Friday, July 27, 2007

[PBN] Indonesia risks going green


By Bill Guerin

JAKARTA - Indonesia is now formally on the vanguard of the global green
energy movement. A new energy law approved last week aims to reduce
significantly the economy's dependence on imported refined oil while
boosting the use of other energy sources, including natural gas,
biofuels and geothermal supplies.

The law mandates the establishment of a National Energy Board, chaired
by the president, which will carve out policies and oversee development
in the energy sector. The new law also stipulates that a strategic
reserve in both conventional fossil fuels and renewable energy
resources, such as bio-diesel, will be maintained and penalties will be
imposed on industrial energy users who ignore conservation. Those who
promote it, on the other hand, will be given incentives.

The new scheme includes a dramatic altering of the national energy-use
mix, with renewable energy sources, currently 5%, accounting for more
than 17% of total supply by 2015. Over the same period, the use of oil
is scheduled to be reduced from 52% to 20% and alternative fossil fuels
such as natural gas and others to more than 60%.

While earning a US$1.36 billion surplus in crude-oil trading last year,
at the same time Indonesia net-imported $8.66 billion worth of refined
oil products. That energy trade deficit resulted in the government
paying Rp60.5 trillion ($6.6 billion) in fuel-price subsidies.

The new policy includes incentives, such as government financial
assistance, for private and state companies involved in the distribution
and utilization of renewable energies, including biofuels. That's
potentially good news for the foreign investors and politically
connected local companies that have recently piled into biofuel
production, including state-owned oil-and-gas utility Pertamina.

Pertamina currently has an in-country monopoly on biofuel distribution,
but has run up heavy losses because biofuel is still more expensive than
subsidized gasoline and diesel at the pumps. As global oil prices hit
new 10-month highs of about $75 per barrel, Indonesian policymakers are
keen to reduce the national fuel bill and move toward more energy

But questions abound about whether the enforced use of more
environmentally friendly energy sources makes economic sense. Indonesia
is close to overtaking Malaysia as the world's largest producer of crude
palm oil (CPO), the most commonly used feedstock for bio-diesel, the
biofuel that is blended directly with conventional petroleum-based diesel.

The yield from Indonesia's CPO plantations is way ahead of most other
tropical biofuel options, including coconut and castor oil. Yet biofuel
is viable only as long as global crude-oil prices stay above $60 a
barrel, economists say. If prices were to return closer to their
historical moving average, the biofuel drive's economics would be dubious.

Not only does the long-term sustainability of biofuels depend primarily
on the future price of oil, but biofuel production is also potentially
destructive to the environment through clearing pristine tropical forest
areas for plantations.

The threat of food insecurity is one that haunts Indonesia perhaps more
than any other country in the region. Domestic cooking-oil prices have
this year risen by almost 30% after an 80% rise in CPO futures offshore.
Indonesian CPO producers are understandably chasing profits abroad,
despite a government bid to stabilize domestic cooking-oil prices
through an export-tariff increase of more than 400% imposed last month
on CPO and related byproducts.

Meanwhile, nationalist sentiments are gaining ground that foreign
companies are disproportionately profiting from Indonesia's natural
resources. Those sentiments are expected to be a major factor in the
run-up to general elections, which are scheduled for 2009.

However, anti-foreign rhetoric also helps mask the reality that while
major foreign investments have recently piled into biofuels, politically
connected local companies are grabbing ever larger chunks of the
country's energy business, particularly in biofuels. Analysts say that
helps to explain the substantial financial assistance for companies
involved in the distribution and use of renewable energies included in
the new energy bill.

Major investments aimed at leveraging existing green energy incentives
and policies had already piled into the CPO plantation sector and
processing facilities. The biggest Indonesian biofuel deal to date,
worth $5.5 billion, was struck in February among Sinar Mas Agro
Resources and Technology, a subsidiary of the Sinar Mas Group, China's
state-owned oil company CNOOC (China National Offshore Oil Corp), and
Hong Kong Energy.

Still, there are several significant barriers to boosting
renewable-energy use and promoting energy conservation. Among them are
the high costs of investment, the lack of an efficient distribution
infrastructure, and the sea-change in consumer attitudes required to
persuade Indonesians to care about saving energy. These factors,
analysts say, could all slow the government's ambitious new
alternative-energy targets.

Despite declining production, the oil-and-gas sector is still a key
contributor to national coffers, particularly when world oil prices are
high. Oil and gas revenues made up about 23% of total domestic revenues
for 2006, according to data from Bank Indonesia. All told, oil and gas
revenues, including income from oil and natural-gas exports, royalties
and taxes, reached $22.5 billion, up 17% from a year earlier.

Yet the downside of higher oil prices is that they cost Jakarta more in
fuel subsidies and in the substantially higher prices the country must
pay for imported fuel products. These subsidies, as well as being a
burden on the Indonesian taxpayer, encourage wastage of energy and work
at cross-cutting cleavages with the energy-conservation cause.

About Rp42 trillion was allocated in 2006 to subsidize the price of 10
million kiloliters of kerosene, the average level of national annual
consumption for household use. A government report issued last year
concluded that 83% of direct fuel subsidies were enjoyed by the 60% of
Indonesians in the highest income group, while only 40% of the lowest
income group received only 17% of the calculated benefit of these subsidies.

Energy subsidies for the poor, including for cooking fuel and public
transport, will be continued under the new law. While using oil
subsidies as a crude vote-buying technique is nothing new, President
Susilo Bambang Yudhoyono won widespread praise among economists in 2005
for making some of the biggest cuts in energy-price subsidies in global
economic history.

Yet the marginal impact on the poor of the rising prices that followed
subsidy cuts was a sharp blow to confidence in his government's promise
to reduce poverty rates substantially. The new energy bill and its
stated aim to green Indonesia are unlikely to deliver big economic
benefits any time soon, particularly considering the apparent flaws in
the policy.

Last year the government said no more subsidy cuts were planned at least
until the end of this year. Yet the temptation for populist measures
ahead of what are expected to be hotly contested 2009 polls is likely to
become increasingly acute. Those political realities could still result
in a swing away from the government's new alternative-energy commitments
- despite its progressive intentions.


Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000,
has been in Indonesia for more than 20 years, mostly in journalism and
editorial positions. He specializes in Indonesian political, business
and economic analysis, and hosts a weekly television political talk
show, Face to Face, broadcast on two Indonesia-based satellite channels.
He can be reached at

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