In Indonesia, Energy Reform Takes A Back Seat To Pragmatism

Pragmatism is winning out over ambition, at least as far as energy reform in Indonesia is concerned. When he assumed office in 2014, Indonesian President Joko "Jokowi" Widodo promised big changes for both the upstream and downstream energy sectors in an effort to attain greater local control of hydrocarbon production and stanch the flow of state funds into expensive consumer fuel subsidies. With this, Jokowi hoped to foster long-term self-reliance in extraction and production while channeling subsidy savings into much-needed infrastructure improvements, right-sizing fuel demand and lowering the country's reliance on imported fuel. All of the changes were part of Jokowi's overall bid to foster an economy based on manufacturing and industry, rather than raw commodity exports.

The Big Picture

Long a major hydrocarbon producer, Indonesia has struggled to lessen reliance on imported fuels since losing its net exporter status in 2004. But Indonesian President Joko Widodo's ambitious energy reforms have hit numerous snags over the past five years. While his objectives to shore up local control of production and curb reliance on foreign imports remain, his second term will feature a continued slow, pragmatic approach to reform.

Five years on, the results have been mixed. On the downstream side, Jokowi did move quickly to scrap key gasoline subsidies and cap diesel subsidies right after taking office in 2014, making painful cuts to a decades-old system that had long sapped government budgets. But even as Indonesia proved willing to cut prices and give market forces a greater role after oil prices began to fall in 2014, the government was not willing to continue them after oil prices began to recover. Instead, Jokowi's government has taken a more cautious approach out of fears of a public backlash and economic repercussions, compelling gasoline prices to remain flat for long stretches and dramatically raising diesel subsidies in 2018 (albeit with a resolution to drop them in 2020). On the upstream side, Jokowi's efforts to recentralize a large share of oil and natural gas production in state-owned Pertamina has also stumbled. The Indonesian behemoth has managed to secure operatorship of key blocks, but the government has put the brakes on giving Pertamina further responsibilities due to its lack of expertise, financing constraints and resulting production declines — to say nothing of Jakarta's fears of alienating vital foreign oil majors in the process. Through it all, oil price volatility has not helped either.

Together, it means that caution will be the watchword for Jokowi going forward. The president will continue to pursue his goals of rationalizing the downstream fuel market and indigenizing hydrocarbon extraction in the long term — but not at the cost of jeopardizing economic growth or setting a pace that unduly disrupts production.

A Cautious Approach to Upstream Reforms

Indonesia's hydrocarbon sector has deep roots and a long history of foreign partnerships, yet it has suffered in recent years from declining production and skyrocketing domestic demand. With this in mind, Jokowi is aiming to expand exploration and production to fill the gaps left by declining blocks. On the production side, his government wants to empower Pertamina to play a stronger role in the domestic industry and move into overseas markets. This effort to expand Pertamina's production role at the expense of international companies is part of Jokowi's overall strategy of resource nationalism to localize control of these resources and move up the value chain.

Indonesia was a net oil exporter until 2004 when it became a net importer. Indeed, OPEC suspended the country in 2009 because of the earlier loss of its net exporter status. Jakarta briefly rejoined in 2015, only to refreeze its membership a year later in resistance to OPEC-mandated production cuts. By 2018, consumption was more than twice as high as production — a state of affairs that is unlikely to change with hydrocarbon blocks declining and Indonesia's growing economy ever-hungrier for energy.

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