Crude Oil

The top three oil producing countries that together account for around 40 percent of total global crude oil production are the United States, Russia and Saudi Arabia.

World's Top Oil Producing Countries in 2023:

Country	Crude Oil Production barrels per day (bpd)
1. USA	12,900,000
2. Russia	10,100,000
3. Saudi Arabia	9,700,000
4. Canada	4,600,000
5. Iraq	4,300,000
24. Indonesia	605,000

^{Source: US Energy Information Administration (EIA)}

Although currently many countries are delving into the potential of renewable energy, the global importance of - and dependency on - oil cannot be denied, nor neglected. For the time being, fossil fuels will remain to be the most important sources of global primary energy. At the end of 2022, fossil fuels accounted for nearly 82 percent of global primary energy consumption (with renewables accounting for 14 percent and nuclear energy for 4 percent). And within the group of fossil fuels, oil (once called 'black gold') continues to play a crucial role.

Increased global demand for crude oil in combination with supply-side concerns during the 2000s caused oil prices to reach historic highs in 2008. Although this rapidly rising trend in the 2000s was temporarily interrupted by the global financial crisis of 2008-2009, global oil demand rose substantially after 2009 (and thus the price recovered accordingly and remained at elevated levels), largely due to rising consumption levels of crude oil in those emerging and developing countries that show robust GDP growth, such as China which accounts for a large share of the world's energy consumption and therefore affects world market prices for primary energy sources.

However, from mid-2014 global oil prices started to decline sharply on sluggish global economic activity (particularly due to rapidly falling economic growth in China as Beijing has been trying to change the economy from being export-oriented to consumption-oriented), and an increase in US shale production, while the Organization of Petroleum Exporting Countries (OPEC) decided not to curb production rates too. In February 2016 oil prices touched 13-year lows. After this low, prices somewhat recovered until the fourth quarter of 2018.

West Texas Intermediate Price (up to May 2024):

In Q4-2018 global oil prices went downhill again amid excessive supply (mostly stemming from the United States) and weaker than expected demand. OPEC supply cuts then pushed global oil prices into higher territory in the first quarter of 2019. However, before oil prices could really recover the COVID-19 crisis arrived that pushed oil prices to a rock bottom in March/April 2020 as government restrictions triggered an unprecedented decline in production, consumption, travel, trade and investment.

After touching that rock bottom, oil prices recovered as economic recovery kicked in from around 2021, after which global oil prices more-or-less stabilized.

The Future of Oil

If we think about the future of oil, then we can certainly argue that its future is uncertain as many countries are eager -or feel pressured- to move away from fossil fuels including oil. So, in that respect one can argue that oil is a sunset industry. However, it will be a very long sunset as advances with renewables go at a very slow pace. And so, in the decades to come, oil will continue to play a crucial role, albeit its importance will be gradually declining.

According to the International Energy Agency (IEA) it is particularly oil use for transport that is going to decline after 2026 as the expansion of electric vehicles, growth of biofuels and improving fuel efficiency will reduce oil consumption. Meanwhile, the IEA expects global oil demand to rise by six percent between 2022 and 2028 to reach 105.7 million bpd, supported by robust demand from the petrochemical and aviation sectors. However, after this peak, global demand is expected to slow as a consequence of increasingly rapid advances with renewable energy sources.

What is interesting about the table below is that while oil consumption is expected to decline in the developed economies (such as the United States and Europe) in the next couple of years, it is expected to rise in the developing economies. The Asia-Pacific is in fact expected to show strongest growth in the years to come.

Projection of Global Oil Demand per Region (in million bpd):

Region	2024	2025	2026	2027	2028
United States	24.5	24.3	24.0	23.8	23.5
South & Central America	6.8	6.9	7.0	7.1	7.2
Europe	14.5	14.7	14.6	14.5	14.3
Africa	4.4	4.5	4.6	4.7	4.8
Middle East	9.3	9.4	9.6	9.7	9.8
Eurasia	4.6	4.6	4.7	4.7	4.7
Asia-Pacific	38.8	39.7	40.3	40.9	41.3
World	103.1	104.1	104.8	105.3	105.7

^{Source: International Energy Agency (IEA), Oil 2023 Report (June 2023)}

Crude Oil in Indonesia

Indonesia's Declining Oil Production and Rising Oil Consumption

For Indonesia, the oil industry has been an important one. In the period 1974–1981 the country’s economy grew at a high and sustained average annual rate. This growth was to a large extent attributable to two oil booms that occurred in the 1970s, which brought ample foreign exchange earnings into the country. The 1973-1974 oil boom was caused by the decision of the OPEC to quadruple the price of oil by cutting its combined oil exports.

Meanwhile, the 1979-1980 oil boom was caused by the temporary closure of Iran's oil industry (as a result of the revolution against the Shah's regime). With Iran being OPEC’s second-largest oil producer and exporter at that time, the closure had a huge impact on global oil prices.

Indonesia benefited tremendously from these oil booms. Not only because the global crude oil price was very lucrative at those occasions but also because domestic crude oil production had become very strong in Indonesia in the 1970s.

Crude Oil Production Indonesia (1973-2024):

After Suharto had replaced Soekarno as most powerful man in Indonesia in 1966, he managed to create an attractive investment environment for foreign companies. The influx of foreign money was badly needed as Indonesia was on the brink of collapse in the mid-1960s. Various big foreign companies arrived in the late-1960s and early 1970s to tap Indonesia’s natural resources potential (and Suharto imposed a system in which he too benefited, personally, from the influx of foreign investment).

Starting in the 1990s Indonesia's crude oil production has experienced a steady downward trend due to a lack of exploration and investment in this sector. Oil production targets, set by the government each year, have not been achieved for many years in a row because most oil production stems from mature oil fields. Meanwhile, today, Indonesia's total of oil refineries have roughly the same combined capacity as they had two decades ago, indicating that there has been limited progress in oil production (after all, declining oil production implies there is no real need to raise national oil refining capacity).

A consequence of this situation is that Indonesia turned into a net oil importer in 2004. Significant oil and fuel imports are needed to meet ever-rising domestic demand in a country that displays robust social and economic growth. Becoming a net oil importer also meant Indonesia had to terminate its membership in the OPEC (1962-2008). The table below displays Indonesia's declining oil production over the last two decades.

Indonesia's Oil Production (2006-2023):

	2018	2019	2020	2021	2022	2023
Production (in 1,000 bpd)	808	781	742	692	644	605

 

	2012	2013	2014	2015	2016	2017
Production (in 1,000 bpd)	917	871	847	838	873	837

 

	2006	2007	2008	2009	2010	2011
Production (in 1,000 bpd)	996	972	1,003	990	1,003	942

^{Source: Statistical Review of World Energy 2023}

Despite its net zero emissions target (by 2060), Indonesia certainly prepares for a long sunset in terms of the national oil industry. For example, for many years now, the Indonesian government has been upholding its ‘one million barrels of oil per day’ target, meaning it wants to have raised its national oil production to one million bpd (by 2030). This ambition shows that Indonesia is not willing to move away from oil in the foreseeable future. In fact, the contrary is true.

Moreover, the Indonesia Investment Coordinating Board (Badan Koordinasi Penanaman Modal, BKPM), a government agency that was elevated into the status of Investment Ministry in 2021, recently listed the national oil and gas industry in its list of ‘priority investment industries up to 2040’. What this means is that it will specifically push for direct investment realization in the national oil and gas industry. BKPM targets to welcome up to USD $68.1 billion in direct investment in oil and gas up to 2040.

So, Indonesia is certainly not in a hurry to reduce its dependence on fossil fuels. In fact, we assume that Indonesia will try to squeeze as much as possible from its oil, gas, and coal resources ahead of its 2060 carbon neutral ambition.

The lack of investment in exploration and exploitation in this industry that has resulted in declining oil production in Indonesia are due to various factors, including regulatory uncertainty (with regulations and policies often rapidly changing), red tape (excessive bureaucracy) when applying for licenses/permits, resource nationalism (implying contracts may not be extended thus discouraging foreign contractors from investing at existing fields), and legal uncertainty.

Moreover, in times of low global oil prices (which we have sometimes seen over the past decade) it also becomes unattractive for oil contractors to engage in capital-intensive investments. Meanwhile, with the global energy transition in mind, it is also becoming unpopular to be engaged in oil mining. Lastly, it is also becoming more expensive and more complicated (technically) as the focus has been moved to deepwater oil mining in Indonesia. This brings more risks for the investor.

It all sort of creates an investment environment that is not too appealing to investors, particularly when it involves costly, long-term investment. And so, the country has become dependent on its existing maturing oil fields (such as the Rokan block).

This implies a number of negative side effects, with the main two being: (1) Indonesia misses out on lucrative foreign exchange earnings, while (2) ever-growing fuel demand in Indonesian society has given rise to a wide trade deficit in the oil and gas balance (as Indonesia becomes increasingly dependent on imports of oil and fuel). This not only puts pressures on the trade balance but also on the current account balance, foreign exchange reserves and the rupiah rate. Moreover, when more expensive imported oil needs to be used in Indonesia’s manufacturing industry, then manufacturing output becomes more expensive too. Lastly, although Indonesia is trying to phase out fuel subsidies, costly oil or fuel imports means that the government needs to spend a lot of public money on fuel subsidies.

Meanwhile, oil consumption in Indonesia has been showing a steady upward trend in recent decades. Due to the growing population, an expanding middle class and a growing economy, demand for fuel is increasing continuously. Today, Indonesia is estimated to consume around 1,600,000 barrels of oil per day. However, it can only produce around 600,000 bpd, hence the deficit needs to come from abroad.

Indonesia's Oil Consumption (2005-2022):

	2017	2018	2019	2020	2021	2022
Consumption (in 1,000 bpd)	1,565	1,616	1,582	1,400	1,461	1,585

 

	2011	2012	2013	2014	2015	2016
Consumption (in 1,000 bpd)	1,589	1,612	1,572	1,572	1,505	1,454

 

	2005	2006	2007	2008	2009	2010
Consumption (in 1,000 bpd)	1,303	1,244	1,318	1,287	1,297	1,402

^{Source: Statistical Review of World Energy 2023}

Most of Indonesia's oil production is concentrated in basins in the western part of the country. But because of few significant new oil discoveries in this western part, the government has shifted its focus towards eastern Indonesia. Meanwhile, around 60 percent of Indonesia's new oil field potential is located in offshore deepwater that requires advanced technology and large capital investment before commercial production can start.

Proven oil reserves have declined quite significantly in Indonesia over the past 25 years; something that is in stark contrast to the global trend. Whereas for Indonesia proven oil reserves fell from 5.1 billion barrels at the end of 2000 to 2.4 billion barrels at the end of 2020, the global proven oil reserves increased from 1.3 trillion to 1.73 trillion barrels over the same period. This also implies that Indonesia controls 0.14 percent of total global proven oil reserves.

Indonesia's Oil Reserves:

	1991	2000	2014	2020
Reserves (in billion barrels)	5.9	5.1	3.7	2.4

^{Source: Statistical Review of World Energy}

Government Policy that Influences Indonesia's Oil Consumption

One heavily criticized government policy of Indonesia is its fuel subsidy policy. For decades, a big chunk of funds (taken from the central government's annual state budgets) has been used to offer cheap fuel (particularly pertalite) to Indonesians. This policy, which boosts fuel consumption, is aimed at supporting the poorer segments of Indonesian society. By supplying cheap fuel, costs throughout society can be curtailed (artificially). For example, when transportation costs are kept low, prices of products sold to consumers can also be kept lower. In combination with Indonesia being a net oil importer, this policy made the state budget (and balance) highly vulnerable to rising global oil prices.

Since 2014 the Indonesian government has taken some real steps to limit government spending on fuel subsidies. However, fuel-related state spending remains robust. And while fuel subsidies have declined on paper, we have seen compensation funds to state-owned energy company Pertamina skyrocket. These compensation funds are needed to allow Pertamina sell pertalite and subsidized diesel at cheap prices.

Fuel subsidies have always been criticized on grounds that they mostly benefit the richer segments in society (instead of the poorer segments), while the artificially low price of fuel causes market distortions in Indonesia (triggering bubbles that may -some day- have to burst when subsidies or compensation payments are removed).

Reduction of removal of fuel subsidies has always been a sensitive issue in Indonesia as it causes demonstrations across the country (implying political risks for the ruling parties in the cabinet) and ignites a jump in inflation.

Contribution of Oil to Indonesia's Domestic Economy

Indonesia's oil and gas sector used to contribute significantly to the Indonesian economy through export and foreign exchange earnings. However, as the contribution of oil has been declining over the decades, so has its contribution to the Indonesian economy and state revenue. In 2023, the oil and gas industry accounted for around 7 percent of total state revenues (while in 1990 this figure was 40 percent).

In early 2023 Indonesian Minister of Energy and Mineral Resources Arifin Tasrif stated that oil reserves in Indonesia are estimated to only last for around 9 to 10 years. Therefore, investment in exploration is badly needed. Indonesia has 128 basins of which only 60 have been explored and exploited. However, the problem with the remaining 68 is that most of them are located in deepwater.

Biggest Oil Contractors Active in Indonesia

Most oil production across Indonesia was typically carried out by foreign contractors under production sharing contracts arrangements (with Chevron Pacific Indonesia, subsidiary of Chevron Corporation, once accounting for around 40 percent of national oil production). However, over the past decade, we have seen big global energy giants (like Chevron or Shell) exit certain oil and gas projects. In some cases, contracts were not extended by the Indonesian government, and so Pertamina was appointed to manage the oil and gas field. In other cases, contractors decided to leave Indonesia amid the complex/uncertain investment environment, and possibly also due to the global energy transition. So, what are the biggest oil contractors in Indonesia?

Biggest Oil Contractors in Indonesia (2023):

Contractor	Crude Oil Production barrels per day (bpd)
1. Pertamina Hulu Rokan	161,623
2. ExxonMobil Cepu Limited	155,444
3. Pertamina EP	69,417
4. Pertamina Hulu Energi ONWJ LTD	26,580
5. Pertamina Hulu Mahakam	26,503
6. Pertamina Hulu Energi OSES	17,510
7. Petrochina International Jabung Ltd	15,303
8. Pertamina Hulu Sanga-Sanga	10,961
9. Medco EP & Natuna	10,590
10. Pertamina Hulu kalimantan Timur	9,869

^{Source: SKK Migas}

Future of the Oil Industry in Indonesia

Similar to many other countries, Indonesia seeks to lower its dependency on oil as a source for energy amid the global energy transition. Moreover, Indonesia wants to cut expensive oil imports as these put pressure on the country's trade balance, current account balance, rupiah rate and foreign exchange reserves (while also causing heavy state spending on fuel subsidies or compensation payments).

However, as discussed above, the Indonesian government still has high hopes for the national oil industry, targeting to restore oil production back to levels last seen in the early 1990s. This will require big investments which, in turn, requires a transparent, stable and secure regulatory and investment environment (including good cooperation and coordination between central and regional governments).

Considering the ongoing energy transition, we expect to see more emphasis on clean oil technologies. So, the challenge for oil and gas contractors in Indonesia will be to integrate carbon capture storage (CCS) or carbon capture utilization (CCUS) in the upstream oil and gas industry. Meanwhile, the government will need to regulate these new technologies accurately.

Last Update: 24 May 2024