Leadership and Democracy LabWestern Social Science

The Hot Seat of Indonesia’s Energy Minister

Primary Contributor: Patrick Pinho

Team Leader: Nick Dang

2/03/2017

In August of 2016, Indonesian President Joko Widodo replaced Energy and Mineral Resources Minister Arcandra Tahar[1]. Just three months prior to that, Tahar had replaced Sudirman Said, who was at odds with the president over oil and gas plan. Due to this, Said eventually found himself a casualty to President Joko’s cabinet shuffle in an attempt to better coordinate his ministries[2].

Why all the turnover? Said, as mentioned, was a casualty of Joko’s cabinet shuffle in an effort to create a more efficient and productive cabinet. Tahar, on the other hand was found to controversially hold a dual-US citizenship, which under Indonesian law is restricted to those either under 18 or married[3]. He had been appointed to the post on July 27, shortly after Said was dismissed, and found himself dismissed just over two weeks later on August 15. An interim minister held the position until Ignasius Jonan was named as the new minister in mid-October[4]. While Jonan claims to have absolutely no experience in the energy sector,[5] his experience as minister of transportation before the Cabinet reshuffle and knowledge of the financial aspect are well regarded[6]. Energy companies and the President alike hope that this financial discipline and experience will help to steer the department towards greater efficiency and solve existing problems.

One of the main issues is fuel pricing. Gas has been subsidized to consumers since the 1970s oil price shock, and these subsidies were dismantled by President Joko in an effort to balance the budget upon election in 2014[7]. The reduction of fuel subsidies was one of Joko’s platform points on energy of in the 2014 election[8]. The dismissed minister Tahar inherited the deputy role to Jonan, and they seek to increasing the availability of electricity to 95% of the nation, up from 85%[9].

While no new substantial policy initiatives have come from the new minister, his goals also include increase production, efficiency, and exploration of the oil and gas industry[10]. It is a growing problem, as a lack of new oil discoveries creates a dependency on imports, and without the aforementioned fuel subsidy it leads to rising fuel prices[11]. It would be nearly impossible to reinstate these subsidies, as their portion of spending is down near 1%, from 13% in 2014[12]. With this in mind, it is important that new oil deposits are found and investment in the production processes are increased.

This creates economic risk; Indonesia had just recently re-entered OPEC after leaving in 2009 due to becoming a net importer of oil[13]. OPEC members are required to be net exporters, and as of 2009 Indonesia lost their membership due to their net importer status. Indonesia has seen the percentage of GDP from oil discoveries decrease from 25% in 2006 to an expected 3.4% this year due to a lack of new oil fields and advancements in refinement processes[14]. The previous energy minister had pursued renewing OPEC membership to negotiate new refinement deals and maintain budgeted revenue streams from oil, however the OPEC meetings that occurred at the end of 2016 saw Indonesia suspend its OPEC membership again[15], almost exactly one calendar year after ending it’s seven-year absence[16].

Indonesia was hoping that being closer to OPEC nations would help its struggling oil production industry, however the OPEC production quotas introduced at the end of 2016 saw them asking Indonesia to cut production by 37,000 barrels per day, which amounted to 5% of production[17]. Jonan had stated that a cut of 5,000 barrels per day could be allowed in the budget, but cites oil as a still significant portion of the nations revenue and the requested production cuts as far too excessive to follow.

This creates both political and economic risk in the energy sector in Indonesia – there is a level of uncertainty over Indonesia’s desire to retain member status with OPEC, however the new energy minister seems to strongly oppose retaining membership if it would require production cuts. It is unclear where President Joko stands in regards to OPEC membership and if having the suspension lifted in the near future will be sought after, but as it stands the current energy minister and administration oppose the production cuts necessary to remain in OPEC due to budgetary concerns.  It is the hope of the president that their combined experience in innovation makes them the best suited to increase the production, as Indonesia faces the possibility of becoming a net importer of oil in the near future if no new discoveries are made and production does not increase[18].



[1] http://www.bloomberg.com/news/articles/2016-08-15/indonesia-s-jokowi-fires-energy-minister-over-dual-citizenship

[2] http://www.wsj.com/articles/indonesia-replaces-energy-minister-amid-dual-citizenship-controversy-1471278218

[3] http://www.bloomberg.com/news/articles/2016-08-15/indonesia-s-jokowi-fires-energy-minister-over-dual-citizenship

[4] http://www.thejakartapost.com/news/2016/10/15/pertamina-expects-jonan-to-create-efficient-investment-friendly-energy-sector.html

[5] http://www.thejakartapost.com/news/2016/10/18/new-energy-minister-highlights-four-prioritized-programs.html

[6] http://www.thejakartapost.com/news/2016/10/15/pertamina-expects-jonan-to-create-efficient-investment-friendly-energy-sector.html

[7] http://www.bloomberg.com/news/articles/2014-12-31/widodo-makes-biggest-change-to-indonesias-fuel-subsidy-system

[8] http://www.indonesia-investments.com/news/news-columns/joko-widodo-s-political-economic-agenda-future-of-jokowi-s-indonesia/item2252

[9] http://www.thejakartapost.com/news/2016/10/18/new-energy-minister-highlights-four-prioritized-programs.html

[10] http://www.thejakartapost.com/news/2016/10/18/falling-oil-and-gas-production-main-problem-in-energy-sector-expert.html

[11] http://www.bloomberg.com/news/articles/2016-06-21/for-jokowi-real-test-on-indonesia-fuel-subsidy-may-be-starting

[12] http://www.bloomberg.com/news/articles/2016-06-21/for-jokowi-real-test-on-indonesia-fuel-subsidy-may-be-starting

[13] http://www.reuters.com/article/us-opec-meeting-indonesia-idUSKBN13Q3M7

[14] Ibid.

[15] http://www.reuters.com/article/us-opec-meeting-indonesia-idUSKBN13Q3M7

[16] http://www.opec.org/opec_web/en/press_room/3403.htm

[17] http://www.reuters.com/article/us-opec-meeting-indonesia-idUSKBN13Q3M7

[18] http://www.bloomberg.com/news/articles/2016-10-14/jokowi-picks-former-transport-chief-jonan-for-energy-minister