Trade winds: Hydrocarbons receipts continue to fill state coffers

Oil and gas commercialisation has been a linchpin of Indonesia’s economic development for more than three decades, accounting for as much as 80% of the country’s annual exports and 70% of its annual revenues since the 1970s. While the country’s economy has expanded and diversified over time, aided by the inflow of foreign currency derived from oil and gas exports, energy exports still provide significant revenue to the government’s coffers as well as private sector investment. The nature of energy exports themselves have likewise evolved over time, moving from crude oil-based production and shipments to natural gas, while demand has also shifted from the West towards an energy-hungry Asia. Formerly a net oil exporter in the Organisation of the Petroleum Exporting Countries, Indonesia’s primary energy exports are now liquefied natural gas (LNG) and coal as the country has become a net oil importer. In spite of various internal factors (recent prioritisation of securing domestic fuel sources, inadequate infrastructure and a complex regulatory environment) and external dynamics (regional and global economic turbulence and volatile energy prices) influencing Indonesia’s export policies, energy exports remain a crucial cog in the archipelago’s economic machine.

Book Value

Indonesia, along with Brunei, Malaysia and Australia, made the Asia-Pacific region the world’s most prolific LNG supplier until it was supplanted by the Middle East in the mid-2000s. As of 2013, the Asia-Pacific supplied 30% of the global LNG stocks compared to 45% for the Middle East. Although not the dominant export force it once was, energy shipments remain a crucial source of foreign currency inflows and accounted for nearly one-third of all Indonesian export revenues in 2013. A combined $56.09bn worth of hydrocarbons products were shipped out in 2013, representing 30% of the country’s $183.55bn total exports, according to the country’s central bank, Bank Indonesia. This represented a decline from 2012 exports of $67.4bn, or 36% of total exports. Of the 2013 export tally, coal exports remained by far the largest earner with $26.64bn worth of shipments on the year (see Mining chapter). Natural gas ranked second with exports of $15.69bn, including $5.12bn worth of LNG shipments. The remaining contributors included crude oil valued at $12.19bn along with $3.85bn worth of manufactured oil products and $10.54m of liquefied petroleum gas (LPG).

Growth Market

Indonesia’s ample proven reserves, combined with ongoing exploration and production efforts, ensure that the supply side of its energy trade will be strong for the foreseeable future. However, the demand side of the equation looks to be even more favourable for the country due to its proximity to the world’s largest and fastest-growing consumer markets for LNG. Of the 29 countries currently importing LNG, the top five receivers are all located in Asia, and account for a combined 61% of all shipments, according to the International Gas Union’s (IGU) “World LNG Report 2014”. Japan in particular has upped its energy imports in the wake of the Fukushima nuclear accident in 2011 and is now the largest purchaser of LNG in the world.

The country purchased more than double the amount of LNG of its closest rival in 2013, with 87.8 tonnes, up 0.5 tonnes on 2012. South Korea ranked second with 40.9 tonnes, up 4.1 tonnes over the previous years’ total, followed by China at 18.6 tonnes, India (12.9 tonnes) and Taiwan (12.8 tonnes). Asia also led all regions in terms of consumption growth with China, South Korea and Malaysia alone increasing their LNG purchases by a combined 9.5 tonnes as demand continued to decline in Europe due to competition from pipelines and renewable energy.

Gas

An early oil producer starting up in the 1870s, Indonesia’s natural gas export market did not begin to hit its stride until after the discovery of the substantial Arun natural gas field in Aceh in 1971 and the Badak discovery in East Kalimantan in 1972. Exploration and production followed soon after, leading to the first exports in 1977 and 1978 from Badak and Arun, respectively. In the ensuing decades Indonesia rose to become the world’s premier natural gas exporter, a title it would hold from 1977 until 2005, when it was surpassed by Qatar. Indonesia’s peak export year occurred in 1998 when it shipped 36.1bn cu metres (bcm) of gas with the country still sitting on reserves estimated at more than 100trn cu feet (tcf). In 2013, Indonesia shipped 10.03 tonnes, accounting for about 7% of the global LNG market, just off the 18.12 tonnes of 2012, according to IGU data. The largest purchaser of LNG at 6.22 tonnes delivered was Japan, followed closely by South Korea at 5.93 tonnes, China with 2.68 tonnes, Taiwan (1.95 tonnes) and Mexico (0.26 tonnes). Although still a major player in the LNG export market, Indonesia’s LNG exports have fallen by 40% since their 1999 peak with Japan in particular cutting its purchases by half from 2010 to 2013. Increased competition from other natural gas exporters, most notably Qatar, Malaysia and Australia, which have added capacity in recent years, has eroded Indonesia’s LNG market share, and the country has been building up regasification infrastructure in anticipation of future imports as well as to transport gas domestically. Liquefaction is currently carried out at three locations throughout the county: Northern Sumatra (Arun), Kalimantan (Bontang) and Papua (Tangguh). Their combined capacity of approximately 1.5 tcf per year (tcf/y) will be further bolstered in the coming years by two additional plants being built in Sulawesi. The DonggiSenoro and Sengkang plants will each bring another 100bcf/y to market upon their completion in 2015 and 2017, respectively, in addition to the 2019 projected start-up date of the 120-bcf/y floating Adabi liquefaction terminal set to be built in the Arafura Sea. Complementing overseas shipment, Indonesia also operates a pipeline network connecting it to Singapore and Malaysia. Current long-term contracts send natural gas shipments to both countries, with 2012 deliveries of 7.9 bcm and 2.3 bcm, respectively, according to BP’s “Statistical Review of World Energy 2013”.

Coal

While much of the world’s attention has been focused on the rise of natural gas, coal continues to fuel the majority of electricity production worldwide. Indonesia remains a leading player as the top exporter of thermal coal by weight, a title which it took from Australia in 2011 (see Mining chapter). Domestic production has far outstripped demand over the past decade, leading to roughly three-quarters of the fuel hitting global markets in 2013. Output hit 237.4m tonnes of oil equivalent in 2012, up 9% over 2011 levels in spite of Indonesia holding just 0.6% of global reserves amounting to 5.53bn tonnes (1.53bn of anthracite and bituminous and 4bn tonnes of sub-bituminous and lignite), according to BP’s “Statistical Review of World Energy 2013”.

Roughly 70% of this output was exported in 2012, destined primarily for regional markets, including Indian, the world’s largest importer, which took 27% of Indonesia’s coal exports. This was followed by China with a 24% share, South Korea (11%), Japan (10%), Taiwan (8%), Malaysia (5%) and others, including Hong Kong, Thailand, and the Philippines.

Crude

As with natural gas, Indonesia’s petroleum trade is dominated by shipping, primarily as a result of having no international oil pipelines and limited domestic pipeline reach. Due to falling domestic oil production and inadequate refining capacity, global trade is weighted towards imports, particularly petrol and diesel fuel. Indonesia imported more than 506,000 barrels per day (bpd) of crude oil and lease condensate in 2013, according to the Analysis of Petroleum Exports (APEX) tanker tracking service of Lloyd's List Intelligence.

Around one-quarter of crude imports were sourced from Saudi Arabia, along with 15% each from Nigeria and Azerbaijan, followed by the UAE (5%), Qatar (4%), Malaysia (4%) and Angola (4%). In terms of refined products, imports totalled 466,000 bpd in 2013 and 435,000 bpd in 2012, according to energy consultant Facts Global Energy. These are comprised chiefly of petrol, which accounts for 66% of refined imports, along with smaller quantities of gasoil for transport and power generation, LPG and jet fuel. State-owned national energy group Pertamina, which is tasked with acquiring subsidised petrol for distribution on the domestic market, purchased 228.81m barrels of refined products from abroad in 2013, up from 226.47m barrels in 2012 and 212.7m barrels in 2011. The group also imported some 122.47m barrels of crude and 5.14m tonnes of LPG in 2013, compared to 98.21m barrels and 4.44m tonnes in 2012. By contrast, Indonesia exported an estimated 455,000 bpd, primarily to regional buyers, according to APEX. Japan was the largest purchaser, with 28% of all shipments, followed by Thailand with 17%, Australia (14%), Singapore (10%), South Korea (8%), China (7%), the US (5%) and Malaysia (4%).