Enhancing National Energy Resilience as Alternative Paradigm for Managing the Volatility of Extractive Industries: How Far Can We Go?

event 2015-08-31   local_offer Market Volatility   edit Joash Tapiheru, Indah Surya Wardhani

 

Oil price has been undergoing steep decline at the global market. The prices slips on persistent fears of a gult in crude oil supply. Investors predict oil prices will remain under pressure for the rest of the year. The volatility is also correspondingly ensued on the market of gas, and coal. This must affect Indonesia’s economic performance due to their central position as Indonesian prime export commodities. While the volatile nature of Extractive Industry – EI has been acknowledge by the involved parties, this situation have not been thoroughly anticipated in Indonesian EI policies especially regarding those related with its national energy resilience.

This article aims to offer an alternative paradigm based on the acknowledgement that Indonesian reserves of natural resources- especially petroleum, coal, and gas - have strategic values as the energy sources besides their immediate economic values in the global market. As strategic commodities, petroleum, coal, and other source of energies are supposed to inclusively comply the broader scheme of the national energy policies. However, for most of the times Indonesia has persistently relies on industrial perspective that perceives them merely as commodities at the expense of their value as national strategic assets.

Oil, for instance, despite its precious strategic values as an energy source is merely treated as commodities following the market mechanism. From economic point of view, in this sector Indonesia has been living on its capital instead of its interest. BP Statistical Review of World Energy June 2015 shows steady negative trend between Indonesia’s export of crude oil and import of refining oil in more than a decade. At the 2014, the gap between production and consumption reached near below 800.000 barrels per day and gradually widen in years. This gap of oil trading is mainly due to stagnancy of Indonesia’s oil refining capacity in the last 10 years that is the lowest among the Asia Pacific countries. Pertamina’s six refinery units are not sufficient for the country. Lacking of processing facilities leads the burdens of EI’s sub-sector to meet the goals of generating revenue from export, and to meet the domestic demand for energy. Besides, the absence of explorations for new sources of oil reserve and the mounting domestic oil consumption explains the aforementioned trend.

Evidently, Indonesia still depends on the old oil fields that have been exploited since the glory days of the Indonesia Petroleum industry in 1970-1980s. On the other side, oil reserves significantly decreasing in a decade by eight times higher exploitation level than rates in the prominent oil producing countries such as Saudi Arabia and Libya. At the end 2014, Indonesia lags in improvement reserves by only having proven oil of 3,7 thousand barrels estimates for 12 years. Related to exploration, we need to bear in mind that even if new oil reserves  is immediately found, it will  take another 10 to 15 to make it productive. In addition to the technical issue, Indonesia still has to struggle with rent seeking in energy sectors that reaping the political mechanism for some interest groups.

Adding Energy Resilience Paradigm to Enhance Indonesia’s Resilience to Market Volatility

Regardless on abundant natural resource, the relatively neglected energy policies in Indonesia has made it lagging behind in comparison with some other countries in the Asia Pacific region. China, for instance, is more ready to cope with their high pressure domestic demand by aggressively seeking energy resource in other countries. This highest population country argued to issue moratorium policy in coal mining and vastly import coal  to cope with the mounting domestic demand. Singapore and Japan, as countries with minimum natural resources; especially energy sources, boost supply and managing their resource limitation by constructing refineries. Considering the mounting domestic demand and the negative trend in its reserves of natural resources, especially those energy sources, it is not an exaggeration to say that Indonesia needs a “Plan B” to tackle this issue, not only in the EI’s sub-sector of oil and gas industries, but also in the policy area of energy in general.

Another major reason for Indonesia to give more appropriate priority to its energy sector is to reduce its liability to the volatile nature of EI industry. The existing hegemonic paradigm in managing EI in Indonesia - including oil, gas, and coal as sources of energy - tends to reduce the values of the commodities produces in this sector to focus only on its immediate economic values and heavily rely on the global market mechanism to reap them. This opens ourselves prone to the volatility of the global market on these commodities and renders Indonesia less able to govern its domestic market on energy sources regardless our position as producer.

Reliance on the global market mechanism leads us away from more thorough consideration to balance the judgment between the goals of generating revenue and anticipating the domestic growing needs for energy. Due to the overemphasis in generating revenue through energy source commodities export, the strategic values of these commodities have been improperly considered. In the meantime, export of oil, gas, and coal while lucrative also possesses vulnerable nature. Countries heavily dependent from the market of these commodities for their revenues are required to come with thorough back-up plan to anticipate the market fluctuation that may come anytime.

The scheme of Extractive Industry Transparency Initiative (EITI) is one of the most recent and widely discussed policy recommendations for Indonesia to adopt in managing its EI sector, including oil; gas; and coal. This model incorporates transparency instruments within the national extractive industry’s revenue management. However, considering its specific context of huge population and necessity to develop its industrial bases, Indonesia should complement the revenue management measure with parallel measures in the policy area of energy. Taking energy policy implies that oil, coal, and gas are to be governed under two paradigms of, first, extractive industry commodities and, second, as sources of energy.

Focusing the discussions on the latter, it has to bear in mind that these paradigm can be actualized in many ways. Two most feasible options are development of the refining and storage capacities for those energy commodities in Indonesia and improvement of alternative renewable energies. Both options are complementary to each other and require political commitment from the policy makers in this country. The first option has considerable strategic potentials both in managing our national oil reserve and also to enhance Indonesian position in the global oil business. It may reduce our dependency to imported refined oil whether they are allocated for domestic consumption or export. The second option, the commitment is still needed to advance the renewable energies. Indonesia has initiated early steps for geothermal development and wind energy farm as alternative energy source.

In order to capitalize its huge strategic values, this energy policy should not be treated as a stand alone policy. Further thorough deliberation on how the stored energy should be put into use is necessary to link the energy policy with other policy areas such as service and manufacture industries and provision of electrical energy as part of public service provision.  However, the very existence of this energy policy will give Indonesia a leverage to manage the volatility of EI market and enable it to be more thorough in handling its huge reserve of natural resources and putting to necessity to meet the domestic demand into consideration.

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Joash Tapiheru & Indah Surya Wardhani - researchers at Resource Governance in Asia Pacific (RegINA), Department of Politics and Government, Gadjah Mada University