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Fuel for Thought

Pertamina station courtesy of Wikipedia Commons

Florence Sihombing (26), a postgraduate law student at the prestigious Gadjah Mada University, on August 27 drove her white Honda Scoopy motorbike to a Pertamina petrol station. The queue for motorbikes was longer than usual, so she tried to use one of the rows of pumps reserved for cars buying a non-subsidized fuel. A military officer ordered her to get into the queue for motorbikes. Angered, she drove away, then posted on her Path account: “Jogja is poor, stupid and uncultured. Friends in Jakarta – Bandung, don’t visit Jogja.”

The woman from the North Sumatra capital of Medan described Jogjakarta people as “bastards” because of the class discrimination against motorcycle users, who tend to be lower income earners than car owners.

Flo unwisely encouraged her friends to “re-Path” her rant and it went viral. Local groups reported her to police and she was arrested on August 30. She was released two days later, after UGM promised she would cooperate with police.

Media attention on her case was diverted when Energy Minister Jero Wacik was on September 2 named a corruption suspect over alleged extortion and kickbacks. The ensuing investigation is expected to lift the lid on some of the graft that has long tainted Indonesia’s oil sector.

Jero Wacik

THE LURE OF BLACK GOLD

Oil had for centuries seeped naturally from the ground in northern Sumatra, where it was used as a medicine for skin ailments, for caulking boats, as a fuel, and for making explosives.

The story of Indonesia’s oil industry starts back in 1883, when oil was discovered north of Medan, resulting in the formation in 1890 of the Royal Dutch Petroleum Exploration Company. In 1907, the company merged with Britain’s Shell Transport and Trading Company, creating the Royal Dutch Shell Group, which dominated colonial oil exploration. Within three years, the new company was operating concessions in Sumatra, Kalimantan and Java, accounting for about 4% of world oil production.

The Dutch Indies oil fields were important to Japan, especially during World War II. In July 1941, the Dutch joined an American and British embargo of oil sales to Japan, which suddenly lost access to 88% of its imported oil. Five months later, Japan invaded in its quest for natural resources. In Kalimantan, retreating Dutch engineers destroyed a refinery at Balikpapan. Japanese forces retaliated with a massacre.

After Indonesia achieved independence, the Army in 1957 began taking over local Dutch oil companies, which were subsequently nationalized by President Sukarno’s administration. In 1962, Indonesia joined the Organization of Petroleum Exporting Countries (OPEC).

The investment climate improved after Suharto took power in the mid-1960s. State-owned oil firms were amalgamated in 1968 as Pertamina, which did little exploration and drilling, but instead issued production-sharing contracts to foreign firms. Pertamina became the regime’s main cash-cow. Transparency and accountability were not its strong points.

The Duri and Minas oil fields in Sumatra’s Riau province were discovered by Caltex in the early 1940s, although production did not commence until 1954. By the 1960s, they provided 50% of the country’s oil production.

Pertamina profited handsomely from the 1973-74 world oil crisis when prices quadrupled. Unfortunately, the company’s chief, Ibnu Sutowo, used profits to speculate in other sectors. By 1976, his mismanagement resulted in Pertamina accruing debts of $10.5 billion.

In 1977, Indonesia’s annual oil production peaked at about 1.6 million barrels per day. Some of Suharto’s children and cronies received concessions as intermediaries between Pertamina, its customers and suppliers. Mark-ups generated massive profits. Such arrangements were supposed to have been dismantled after the 1998 fall of Suharto. An audit of Pertamina found losses of $6 billion over 1997-98 because of inefficiency and corruption. If only such funds had been allocated to discover and exploit untapped reserves, and to develop refining capacity, then Indonesia might have averted declining production and costly fuel imports.

As old fields matured, Indonesia in 2004 became a net oil importer. Pertamina lost its numerous monopolies over 2004-2010, resulting in foreign firms being allowed to sell fuel. In 2008, Indonesia withdrew from OPEC, no longer able to meet production quotas, while the world oil price soared to over $140 per barrel.

In 2013, Indonesian oil production averaged 825,000 barrels per day. This year’s output is forecast to be even lower. Pertamina is presently importing about 600,000 barrels per day to meet domestic demand.

SENSITIVE SUBSIDIES

Fuel prices in Indonesia have been subsidized since the Sukarno presidency, ostensibly with the aim of making life easier for the country’s poor. Yet cheap fuel has disproportionately benefited higher income earners.

Cutting subsidies is a politically sensitive issue. Fuel price increases contributed to the protests that ousted Suharto after 32 years in power. In 1999, fuel subsidies accounted for almost one-quarter of the state budget. Despite some cuts over the past 15 years, subsidies in 2013

Royal Dutch Petroleum dock in the Dutch East Indies courtesy of Collectie Tropenmuseum

still consumed 19.5% of the budget — about $25 billion. By reducing subsidies, more money can be allocated toward vitally needed infrastructure, healthcare and education.

This year’s petrol supply problems occurred after the government in June cut the subsidized fuel consumption quota by 4.2% to 46 million kilolitres. This meant Pertamina had to reduce its daily distribution of subsidized petrol by about 5% and diesel by 10-15% at gas stations across the country. The shortages prompted panic buying at many stations.

President-elect Joko ‘Jokowi’ Widodo will inherit a growing budget deficit and is under pressure to cut fuel subsidies within his first 100 days in office. His political opponents could use any cuts as a pretext to orchestrate protests against him.

FUEL IMPORT MAFIA?

Indonesia’s crude oil and fuel procurements are handled by Pertamina’s trading subsidiary Petral. There have long been claims that fuel imports are dominated by an intermediary “fuel mafia” that increases the cost of each barrel by about $10 — and the profits are alleged to be widely shared, so the scheme continues unopposed.

A group called the People’s Special Solidarity for Oil and Gas recently accused failed presidential candidate Hatta Rajasa, the former chief economics minister, of involvement with the “fuel mafia”. Hatta denied any wrongdoing.

Ferdinand Hutahaean, the group’s coordinator, told Tempo magazine that Indonesia could be losing $9 million daily because of mark-ups. He alleged that Hatta has for a decade been associated with Riza Chalid, the boss of Singapore-based Global Energy Resources, which has brokerage deals with Pertamina. Globe Asia business magazine has described Chalid as “one of Indonesia’s most under-the-radar oil businessmen”.

Pertamina’s respected president director Karen Agustiawan resigned in August for “personal reasons” following reports she had been under pressure to divert funds to crooked legislators. She denied making any payments.

Jokowi has said the Energy Ministry is highly involved with a mafia and requires better leadership. There are great expectations for the new president to clean up the oil industry, but if he doesn’t get majority support in parliament, he may be unable to push through reforms needed to eliminate costly red tape and other investment impediments. Motorcyclists and oil investors alike will have to remain patient.

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