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[News] Indonesia’s Oil Industry Has Many Problems
Posted at: 06 May 2019

While Indonesia's once-vibrant oil and gas production business is mostly a victim of geology and the natural decline of aging fields, the decrepitude of its oil refining industry is the result of bad decision-making -- poor policies, red tape, and lack of strategic planning.

Even though President Joko Widodo's last government contributed to these failures, his re-election last month creates an opportunity to revive much-needed reforms, especially in phasing out fuel subsidies.

Smaller economies in Southeast Asia, such as Malaysia and Vietnam, have stolen a march in recent years by modernizing and expanding their refining sectors, while Indonesia struggles to attract foreign investment, with projects prone to cancellation and delay, even though the country has a much bigger and faster-growing retail fuel market.

With a refining capacity of just over 1 million barrels per day against domestic products demand of 1.5-1.6 million barrels per day, state-owned Pertamina ends up importing a third of its fuel requirements, instead of bringing in crude for processing.

That is a growing drain on the country's foreign currency reserves and erodes the strength of the Indonesian rupiah, while saddling Pertamina with losses from importing fuel at international prices and selling it at government-capped subsidized rates. The company has a monopoly over refining, with foreign majors, which came to the country decades ago, remaining in oil and gas production.

Widodo's last government made a creditable start in tackling the root cause of the problem by taking advantage of the 2014 oil price crash to start reducing Indonesia's distortive and costly fuel subsidies.

Indonesia struggles to attract foreign investment, even though the country has a fast-growing retail fuel market. 

(source: Reuters)