(Photo: Pixabay)

JAKARTA (TheInsiderStories) – Low international oil prices over the past three years have greatly helped President Joko Widodo to maintain prudent fiscal management, enabling him to slash energy subsidy by one-third only one month after his inauguration in October 2014, and invest the annual savings of US$15 billion in infrastructure development.

Given the high volatility of oil prices and Indonesia’s position as a net oil importer with a daily import need of more than 800,000 barrels of oil (bbl), the period of low oil prices (below $50/bbl), which lasted until the end of 2017, has indeed been highly fortuitous for the Joko Widodo’s administration.

Indonesian government has successfully managed to cut energy subsidies drastically since 2014. Rather than spending a massive amount of funds for the consumption of fuel and electricity by the huge population, the government decided to relocate a significant fund to infrastructure and social development programs that bring structural economic growth for Indonesia.

It is important that the government continues its energy subsidy reforms in the years ahead. This includes raising the price of subsided fuels.

Naturally, this will bring some risks because hiking fuel prices is not a popular move (especially when approaching elections it can involve some political risks).

Somehow, considering international oil prices are rising, raising gasoline price is the only way to meet the government’s energy subsidy spending target that is set in the 2018 State Budget.

The Indonesian government emphasizes that the higher-than-estimated crude oil price will not destabilize the 2018 State Budget. While the government sets its Indonesian Crude Price (ICP) at USD $48 per barrel in the 2018 State Budget, West Texas Intermediate (WTI) and Brent oil prices have already surpassed the $60 per barrel level, significantly higher than the assumption of the Indonesian government and therefore triggering some concern over rising energy subsidies.

(Graphic: The Insider Stories)

A Dilemma for Business

The trend of low price of oil in the past three years has hampered investment activity in upstream and downstream industry.

Investment for exploration in Indonesia shrank to $100 million in 2016 from $1.3 billion in 2012, according to the government data. A lack of drilling success and commercialization issues have weakened Indonesia’s outlook and spending is likely to drop further.

Indonesia’s crude oil output reached around 1.7 million barrels per day in the mid-1990s, but with just a few oil fields discovered in the western part of the country, production has dropped by half in the past decade.

The recent year of depressed oil prices and industry uncertainty have been the source of strict capital expenditure (Capex) cuts for oil and gas companies worldwide. Layoffs came in droves much to the detriment of the industry’s workforce.

As of Feb. 10, 2017, the total number of oil and gas layoffs around the globe reached 441,371 people, according to data compiled by the Houston-based consulting firm Graves & Co.

In Indonesia, a hard decision has been taken by Chevron Pacific Indonesia as they cut more than 25 per cent of its 6,000 employees in 2016.

To lift up the spirit of investor, the government has undertaken regulatory reform in the energy sector. This includes scrapping a total of 186 energy regulations and permit requirements, hoping to make its energy sector more attractive as it seeks to lure as much as US$50 billion in investments to offset the decline in its mature oil and gas fields.

The Energy and Mineral Resources Ministry is revoking 90 general regulations and 96 other rules related to permits and certification requirements in an effort to cut the red tape and provide a more investor-friendly climate in its energy sector, including oil and gas, minerals, coal, and renewables.

Last year, Indonesia revised the terms of its production sharing contracts (PSCs), from to make them more attractive for investors, just months after it launched the gross split-based PSC oil contracts. Nevertheless, experts still thought that Indonesia needed to change the regulatory and fiscal regimes to become an attractive destination for oil and gas investment in the current oil price environment.

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com