INDONESIA: PROSPECTS FOR THE OIL INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010115-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 115
• Publication Date: December 1, 1968
• Content Type: IM

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I)o t_ jot
Confidential
DIRECTORATE OR
INTELLIGENCE
.Intelligence Memorandum
Indonesia: Prospects for the Oil Industry
Confidential
ER IM 68-1'64
December 1968
Copy N6-.
81
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
NIICLUUID -NOM AUTOMATIC
UOKN011AUIN0 AND
D[CLA[AIfICATION
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CE14TRAL IiiTLLLIGLNCL AGL14CY
Directorate of Intelligence
December 1968
Indonesia: Prospects for the Oil Industry
Summary
Indonesia's rapidly growing petroleum industry
is the country's only hope for a large increase
in export earnings during the next few years. Oil
production increased rapidly during the 1950's,
but growth slowed greatly in the 1960's as a
result of threats to nationalize properties of
the three foreign companies that operated most of
the country's oil industry. Unlike the other
foreign-owned interests, however, the oil industry
had not been taken over by the time of the 1965
coup, and much of its mechanized equipment remained
in relatively good condition. Therefore, the in-
dustry was able to respond rapidly to President
Suharto's new policy of encouraging foreign private
investment. Production of crude oil, which will
increase 15 percent in 1968 and reach a record
580,000 barrels per day, will probably double by
1972.
Almost all, of Indonesia's increased crude oil
production will be exported, and this will make a
major contribution to the country's pressing for-
eign exchange needs. Petroleum exports were nearly
$250 million in 1967, about one-third of total
exports, and in 1968 the share will be even larger.
Because Indonesia's exports of oil are expected to
reach at least 1 million barrels per day in 1972,
Djakarta's net receipts of foreign exchange from
oil probably will be $300 million by 1972, compared
with only $70 million in 1.967.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of National
Estimates and the Office of Current Intelligence.
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In the longer run the extensive exploration
now getting under way could produce a genuine
oil boom. At least.20 foreign companies already
have signed exploration and development contracts,
and the number of contracts soon may reach 30.
Generally, the new contracts cover offshore areas
in the shallow waters of the Malacca Straits and
the Java Sea. While most of the companies in-
volved are small and.medium-sized US firms, the
major US and other international companies have
now entered the scene. The sustained interest
shown by foreign companies.in bidding for these
areas indicates that these companies are highly
optimistic about the prospects of finding oil and
reflects favorably on the investment climate created
by the Suharto regime.
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The Setting
1. The Indonesian petroleum ir;.dustry was
developed almost entirely by three major foreign
oil companies during the half century before World
War II. A predecessor of the Royal Dutch/Shell
group began commercial production of crude oil in
1890, Stanvac* obtained concessions in 1912, and
Caltex** in 1931. Petroleum production and ex-
ploration activities increased rapidly until
intelruptc d by World ~7ar II, which left the petro-
leum industry in a shambles.
2. After a brief period of postwar reconstruc-
tion during which the foreign oil companies re-
ceived favorable treatment, the Sukarno government
began to increase its control over the industry.
Initially the main purpose of the government con-
trol was to gain a greater share of the revenues,
but as time went on, nationalistic objectives came
to be predominant. In 1951 the government stopped
granting new oil rights, and activities of the
petroleum companies were limited to old conces-
sions, pending the adoption of a new petroleum
law. Company properties that had not been re-
habilitated after the war or were inaccessible as
a result of civil unrest reverted to the govern-
ment. The government established tl.ree petroleum
enterprises (now combined into one company?
Pertamina), which took over some company proper-
ties, particularly those of Shell, and extended
government control over domestic distri;,ution
and marketing. The investment climate worsened
markedly in 1957, when President Sukarno intro-
duced his "Guided Democracy" and announced he
would extend government control to all sectors
of the economy and limit all foreign investment
in Indonesia.
3. During 1960-65 the government greatly
tightened its control over the economy, including
The Standard-Vacuum Petroleum Company is
jointly owned by Esso Standard Eastern Inc-, and
Mobil Petroleum Co. (formerly called Socony
Mobil Oil).
** Jointly owned by Standard Oil Company of
California and Texaco, Inc.
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the petroleum industry, and as a result the growth
of crude oil production slowed markedly. A new law
in 1960 specified that explo'.tation of oil and
natural gas resources was to be carried out only
by state enterprises or by contractors for the
state. Private investment in the petroleum in-
dustry nearly stopped in the confusion that
followed. The companies were subjected to a
variety of political pressures amid recurrent
rumors of impending nationalization. Finally,
in June 1963, after more than two years of negotia-
tions, the oil companies and the government signed
an agreement in Tokyo covering profit sharing
(60/40 percent in favor of the government), the
duration of exploration and production rights
(20 years for older holdings and 30 years for
new ones), and government purchase of refineries
(within 15 years) and marketing facilities (within
five years).
4. The 1963 Tokyo agreement brought only a
temporary end to uncertainty regarding the legal
basis for foreign oil company operations. A year
later the Indonesian legislature and the trade
unions demanded nationalization of all foreign
holdings, including the oil industry. And in
early 1965 most US and other foreign firms, but
not the oil companies, were taken over by the
government. The oil companies were placed under
temporary protective custody. By October 1965,
when the aborted Communist coup occurred, the oil
companies were the only important ffr;us remaining
under foreign operational control.
5. Despite the Tokyo agreement, Sukarno
obviously intended to eliminate all foreign oil
interests except those operating on a production-
sharing basis. His interpretation of production
sharing was an arrangement in which the government
held formal management responsibilities even though
it might not take an active role, while the for-
eign investor provided only technical advice and
financial support fL.r which he received a share
of production for a specified time. After that
the project belonged entirely to the government.
The prospects of government interference with
management: and of eventual nationalization so
completely discouraged the Shell Company that it
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sold its interests to the government at the end of
1965. Stanvac also was negotiating to get out
when the present military government under Suharto
took control of Indonesia. Caltex, with substan-
tially more profitable fields, was the only company
willing to continue operations under Sukarno's rule.
6. Sukarno's policies caused a virtual cessa-
tion of investment by the oil companies, except
Caltex, and kept crude oil output considerably below
what it could have been. Despite these problems,
however, when Suharto took over the government,
the oil industry was in much better condition
than other sectors of the Indonesian economy.
The iTature of the Industry
7. Indonesia produces about 3 percent of the
Free World's crude oil and has about the same
percent of proved oil reserves. The country is
well located to supply high-quality crude oil to
the rapidly growing Far Eastern market. Indo-
nesia's crude oils have a low sulfur content,
which makes them desirable in pollution-conscious
countries. The major consumers of Indonesian
crude oils are Japan, Australia, the Philippines,
and the United States (mainly Hawaii).
8. Indonesia has about 50 producing fields
on the three major islan63 (see Figure 1), but
fields in Sumatra accounted for about 90 percent
of the total output in 1967. Crude oil produc-
tion increased from about 170,000 barrels per
day (b/d) in 1922, the year in which production
regained pre-Word War II levels, to about
450,000 b/d in 1962 and about 500,000 b/d in
1967. Lxports of crude oil have increased at
about the same rate as production (see Figure 2).
The substantial increase in output between 1952
and 1962 (i0 percent per year) resulted from
expansion in all producing areas. From 1962
until 1967, output increased only about 2 percent
a year because output declined in all areas,
except in central Sumatran fields mainly operated
by Caltex. The share of crude oil production
accounted for by the government and the companies,
by area, is shown in the following tabulation:
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Percent of Total
Crude Production
Operator
Area
1958
1962
1967
Caltex
Central Sumatra
45
50
70
Stanvac
Southern and Cen-
tral Sumatra
23
15
10
Southern Sumatra,
Java, Kalimantan
22
24
Government of
Indonesia
Northern Sumatra,
Java, Kalimantan
10
11
20 a/
Total
100
100
100
a. Including areas formerly operated by Shell.
9. The shift in area and in producing :c pang
is to a great extent the result of Sukarno's poli-
cies. Stanvac and Shell held older concessions
that were being depleted, and until after the Tokyo
agreements in 1963 new lands were not made avail-
able to them. In any case, these companies were
unwilling to invest because of the political and
economic climate of the country after about 1957.
Stanvac let its properties deteriorate and did not
make plans for substantial expansion until 1967.
Facilities owned and operated by the government --
including the former Shell properties -- ran down
because of poor management and lack of investment.
Caltex, on the other hand, with prolific fields
it had discovered shortly before World War II, had
more to gain than the companies operating older
and less productive properties, and the company
substantially increased production.
10. Government refineries accounted for nearly
70 percent of total refinery output in 1967;
Stanvac produced the remainder. Refinery output
rose slowly during the 19501s, declined slightly
during the first half of the 1960's, and has
since remained at about 200,000 b/d. An increas-
ing portion of the output is being consumed domes-
tically each year, and consequently exports of
petroleum products are declinifg (see Figure 2).
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Only three of the seven refineries ship products
outside their immediate area. They account, how-
ever, for over 95 percent of the national capacity
of about 275,000 b/d (see Figure 1). The Piadju
(government-owned ex-Shell) and the Sungaigerong
(Stanvac) refineries are both located on the Musi
River close to Palembang in southern Sumatra (see
Figures 3 and 4). Owing to declining production
of crude oil in adjacent areas, these two refineries
have become heavily dependent on crude oil being
shipped by sea from other areas in Indonesia,
especially from the Caltex fields in central
Sumatra (see Figures 5 and 6). The shallow draught
of the Musi River bar, however, generally limits
tankers to sizes of about 8,000 to 10,000 tons.
The third major refinery is the government-owned
(ex-Shell) Balikpapan Refinery on the island of
Kalimantan (see Figure 7) which also obtains more
than half of its crude oil from central Sumatra
because of declining production at local fields.
The other small refineries are government enter-
prises.
Suharto and the Petroleum Industry
11. Since March 1966, Suharto and his col-
leagues have successfully created an atmosphere
both encouraging to former investors and attrac-
tive to new ones. The government enacted a
foreign investment law in 1967 which provides
for guarantees on repatriation of capital, land
use rights, special tax incentives for companies
that increase foreign exchange earnings, and
assurances against nationalization and undue
interference in the control and management of
foreign enterprises. The government also changed
most of the prevailing special discriminatory
foreign exchange procedures objected to by the
private oil companies and gave them more freedom
in establishing export prices. Djakarta, in
addi'?ion, began paying off old debts to the oil
companies, particularly to Stanvac.
Recent TrendE and Pros ect
12. Production of crude oil in 1968 probably
will be about 580,000 b/d, an increase of about
15 percent compared with a 9-percent inu:-ease in
1967 and a decline in output in 1966. Most of
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the increase in 1968 and in the next several years
will come from Caltex, which has the larc,ast in-
vestment program of any foreign company in
Indonesia -- about $24 million in 1968. A Caltex
expansion program, including development drilling
and construction of jetties and storage facili-
ties, aims at increasing the company's production
to 600,000 b/d by late 1969, compared with about
360,000 b/d in 1967. In addition to the very
large Minas field (with an output of 250,000 b/d),
Caltex has the Duri and Bekasap fields (30,000 to
40,000 b/d each) a_id twrr new fields at Permatang
and Pungut which began producing in 1966. More-
over, Caltex will soon begin drilling in the
highly promising Lebo field (near Minas) and has
discovered still another very promising field
northwest of Duri, both of which probably contain
low-sulfur Minas-type crude oil. Caltex now
holds the best of the potential oil--producing
lands and has been awarded for exploration some
of the best of the former Pan American areas
adjacent to its present producing areas (see inset
on Figure 1). If its Lebo field alone proves out,
as Caltex officials are confir'ant it will, Caltex
production could go well over a million ba.:rels
in 1972.
13. Aside from Caltex, other established pro-
ducers are making improvements to at least arrest
the dec'~ine in their output and hopefully to in-
crease it in the near future. Stanvac's fields,
v,nere output declined from 70,000 b/d in 1962 to
about 55,000 b/d in 1967 principally because of
lack of investment in machinery and equipment,
are being rehabilitated and the company is con-
tinuing to explore onshore and offshore for new
fields. Stanvac's total new investments, includ-
ing the refinery, were scheduled at $3.1 million
.or 1967 and $4.1 million for 1968. Output of
Pertamina, the government enterprise, which had
declined from 160,000 b/d in 1962 to only 100,000
b/d in 1967, has prospects for modest increases
from small fields discovered in southern Sumatra
and on Kalirn=ntan by Pertamina and a Japanese
contractor, 140SODLCO. Asamera, a Canadian company,
also began operating in 1967 in northern Sumatra,
but production has reached only 8,000 b/d.
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14. The conclusion of contracts with new for-
eign companies for exploration and eventual ex-
ploitation greatly improves the outlook for
developing Indonesia's oil resources. At least
20 companies, including Stanvac and Caltex, have
been awarded one or more exploration areas each,
and a number of other contracts are under discus-
sion (see the table). The new companies are for the
most part small or medi>?m-sized independent US
firms, but there are also two Japanese companies
and one each from Australia, Canada, Italy, and
France. The new, large areas for exploration are
predominately offshore in the shallow waters sur-
rounding the Indonesian islands, mainly in the
Malacca Straits and Java Sea (see Figure 1). The
Indonesian government expects to bring the total
number of foreign contracts to about 30, mostly
for offshore areas, and to reserve the remaining
onshore areas for government exploration. Expec-
tations are high that significant new oil finds in
these offshore areas, which have never been sur-
veyed, will by the mid-1970's greatly increase
Indonesia's output of crude oil.
15. In 1967 and 1968 t,iere was good progress
in exploration. In order to reduce Japan's
90-percent dependence on the Middle East as a
source of crude oil and to reduce its substantial
expenditure of foreign exchange for oil imports,
the Japanese government is giving financial sup-
port to the three Japanese companies working i::
Indonesia. Large US oil and holdiiig companies
(Sinclair, Natomas, Cities Service) bought into
contracts already signed; and two major interna-
tional companies, Mobil and Gulf oil, obtained
concessions on their own. Wildcat drilling off-
shore is under way in three areas held by Kyushu,
Japex, and Sinclair. The Japanese estimate that
imports of 200,000 b/d will originate from their
areas beginning in 1970.
16. Indonesia's refinery problems are expected
to be largely over by 1971. Two Japanese firms
signed a contract at the end of 1967 to build a
100,000 b/d refinery at Dumai, the site of the
Caltex pipeline terminal. As payment, the
Japanese will take the low-sulfur heavy fuel oil
to be produced at the refinery and will continue
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these purchases after payment is complete. This
refinery will supply sufficient kerosine, some of
which is now imported, for domestic needs, and
Japan will provide a ready market for the fuel
oil, which is the only form of petroleum other
than crude oil that Indonesia now exports in
quantity. Also some of the new exploration agree-
ments specify that refineries will be built after
a certain production level is reached.
17. The petroleum industry is clearly the
most promising sector for a rapid expansion of
exports. Production is expanding rapidly now
and will probably double by 1972. Although the
petroleum industry accounts for only about 5 per-
cent of Indonesia's national product, it contrib-
uted $250 million, or about 35 percent, of the
country's gross foreign exchange earnings in
1967; in 1968 the share will be even larger.
With expected production increases in the next
few years, Djakarta's net foreign exchange
receipts from petroleum will rise to
about
$300
million in 1972, about equal to the
deficit
in
Indonesia's transactions on goods and services
in 1967, when comparable receipts were only $70
million.
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Indonesia: New Oil Explorati_"., Contracts
1967-68
Location of
Company Origin _ Contract Area
Japan Petroleum Exploration Japan
Company (Japex) a/
Indonesian Indep-!r,dent
American Petroleum (IIAPCO)
Company/Siaclair,/Natomas
Australian Drilling/Cities
Service/Ashland Oil and
Refining
Caltex J
International Oil
of Australia
Offshore east Kalimantan
(Bunju Island area)
Offshore east Kalimantan
(Mahakam area)
Japan Offshore south Kalimantan
Offshore southeast
Kalimantan
United States Offshore north Java
(Djakarta-Semarang)
United States Offshore and onshore
north Java (Semarang-
Madura)
United States Onshore Barito Basin in
south Kalimantan
United States Onshore and offshore
northwest Sumatra
(northwest tip to
Bukittinggi, including
bias Island)
United States Onshore central
Sumatra (ex-Pan
American)
Australia Onshore and offshore
Timor
Size
(Square Miles)
13,000
March 1967
14,000
March 19E7
Aerial magnetic survey, 1967;
seismic survey, 1968; drill,
1968
52,000
March 1967
Aerial magnetic survey,
21,000
Acquir?d from
August-November 1967;
seismic survey, 1968; drill,
19G8
Seismic survey, July 1967 -
June 1968; drill, mid-1968
65,000
March 1967
Seismic survey, 1968; geo-
Unknown, but
January 1968
logical survey (Madura),
complete; plan drill, 1968
very large
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Company Origin
Phillips Petroleum/Superior United States
Compagnie Francaise des France
Petroles (CFP)
Indotex (association of United States
independents set up to
operate in Indonesia)
Virginia International and United States
Roy Huffington
Indonesia: New Oil Exploration Contracts
1967-68
(Contint.e i )
Location of
Contract Area
Offshore south West
Irian
Onshore and offshore
south Sumatra.at Djambi
East Kalimantan and
south Sumatra
Size
(Square Miles)
DP-.e of Agreement
State of Exploration
125,000
May 1968
N.A.
10,000
July 1968
Survey in preparation
(1,900 offshore)
Offshore southeast
Sumatra
Ucntinental Oil
United Stat_J
39,000
AGIP/SPA subsidiary of
Ente Nazionale
Indrocarburi (ENI)
Stanvac (Esso and Mobil)
Italy
United States
Offshore western tip
of West Irian
East side of Malaya
between 00 and 50 N
38,000
Asamera Oil
Canada
Onshore north Sumatra
1,220
Mobil Oil
United States
Onshore north Sumatra
700
Frontier C11
United States
South China Seas
38,640
Gulf Oil
United States
South China Seas
65,000
October 15"j8 N.A.
October 1968 a,4.
L.A.
Survey in preparation
October 1968
N.A.
November 1968
N.A.
December 1968
f:.r.
a. Companies working in Indonesia prior to 1967. Japex acquired its first contract off northeast Sumatra in 1965 from Refining
Associates (Canada). No contracts were signed in 1966. Caltex is the only company to obtain new area grant under old-type work contract.
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,PULAU MIANOA$
(Indonesia)
t/,~ULAU KARANLLONO
t
ondeno
mobagu G Tsrnnt~i I ` ( H . MAHIRA
fx I
V I O,
INDONESIA
OIL INDUSTRY PROSPECTS
DECEMBER 196e
I Mayor oil proc'ucing uren Pipeline
40 Siloctod ollfh.Id ^ Rofhiory
Oil Concaaslon/Contract t3oundnrloa
- - .- Definite ._ - - - Indefinite
Q Aron less than 100 fathoms 12 Dopth In fathoms
0 100 200 300
StehIte Mlles
?-----_100 200 300
,PULAt1\M1S00L -' ( (l
l u..un1 / - 1
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?
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Figuhe. 2
Indonesia
Production and Disposition of Crude Oi!
and Refinery Products, 1952-67
1932 1933 1934 1933 1996 1937 1936 1939 1960 1961 1967 1963 1964 1963 1966 1967
Production of Crude Oil
Refinery Output
Domestic Consumption of Petroleum Products
Exports of Crude Oil
Exports of Petroleum Products
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F.igune 3. I-tdonee.ia: The SheUU and S.tandand-
Vacuum O.iJ'. Compan.iee Re6.ineniea at Palembang,
Sum t.tka
F.iguhe 4. One Pan* o6
the Catalytic Un.& at
S.tanvac'd Sunga.i9enoit g
Re6.ine4y at Palembang,
Suma.tna
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CONVII)II;N'I'IA],
F.igu'te 4. (Con.t.in(W(!)
Add( ti0nae, 1'a'l t ti (';, thc' Sullcl,c(g("(nltg
Re6(IIC't1/ r1t !'rzVewb tllr)
F.igune 5. The Fc't,'ty a-id Smaf. Boat Land-
ing at the Stau'ac Oi (' Rc!%neny P.ien on
the Mu6i Rive-'c i-t Sumatra
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F.tgu,7o 1. A.tmobphen',c Vi6-
z,t.Q.Zation Unit at the Ba i.`z
Papan Re-6Lnehy tn Bonneo
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