Act or react (pre-election)

Moderator, Angus Graham, Risco Energy

In a matter of days, 186 million Indonesians will have voted in the world’s biggest direct presidential election. They face an unusually binary choice for Indonesia’s 7th president, with only two qualifying candidates: Jakarta Governor Joko Widodo (“Jokowi”) and former Suharto son-in-law and general, Prabowo Subianto. To help inform debate about the election and its impact on the energy industry, we asked two independent experts, in Indonesian politics and investment respectively, for their views on the candidates’ policies and ability to affect the country’s oil and gas future.

A critical element to both campaigns is Indonesia’s ongoing economic prosperity and increased growth rate targets. Indonesia’s energy sector is a significant economic constituent, representing 15.6% of GDP in 2012 with oil and gas alone providing 16% of state revenues. However, production in ASEAN’s historically dominant oil and gas producer is stagnating in the face of soaring demand, prompting an ever-expanding deficit gap currently being filled by imports. Imports have fuelled pressure on the country’s current and trade accounts, which will only increase without increased oil and gas production. This pressure is exacerbated by fuel subsidies dating back to Indonesia’s OPEC membership (it exited in 2009), which currently cost the government more than oil and gas revenues.

 

Graph: Oil & gas revenue vs fuel subsidy cost

Source: CLSA

 

Graph: Oil & gas revenue as a proporation of total Indonesian government revenue

Source: CLSA

 

In his analysis for Risco, Indonesian political expert and commentator Kevin Evans explores Jokowi and Prabowo’s energy platforms, highlighting commonality in their economic and resource nationalism, albeit to varying degrees. Kevin ultimately concludes that we are unlikely to see a policy environment that genuinely encourages foreign investment in the sector without a major economic shock and expects no material change to the current trajectory of oil and gas in Indonesia.

Jayden Vantarakis, Deputy Head of Indonesian Research at CLSA, Asia’s leading independent equity brokerage, is more optimistic for change. He sees GDP growth of 7-9% pa as a priority for both candidates and the current structural energy trade deficit and fuel subsidies as a significant barrier to achieving this. This will compel the new president and his government to implement positive structural reform to encourage oil and gas investment to in turn stimulate higher production.

There is greater overlap in Kevin and Jayden’s conclusions than might appear at first glance. Both see Indonesia’s overall economic performance as a key motivator for action. History would support this view, expressed by the current administration’s articulate Minister of Finance as “good times lead to bad policy and bad times lead to good policy”. The difference in their view lies in the implicit timing, with Jayden believing the next government will be proactive in protecting targeted growth, while Kevin believes change will only be stimulated by an economic shock. Time will tell.

One area of oil and gas investment that seems set to receive greater support whoever becomes president is domestic participants. This is potentially a welcome source of investment, although it is not a singular solution and is unlikely to make material impact on such a significant (and expanding) energy shortfall. Domestic oil and gas participants naturally face balance sheet, funding and skill constraints in an industry that is highly capital and skills intensive and, for Indonesia, set to become even more so as the industry seeks resources in the more challenging eastern and deepwater areas of the country.

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