Saturday, February 2, 2008

Towards Alternative Energy Policy in Indonesia

Towards Alternative Energy Policy in Indonesia:
A Shifted from Oil to Natural Gas and Geothermal
Fathul Nugroho, Lee Kuan Yew School of Public Policy, NUS

1. Introduction
As one of big and most populous countries in Asia, Indonesia consumes an enormous amount of energy. Even though Indonesia is an oil producer, the present production is not enough to cover daily national oil consumption, which is estimated at 1.168 million barrels per day, so it becomes a major problem for the energy sector as well as the economy of Indonesia. In order to answer that issue this paper highlights the importance of Indonesia to select other alternative energy resources other than oil as the main energy resources respecting on energy security and economic constraints. The First section of this paper will discuss on the Indonesia’s current oil consumption and on the depletion of Indonesia’s oil reserves. The second section will address natural gas as cheaper and cleaner fossil fuels as alternative energy. And the third section will talk about geothermal as another favourable alternative energy sources for generating electricity.

2. Current oil consumption
2.1 Oil as primary energy resources
Like in any other countries in the world, in Indonesia, fossil fuels, particularly oil have become the main energy sources for several purposes, and particularly oil. Since long time ago, oil has become the main energy that uses in daily activities, people use oil for generating electricity, cooking, transportation, and for industrial purposes. Compared to other sources of energy that available and generally used in Indonesia, oil has the highest percentage as the energy source used by the people. In 2002, the proportion of oil as energy sources is 34 percent, followed by natural gas 32 percent, coal 29 percent, hydro 4 percent, and geothermal is only 1 percent. Even though the percentage of oil consumption and natural gas is only a bit different, oil has steadily increasing trend to be used by Indonesia people in the future, while natural gas has downward sloping trend.

Moreover, suppose that in 2010 fossil energy uses will increase by 10 % from now, oil consumption is likely to have the largest increase, then followed by coal consumption. Natural gas consumption, however, seems to decreased. From the regression analysis, oil consumption trend has steeper slope than other types of fossil energy. We can estimate that every increase one year in the future, oil consumption in Indonesia will increase by 0.0738 exa joules, for example, by an increase of 10 % in year 2010, oil consumption will be 1.52526 exa joules.

Transportation sector is become the main factor that caused largest increase in the future oil consumption in Indonesia is to be likely has the largest increase. Transportation is the major sector that consumes oil fuels, and the trend shows that it is going to increase in the future. For instance, based on the data from Ministry of Energy and Minerals of Indonesia (ESDM, 2007), in 2001 transportation consumed about 22,939,581 kilo litres of gasoline, which is 43.12 % from the total gasoline consumption, and it was increasing rapidly in 2002, which is consumed about 26,766,910 kilo litres or 46.80 % from total national consumption, it was surprising to see that the consumption of gasoline is remain high even though the government has boosted up the gasoline price during that time, but still many people had consumed gasoline for transportation. In addition, in 2005 transportation sector had consumed more than in previous years, that is, 29,966,073 kilo litres of liquid fuels, which is 48.29 % from the total liquid fuels consumption.

On the other hand, the percentage of gasoline consumptions of residential and industrial sectors are equally the same about 20 % from the total national consumption in 2002, and the trend of these sectors indicates diminishing scale of consumption. In 2002, the gasoline consumption by industrial and residential sectors are 11,622,937 and 12,259,498 kilo litres or equal to 21.43 % and 20.32 % from total nationwide consumptions, but it was decreasing in 2005, which is 19.01 % for industrial consumption and 18.20 % for household consumption. In addition, electricity also has contribution to the increasing rate of national gasoline consumption, in 2004; Indonesia had 25 gigawatts (GW) of installed electricity generating capacity. By 2004, Indonesia produced about 112.6 billion kilowatt-hours (Bkwh) of electricity, and 86 percent of which had come from conventional thermal sources such as oil, natural gas, and coal (Cogen3, 2004). And in this context, the electricity sector had consumed 6,796,916 litres of oil in 2004, and sharply increased to 9,003,023 litres in 2005. The table below shows that total national consumption of gasoline is at increasing rate, for instance, from 2004 to 2005, gasoline consumption had increased from 61,601,811 to 62,061,438 litres.
Gasoline Consumption in Indonesia 2001 - 2005 (Kilo Litres)

: Ministry of Energy and Minerals of Indonesia

2.1.1 The depletion of oil reserves in Indonesia
Refer to the national oil consumption and Indonesia’s current production, Indonesia’s oil reserves is being depleted. As mentioned above, currently Indonesia faces large increase in average per capita oil consumption, the annual rate is around 0.05 %. For instance, in 2005, per capita oil consumption is 19.85 litres per month, it has increased from the 19.51 litres in 2004, and the trend is increasing. In addition, the population of Indonesia is also getting bigger with the trend is increasing as well, as a result Indonesia’s future consumption of oil will be likely to increase. However, the increasing of oil consumption is not followed by rapid increase of new invention of oil reserves on shore or off shore. Thus, the annually oil production by dropped gradually from 1.55 million barrel per day in 1996 to 1.01 million barrel per day in 2005. On the other hand, the oil consumption rose steadily from 706 thousand barrels per day in 1992 to 1.14 million barrels per day in 2003. Consequently, in the beginning of 2004 Indonesia began net importer due to the oil consumption overshoot the oil production since 2003.

Regarding the Indonesian oil production, in 2005, Indonesia produced 1.07 million barrels per day, and the 81 percent of which was a crude oil. Indonesia’s total oil production has dropped by 31 percent since 1996, as many of world oil producers experienced the same thing. Currently, Indonesia hold an OPEC quotas as much as 1.45 million barrels per day, it was overstated of Indonesia’s current production. Some OPEC members think that Indonesia should not join in OPEC anymore because Indonesia no longer a net oil exporter. But, since Indonesia is one of the founders of OPEC, Indonesia is still joining OPEC.

Furthermore, in 2005, Indonesia has some largest oil production fields, but most of these fields have already reached its maximum peak and its production capacity has been declining. Many of oil exploration projects are in progress in Indonesia right now. However, up to now, these projects have not produced adequate new oil resources on-stream to cover the diminishing volume of production at some older fields (EIA, 2007). But, there were some under-developed oil fields that have large reserves potential such as a Cepu block located in Central and East Java. ExxonMobil, the contractor that is going to take over the oil production in this field estimated that Cepu bock could hold up to 600 million barrels of recoverable oil reserves, and 250 million barrels of it is proven. In addition, the World Oil (2005) estimated that Indonesia’s proven oil reserves is 5.03 billion barrels, meanwhile BP Statistical Review (2005) estimated that Indonesia has only 4.7 billion barrels proven oil reserves, moreover, Oil and Gas Journal had estimated that proven oil reserves in Indonesia is declined to 4.3 billion barrels. In other words, Indonesia’s oil reserves are diminishing over time and it should be concerned by the government of Indonesia.

Indonesia's Proven Oil Reserves
(Billion Barrels)
(Billion Barrels)
(Billion Barrels)
BP Statistical Review
Oil & Gas Journal
World Oil
Year-End 2005
January 1, 2007
Year-End 2005


2.1.2 Security constraint of oil

The oil and gas industry has an important role in Indonesian economy; it is a major contributor to Indonesia’s state budget. Every year, oil and gas had contributed at least 30 percent to Indonesia’s GDP, so oil and gas is a key contributor to the Government of Indonesia’s total revenue. According to International Petroleum Monthly, Indonesia is ranked 20th in world oil production and owned 1.4% of market share. Its gas production was ranked 9th globally with 2.7% market share (EIA, 2007). However, since Indonesia no longer become a net oil exporter and the consumption of oil already exceeds the oil production, the government should be more concerned on this problem. Since it not only affected the government’s budget, but now it has become a security issue regarding the scarcity of available oil, or in other words, the government now should be concerned on the sustainability of Indonesia’s oil production.
Furthermore, the increasing on world crude oil prices from last year was extraordinary. Although some countries have already left their winter season, the demand for oil of those countries ought to decrease, but, the world’s oil prices is still high, and this year the price of oil was above $ 70 US dollar per barrels, and reached the highest point almost $ 100 US dollar per barrels. This high increases of oil price was triggered by geopolitics problem on Iranian nuclear and political instability in Middle East and high demands from international market.

In my opinion, the increases on oil price will continue, since the demand from large country such as US and China is remain high. In this case, the government of Indonesia should reduce the consumption of oil nationwide and should also encourage the people to be smarter and more efficient in using oil in order to deal with high price of oil. The high consumption of oil in Indonesia is due to extravagance behaviour by the public. The increasing number of cars and motorcycles caused the transportation sector to consume large amount of gasoline. For instance, in Jakarta, with resident around 8 million people there were 2 million motorcycles, suppose each family consist of 4 persons, it means that each family in Jakarta has their owned motorcycles. Indeed, many families in Indonesia have more than one motorcycle, and also large numbers of families have their owned cars. This extravagance behaviour is even worse caused by traffic jam that happened not only during peak hours, but almost every time. From this situation it is clear that Indonesia should reduce its high dependence of oil by shifting to other energy resources.

2.1.3 Budget constraint; cost for oil subsidies
Indonesia historically has maintained consumption subsidies for domestic retail petroleum consumers, with the fuels being retailed at a discount rate from world market prices. After a series of modest raises in petroleum prices over the past few years, Indonesian government announced a sharp rollback of subsidies in September 2005. Prices of retail gasoline and diesel rose by an average 100 %. It was so hard for the people, especially for the poor, since the highest increase was on gasoline for household uses. In the national budget 2007, the government of Indonesia still provide subsidies Rp 68.6 trillion for oil and Rp 25.8 trillion for electrics; which together accounted for almost 14 percent from the total national budget. This high budget allocation for oil and electricity subsidies was because the government has not yet shifted to the substitution for petroleum such as natural gas, geothermal, and also newest energy sources like biofuels that are cheaper than oil and more affordable to the public.

Furthermore, the government should be concerned of the increase in oil consumption by, it is important to anticipate the increasing budget of oil and electricity subsidies that should be allocated by the government, large number of subsidies will lead to the increases of Indonesia’s current account deficit. For instance, in 2006, the government pegged the price of oil in its budget at $ 57 US dollar per barrel, and during that time the world price of oil is above $ 70 per barrel. Consequently, Indonesia’s current account deficit was increased, and the government had to add more budget allocation in the national budget revision. In addition, during 2006 and onset of 2007, the government had failed to maintain the oil supply in some region in Indonesia, there was emerged a scarcity of oil stock and the people have to wait for several hours for getting oil.

3. Alternatives resources of energy

In order to anticipate further crisis on oil supply, the government of Indonesia should establish policy by which national planning on energy diversification could be realized soon, so that the dependence of Indonesia on oil as main energy sources can be discharged. Diversification of energy is one of strategic steps to reduce the dependence of oil in the future, through diversification of sources of energy, Indonesia will be able to provide cheaper and cleaner energy, and reduce the budget for oil subsidies as well as security problems on oil.

Currently, Indonesia has several options in choosing the alternatives energy. There are abundant resources of energy such as natural gas, geothermal, coal, water, biomass, even solar and nuclear energy. From these several options of alternative energy, natural gas, geothermal, and coal are the most favourable as alternative of energy. Natural gas and geothermal provide environmental friendly of energy. As energy resources natural gas is cleaner compare to other fossil fuels energy due to its low CO2 emission, while geothermal is almost free from CO2 emission. In addition, natural gas and geothermal energy are available in large amount of potential reserves and sustainable for long term Indonesian main energy resources.

3.1.Natural Gas
3.2.The Reserves Potential

BP Statistical Review (2005) estimated that Indonesia’s proven natural gas reserves is 97.428 trillion cubic feet, meanwhile, the latest estimation from Oil and Gas Journal (2007) estimated that Indonesia had 97.780 trillion cubic feet (Tcf) of proven natural gas reserves as per January 2007. Currently, Indonesia is the tenth largest holder of proven natural gas reserves in the world and the single largest in the Asia-Pacific region (EIA, 2007). By January 2007, Indonesian government stated that more than 70 percent of natural gas reserves are located offshore, with the largest reserves found off Natuna Island, East Kalimantan, South Sumatra, and West Papua.

Even though Indonesia’s natural gas reserves is not the largest in the world, in 2004, Indonesia was the world’s largest exporter of LNG with an export of 1.2 trillion cubic feet or 21 percent of the total world export (BP Statistical review, 2004), the majority were exported to Japan, South Korea, and Taiwan. In 2004, Indonesia produced 2.66 trillion cubic feet of natural gas, while the national consumption is 1.31 trillion cubic feet. From the graphic, we could see that the disparity of Indonesia’s natural gas production and consumption is more than enough to cover national consumption if the government has started to largely shift from oil to natural gas. In addition, the effort to shift natural gas toward national uses as a substitute for the declining in oil production; should be followed by larger natural gas exploration activities in order to maintain its LNG export level. However, the plan to shift from oil to natural gas has impediments on limited natural gas infrastructure for transmission and distribution network that should be constructed by the government.

3.2.1 Cheaper and cleaner energy for industry and home uses
The usage of liquid natural gas (LNG) in Indonesia as energy sources for household and industrial is still low compared to neighbouring countries. In Malaysia, around 5 percent of people are consuming LNG, and in Thailand the number of people using LNG is around 2 percent. Meanwhile, in Indonesia only around 0.5 percent of citizens are consuming LNG, or about one million tons of LNG per year. More economical, through simple and rough calculation, Indonesia will no longer need to import kerosene to supply household and industrial sectors if the government successful on the energy conversion program from oil to LNG. For instance, Indonesia’s consumption on LNG in 2004 is equal to 1.31 trillion cubic feet and the production is 2.66 trillion cubic feet, thus the disparity between production and consumption is 1.35 trillion cubic feet. If we converted this disparity to kerosene, it equals to 38,227,742,910 kiloliters of kerosene. Assume that the disparity of available production is not exported; it will be more than enough to cover annually gasoline consumption that in 2005 is equal to 62,061,438 kilolitres. In addition, natural gas is source of energy that has low carbon dioxide emission, by shifting from using oil to natural gas Indonesia will contribute in reducing climate change effect in the world.

3.3. Geothermal

3.3.1 Renewable Energy Resources
As country that located on the ring of fire zone, Indonesia has a large amount of available geothermal energy resources. The ring of fire that is a line where many volcanos located on it is passed about 20% area of Indonesia. These volcanoes produce geothermal energy. However, as energy resources, geothermal has some limitations. First, geothermal energy is commonly use for generating electricity, since the heat from the geothermal sources cannot be transported to other site that far away from the heat source, so it requires the electrical power plant to be developed on-site. Second, from the economic point of view, the development of geothermal power plant requires high investment of capital, however, once the power plant installed its variable and marginal cost are quite low.

3.3.2. High potential reserves for power plant energy sources
According to Pertamina (2007), a state-owned oil company, Indonesia’s potential reserves of geothermal energy is about 20,000 MW or equivalent to 9 billion barrels of oil, it almost a one third of the worlds geothermal resources. Almost half of this potential, which is 8,000 MW, is located in Java and Bali, the most populous islands with the highest demand for electricity. From geological surveys that have been carried out on 214 locations Pertamina confirmed that from the total potential reserves, about 2,245 MW is proven reserves and total probable and possible proven reserves is 7,165 MW. In this context, if the government of Indonesia could maximize this geothermal potential reserves and able to install power plants on those potential sites, about 9 billion barrels of oil can be saved by the government.

4. Conclusion

Based on above discussion, the government of Indonesia should reform the country’s energy sector. Indonesian energy sector has been consuming large amount of oil as the main energy resources in inefficient ways. By addressing alternative energy policy, the government of Indonesia will force national plan to shift from oil to natural gas and geothermal energy to be realized in a shorter time. Finally, this policy is expected to prevent Indonesia from oil crisis that had happened many times in the past.

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