2004 Oil and Gas Output Down

Indonesia's crude oil and condensate production dropped by 4.5% in 2004, according to government statistics. Crude oil and condensate production fell from 1.146 to 1.095 million barrels per day (bopd). ChevronTexaco's PT Caltex Indonesia remains the largest oil producer in the country, accounting for 46% of total oil production. U.S. companies account for a combined 60% of the country's production. Indonesia's state-owned Pertamina and Medco Exspan Nusantara produced 9% and 4% respectively. Output from the Chinese National Offshore Oil Corporation (CNOOC) and PetroChina dropped from 12% to 9.5% in 2004.

Natural gas production declined by 7% in 2004, to 2,922,722 million cubic feet. French petroleum company Total is still the top natural gas and LNG producer in Indonesia with 897,210 million cubic feet, up 2% from 2003. Indonesia's other LNG producers - ExxonMobil, VICO and Unocal - accounted for most of the natural gas production decline in 2004. Output from ExxonMobil's aging Arun fields was down 15%, to 508,712 million cubic feet, while production and maintenance problems at Unocal and VICO Kalimantan operations caused output to drop by 35% and 16%, respectively.

Green Light for BP's Tangguh Project

Two years after the initial award, BP Berau Ltd. and a Kellogg, Brown and Root (KBR) partnership signed an engineering, procurement, construction and commissioning (EPCC) contract worth $1.8 billion on March 6. KBR's partners in the contract are the JGC Corporation of Japan and Indonesian firm PT Pertafenikki Engineering. The action follows the GOI's long-debated approval of a principles of agreement (POA) and extension of the BP consortium's production sharing contracts for Tangguh. Under the POA, the government shares liability with the BP consortium in the event of central or provincial government policies that lead to a breach of contract with Tangguh's LNG customers. The signings mean that Tangguh LNG first-production should occur in late 2008.

GOI Weathering Fuel Price Hikes

As of March 30, the Yudhoyono Administration has successfully weathered vocal but limited public protests over its March 1 decision to raise subsidized fuel prices by a weighted average of 25%. There was sharp debate along party lines within the parliament (DPR) over the price hikes in mid-March (ref a); however, further debate on the issue has been relegated to committee. The DPR will now discuss the GOI's 2005 budget revisions, including assumptions for crude oil prices ($35/barrel) and Indonesia's target oil production (1.125 million bopd). Key challenges for the GOI in the months ahead are whether these assumptions are sufficiently realistic, and the extent to which consumption of heavily subsidized kerosene for home use will rise given the large price disparity between it and industrial kerosene.

Opening Talks on Ambalat Dispute Conclude

Indonesia and Malaysia concluded the first round of talks to resolve the territorial dispute on the Ambalat oil and gas blocks on March 23 (ref b). Although officials did not provide details of the two-day talks, Foreign Minister Wirajuda described discussions as "friendly." Two oil companies, U.S. Unocal and Royal Dutch Shell, are tangentially involved in the dispute. Indonesia awarded Unocal the rights to explore and develop the East Ambalat block in November 2004, while Malaysia awarded Petronas Cargil and Shell Malaysia an overlapping concession in February 2005. The blocks lie partially within the disputed area. Indonesia and some other ASEAN members say the dispute dates back to 1979, when Malaysia unilaterally defined the maritime boundary in the area. Malaysia claims its victory in a 2002 International Court of Justice decision on two neighboring islands strengthens the country's definition of that boundary. Talks could resume in May.

Indonesia Wants To Be Top Coal Exporter in 2005

Indonesia hopes to surpass Australia and become the world's largest exporter of thermal coal in 2005, according to the Indonesian Coal Mining Association (ICMA). ICMA chairman Jeffrey Mulyono said that rising production and relatively static domestic demand could push thermal coal exports to 115 million tons in 2005. The country has targeted total coal production at 155 million tons for 2005, about 70% of which would go to the export market. Domestic demand comes primarily from the power sector; however, there are only two new major coal-fired plants planned for 2006-2008 (Cilacap and Tanjung Jati B). High international coal prices account for the current rise in Indonesia's coal output. However, analysts argue that the GOI must revise onerous regulations on VAT and royalties in order to make the country's mining sector more competitive in the long run.

Court Set to Review Mining Law

Indonesia's Constitutional Court has begun its review of Law 19/2004, which allows 13 companies to resume open-pit mining in protection forest. The GOI passed Law 19/2004 in September 2004 to provide legal certainty and improve investment after an earlier forestry law (41/1999) prohibited open-pit mining in protection forest. Law 41 had provoked sharp debate within the mining community, as it conflicted with the existing state mining law and had no provisions for honoring approximately 150 existing open-pit mining contracts. Environmental NGOs hope the Court will revoke Law 19, claiming that will hurt sustainable development in Indonesia. The Constitutional Court is no stranger to controversy, having ruled on two prior pieces of energy legislation (Oil/Gas and Electricity) in the last several months. The Court's December 2004 annulment of Electricity Law 20/2002 has thrown into disarray the GOI's plans to deregulate the power sector. The GOI is currently drafting a new power law.

Java-Bali Power Grid on Alert

The Java-Bali power grid, which accounts for 80 % of electricity demand in Indonesia, was on alert during the third week in March. Boiler problems at two coal-fired units, state-owned Suralaya in West Java and privately owned Paiton II in East Java, reduced the grid's available capacity by approximately six %, or 1000 megawatts (MW). During most of the week, the grid was in alert mode, which occurs when the available (or spinning) reserve margin falls below 600 MW. On March 17-18, the grid was in deficit mode, meaning available capacity was less than demand. Adroit demand management by state-owned power company PLN prevented large-scale blackouts during that period. However, rotating blackouts are common throughout Java and the rest of Indonesia. Industry observers have stated that to accelerate power sector development, the GOI will need to improve incentives for private investment, honor existing contracts, help PLN become financially solvent, and pass new electricity legislation to replace the annulled Law 20/2002.

Groups Compete for PLN LNG Terminal Tender

State-owned PLN announced March 18 that it had received 33 prequalification bids from 14 groups of companies for the EPCC contract for a proposed LNG terminal and re-gasification facility in West Java. The 14 groups include Hyundai-Theiss, Mitsui-Waskita-Sumitomo, Daewo, Marubeni, Mitsubishi and U.S.-Indonesian partners Fluor Daniel and PT Tripatra. The LNG terminal, which will have an estimated cost of $300 million, is a major part of PLN's plan to reduce Indonesia's reliance on expensive fuel oil for power generation. PLN's poor financial health (its operating costs increased following the GOI's March 1 fuel price hikes) could raise concerns from potential lenders. If completed, the LNG facility would provide natural gas to Jakarta area combined cycle plants that are presently running on fuel oil.

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