(EnergyAsia, July 25 2014, Friday) — The election of Joko Widodo as Indonesia’s new president and Jusuf Kalla as vice president is potentially good news for Southeast Asia’s largest economy, particularly its energy and mining sectors, says UK consultant Wood Mackenzie.

As a more progressive and pragmatic choice than his opponent, Prawbowo Subianto, Widodo’s victory will at least generate short-term positive sentiments for foreign companies looking to invest in Indonesia’s energy and mining sectors, said Wood Mackenzie.

Longer term, however, it said there are doubts about the new government’s ability to make the economy more investment and business friendly due to its lack of a majority in the senate to implement reforms.

Upstream oil and gas

Wood Mackenzie believes Indonesia’s upstream oil and gas sector will be the most impacted by the arrival of the new regime at a time of growing domestic energy demand, declining indigenous production and years of regulatory instability.

The company’s senior upstream analyst, Andrew Harwood, notes that Indonesia’s crude output has fallen from over one million b/d in 2005 to just over 800,000 b/d today while the domestic fuel subsidy bill is approaching US$21 billion in 2014 and regulatory uncertainty has stalled several major investment projects.

He predicts the new government could help trigger over US$30 billion of new investment in Indonesia’s oil and gas sector by sanctioning Chevron’s deepwater development plans, Inpex’s Abadi FLNG and BP’s Tangguh expansion that have been delayed by regulatory uncertainty.

“Widodo has outlined plans to reduce Indonesia’s reliance on oil imports by developing new gas infrastructure and accelerating the switch to gas. He aims to boost oil and gas output by providing enhanced fiscal terms for mature fields and exploration, and removing red-tape, which would also apply to the mining sector,” said Mr Harwood.

He believes a revision of the 2001 Oil and Gas Law and formalisation of the upstream regulator’s role is a longer term objective that would enhance the investment environment by removing regulatory uncertainty.

While state energy firm Pertamina is expected to play a greater role in Indonesia’s upstream sector, Mr Harwoood said the new President also recognises the benefits of working with international investors to secure technological know-how as well as investment.

Mining

The new President could shift the regulatory environment towards being more accommodating of foreign investment and mining in general, said Wood Mackenzie’s senior coal analyst Rory Simington.

“Mining-friendly regulatory change is possible, however it is likely to be incremental rather than exponential,” he said, with existing official policies likely to remain including the ban on mineral exports, requirements for divesture of foreign ownership, and the renegotiation of coal contracts terms.

If the Widodo-led DPI-P coalition government appoints a competent administrator with industry experience to head the Department of Energy and Mineral Resources, Mr Simington believes it could result in mining friendly changes to the regulatory environment. He observed that the DPI-P led government of Megawati Sukarnoputri from 2001 to 2004 had appointed industry experts instead of politicians to prominent positions in key ministries.

“Based on discussions with industry contacts in Indonesia, we believe that changes could include easing of foreign investment divesture requirements, and reducing minimum levels of purity that must be achieved for metals refining before export is allowed,” he said.

Fuels market

Wood Mackenzie expects the Widodo government to push through price reforms that will slow down near-term demand, but will boost medium-term demand due to income-enhancing effect of the reforms.

“Subsidies are a huge burden to the government because around 60% of the total oil demand is subsidised. During the period of 2014-2020, we estimate the total fuel subsidy bill to be around US$120 billion, assuming current domestic prices in Indonesia. This accounts for around three-percent of GDP and is therefore unsustainable,” said Sushant Gupta, Wood Mackenzie’s Head of Asia Pacific Downstream Research.

“If subsidies are sharply reduced, we could see a demand drop of around 60,000 to 70,000 b/d in gasoline and 45,000 to 50,000 b/d in diesel.”
If the government fully deregulates the market, he expects “huge upside potential” in the demand for unsubsidised retail gasoline and diesel from its current “very small” base.

“This would provide a good market opportunity to foreign players operating in the unsubsidised retail fuels market or new players looking to invest in refining and retail sectors in Indonesia,” said Mr Gupta.