The OPEC Stalwart That Imports Oil

Indonesia's output has been lagging for years, so it's gunning for foreign investment-fast

Indonesia's energy minister, Purnomo Yusgiantoro, must feel funny at times going to OPEC meetings. Indonesia is the only OPEC member that isn't a net oil exporter, and yet it continues to pay millions of dollars in annual dues to keep its membership. Over the past 16 years, Indonesia's oil production has declined 1.5% a year, while consumption has grown at 5.4% annually. Today, Indonesia imports about 60,000 barrels of oil a day, compared with exports of 27,000 bbl. daily last year.

What's behind Indonesia's fall from major oil exporter to humble importer? Chalk it up to a lack of new investment, as well as subsidized oil prices for Indonesian consumers, which have boosted domestic consumption -- and waste. Despite a cut in oil subsidies in March, fuel prices in Indonesia remain among the lowest in the world, with kerosene -- often used in cooking -- costing about one-fifth what it does in neighboring Singapore. Although the latest measures will cut oil subsidies this year to less than $3 billion, down from $6.9 billion last year, consumption is still on the rise. The country's net import bill for oil could reach $1.2 billion this year.

A bigger problem is the age of Indonesia's oil fields. Purnomo estimates that more than 85% of them have reached maturity, so it's harder to extract oil, and the quality of the crude is falling. Indonesia now pumps about 950,000 bbl. a day, compared with the 1.7 million it was producing in 1977 and the 1.42 million it is allowed under OPEC quotas. Investment in the sector has fallen by 80% from its peak before the 1997 Asian financial crisis to about $450 million last year, though in recent months it has started to recover, and it may hit the $2 billion mark this year. New technologies, meanwhile, have helped squeeze an extra 50,000 bbl. a day from older fields since March, says Euben Paracuelles, an economist at DBS Bank Ltd. in Singapore.

Ultimately, though, Indonesia will have to get some big new fields pumping if it hopes to become a net exporter. So it's seeking investment from global oil-and-gas giants. The government has opened 43 new offshore exploration sites for bidding. By some estimates, $10 billion in new money could flow into the sector in the next five years if Jakarta were to remove some of the regulatory and tax disincentives that have hampered energy investment.

Some of the money is already starting to flow. After four years of negotiations, the government on June 22 reached an agreement with Exxon Mobil Corp. (XOM ) to open up the $2.6 billion Cepu oil field in central Java. Under the deal, the U.S. giant will get 6.75% of the revenue from the $2.6 billion project, though the company's share could rise to 13.5% if oil prices fall below $35. The field has as many as 500 million bbl. and is expected to produce at least 170,000 a day -- which would turn the country back into a net exporter.

Indonesia is also offering a large natural gas field in Aceh province after U.S. major ConocoPhillips (COP ) bowed out of the project. The company cited high levels of carbon dioxide in the gas, which makes it expensive to extract, and security costs for operating in the region, which has been long mired in a separatist rebellion.

Still, "even if big investments are made today, it won't be until 2008 when Indonesia reemerges as a substantial oil exporter," says Fauzi Ichsan, an economist at Standard Chartered Bank in Jakarta. With luck, by then Indonesia's ministers will be right at home at those OPEC meetings.

By Assif Shameen in Jakarta

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