Widodo wobbles on fuel price hike reversal
Concern heightened over state-owned oil firm as Indonesian president drops plans for an average 7% fuel price increase only an hour after being announced
After a long silence, Indonesian President Joko Widodo now acknowledges he signed off on a surprise October 11 fuel price increase, then scrapped it an hour later when he realized the impact it would have on the purchasing power of low-income Indonesians.
“I had agreed, but there was new information given to me related to purchasing power and inflation, so we recalculated,” he said in an October 23 panel discussion on Kompas TV, which surprisingly drew little media attention. “Besides, the benefits to Pertamina of increasing the price were minimal.”
The episode reflects growing concern over the financial status of the state-owned firm, whose earnings have almost halved this year as a result of the Government’s nationwide single-price policy and its decision so far not to pass on the rising world oil price to consumers.
Appearing on One Table: The Forum, the president said the average 7% price increase for premium and diesel had in fact been decided the previous month, along with a hike in high-octane Pertamax used by wealthier car-owners which remains in force.
But on the day it was announced by Energy and Mineral Resources Minister Ignasius Jonan, the president said that “new figures were given to me linking the people’s purchasing power to inflation. That’s why we decided to recalculate and ask the opinion of experts, including Pertamina.”
Analysts were convinced at the time that neither Jonan nor State Enterprise Minister Rini Soemarno would have gone ahead with such a politically-sensitive move without Widodo’s approval, particularly when the country is only six months away from a presidential election.
The president clearly realizes that protecting low-income Indonesians from global economic winds is key to him maintaining the wide lead he enjoys over opposition presidential candidate Prabowo Subianto, a retired special forces general who at this point appears to be struggling to gain any traction.
In reality, increasing the price of premium gasoline would have had more of a psychological impact than anything, given the fact that supplies of the low-octane fuel are now limited in favor of Petralite, a new environmentally-friendly variant introduced in 2015.
Pertamina was always going to take the brunt of the one-price policy, which requires it to absorb the extra transportation costs to places such as Papua. But since the crossover point in September last year, it has also had to make up the difference with world oil prices.
The company’s financial woes come at a time when it is also faced with higher capital expenditure as a result of Indonesia’s push to nationalize more of its oil and gas assets, which may play well with a domestic audience but puts a damper on new investment.
Pertamina took over the Mahakam block, the country’s then-largest producing gas block when French oil giant Total’s contract ran out in December 2017, and is now preparing to do the same with Chevron’s long-established Rokan block in 2021.
Energy minister Jonan said Pertamina was awarded Rokan because it offered the biggest signing bonus and the highest government revenue – factors which will also apply to 12 smaller producing blocks whose leases expire through 2019.
The company expects to earn additional revenue of US$24 billion from the contract extensions, which Jonan says is “compensation” for the one-price policy and fuel price cap that weighs heavily on its bottom line and will do for the foreseeable future.
What Widodo calls “safeguarding national assets” comes at a price, something the government is still coming to grips with in acquiring a controlling interest in the Freeport McMoRan Copper & Gold’s Grasberg mine in Papua.
Pertamina estimates the onshore Rokan block, located in the Sumatran province of Riau, will need $70 billion in investment over the next 20 years to maintain production at acceptable levels and save an annual $4 billion in oil imports.
That means learning the tricky technique of steam-driven enhanced oil recovery (EOR), under which Chevron has achieved a 60% recovery rate since the mid-1980s in extending the life of the 200,000 barrel-a-day field.
“Enhanced oil recovery is not just about money,” says one industry source. “You have to be a magician because it is as much an art as it is a science. If you don’t do it well, you’re in deep trouble.”
While Pertamina is expected to take over Chevron’s Indonesian field staff, the key to the effectiveness of the enhancement effort lies in the design and placement of the wells.
That relies to a large extent on technology developed by the California-based oil giant, which is an improvement on a technique first used in American oilfields in the 1960s and which Pertamina is not expected to have access to.
Mahakam has presented similar challenges, shown in the way production has fallen by 30% in its first year under Pertamina management, mostly because it has not had the funds for a full program of drilling and well interventions.
The East Kalimantan field has proven and probable reserves of about 3.8 trillion cubic feet of gas, requiring a budget outlay of $1.5 billion a year just to maintain gas production at a targeted 910 million cubic feet a day – a goal it won’t achieve this year.
Regulatory and bureaucratic obstacles have long been seen as the key factors in the steady decline in investment in the oil and gas sector, whose contribution to state revenues has slumped from 400 trillion rupiah ($26.1 billion), or 20% in 2010, to 135 trillion rupiah ($8.8 billion) or 5% in 2017.
In an effort to simplify procedures, the government last year introduced a new gross-split production sharing contract, under which all expenses are borne by the company and not reclaimed later as is the case now. But the reform appears to have made little difference.
This year, oil and gas investments have so far reached only US$3.9 billion, well short of upstream regulator SKK Migas’ ambitious target of $14.2 billion, despite hopes that the rising world oil price would be an incentive for more exploration.
In 2013, total investment in the sector was closer to $20 billion, but the amount of money spent on actual exploration since then has sunk from $1.8 billion five years ago to $732 million in 2016 and $910 million last year.
Overall, crude oil production has dropped from 1.5 million barrels in the mid-1990s to below 800,000 barrels today, while natural gas has fallen from a high of 85.7 billion cubic meters in 2009 to today’s 72.8 billion cubic meters.