expanding hydroelectric capacity. The Indonesians
are concentrating on Java, where the demand for
electricity is greatest.
Control of geothermal development is split between
Pertamina, which is responsible for the wells and
steam collection system, and PLN, which is responsi-
ble for the electric power generation and distribution
facilities. Pertamina is planning to develop some
areas, such as the Dieng Plateau in Central Java, by
itself. It also is planning to expand a 30-megawatt
plant at Kamojang, West Java, with assistance from
New Zealand, which helped build the existing plant.
Pertamina has signed a contract with Union Oil for a
geothermal plant in West Java and is in advanced
negotiations with a Caltex subsidiary, Amoseas, for
another. The Indonesians are moving ahead slowly on
several hydropower projects-typically multipurpose
projects with long leadtimes-with major financial
and technical assistance from the World Bank. The
current Five-Year Plan calls for hydroelectric capaci-
ty to expand from about 1,300 MW in 1983 to 1,740
MW by 1988.
Even if oil prices rose sharply, investment in alternate
energy resources probably would continue to lag
because of the difficulties in marshaling the necessary
managerial, technical, and financial resources. Fur-
thermore, given the abruptness of the last recession
and the high likelihood of a similar sudden downturn,
Jakarta probably would be reluctant to renew afull-
scale development program, but would gradually step
up construction.
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