indonesia

its petroleum-export future in LNG more than in oil. Moreover, ongoing problems associated with
corruption, complex bureaucracy, unstable contract terms, and uncertain field contract extensions
increasingly bedeviled industry negotiations with Pertamina. With revenues high and given its
previous success, Pertamina shifted increasingly toward limiting the role of foreign companies
while retaining the best field prospects for itself. Reserve replacement ratios, which indicate the
ratio of newly discovered reserves to oil actually produced, dropped over time to just 40%–50%. 7
All these shifts gradually led to declining investment, declining proven reserves, and eventually
declining production in the late 1990s.
Political changes created additional challenges for oil production and exports. The collapse
of the Suharto government in 1998 following a period of unrest and violence led to a succession
of new administrations that were more driven by resource nationalism than the Suharto regime
had been. While these changes brought about a more democratic system, they also unleashed
strong nationalistic and populist political pressures. Under these conditions, the environment
for investment in oil exploration and development became more complex and difficult. Further
complicating the investment environment, new arrangements were put in place that gave
the various regional governments a portion of the revenues from oil production. As a result,
uncertainty grew over investment conditions.
The Indonesian government recognized that oil industry reforms were needed and in 2001
reduced the power of Pertamina by creating a new regulatory agency, BP Migas, that would be
in charge of negotiating production sharing and contract extensions with private companies.
Pertamina became just another company in the exploration and production sector. The
government also ended its monopoly on the downstream refining and marketing industry. Yet
despite these reforms, the cumulative impact of changing conditions eventually showed up in a
long-term decline in oil investment and production beginning in the late 1990s. Between 1997
and 2014, oil production declined by nearly 50% from 1.58 million bpd to just 852,000 bpd. 8 With
domestic oil demand simultaneously rising, Indonesia became a net oil importer for the first time
in 2004, and it left OPEC—the organization it had co-founded—in 2009. The contribution of oil
and gas exports to the state budget declined from 21% in 2004 to an estimated 12% in 2014. 9
The Other Side of the Equation: Booming Oil Demand and Fuel Subsidies
Indonesia’s sharp decline in oil production since the late 1990s has corresponded with strong growth
in domestic oil demand. In the wake of the Asian financial crisis of 1997–98 and the political crisis of
1998, Indonesian oil demand increased by 60% over the next fifteen years. 10 The fundamental driver of
this trend was rapid economic growth that mirrored strong growth in oil demand across Southeast Asia.
Indonesia’s economy entered a sustained period during which the use of oil in the transportation sector
accelerated quickly. One only needs to navigate the crowded streets of Jakarta filled with passenger cars,
small trucks, and millions of motorbikes to appreciate the pace of oil demand growth.
But such booming oil demand has been supercharged by the persistence of large fuel subsidies
built into government pricing of oil products. During the 1970s and 1980s, these subsidies were
7 Wood Mackenzie, “Indonesia Energy Markets Outlook 2015—Oil,” January 2015.
8 BP plc, “BP Statistical Review of World Energy 2015.”
9 PwC Indonesia, “Oil and Gas in Indonesia—Investment and Taxation Guide,” 2014.
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NBR
10 BP plc, “BP Statistical Review of World Energy 2015.”
SPECIAL REPORT u DECEMBER 2015