Election of new Indonesian president encouraging for foreign investment in energy and mining sectors

Jokowi Indonesian PresidentJoko Widodo’s victory over opponent Prawbowo Subianto in the Indonesian presidential election yesterday could mean increased activity in Indonesia’s oil and gas sector with the new President-elect indicating he would reduce red tape and fiscal impediments to the expansion of the sector in his country.
Joko Widodo, or Jokowi as he is known, is viewed as a more progressive and pragmatic politician than his opponent and someone more receptive to foreign companies operating in Indonesia.
Resources analysts, Wood Mackenzie, have released a statement saying that,  “Jokowi’s victory will generate short-term positivity for foreign companies looking to invest in Indonesia’s energy and mining sectors. However, the new government’s ability to implement reforms remains uncertain. A lack of a majority in the senate will weaken the government’s ability to push through all reforms required to reinvigorate the investment environment and contribute to a revived Indonesian economy.”
Wood Mackenzie says the significance of this political development for the mining, upstream oil and gas are far reaching: 
Jokowi could shift the regulatory environment towards being more accommodating of foreign investment and mining in general. Wood Mackenzie’s Senior Coal Analyst Rory Simington explains, “Mining-friendly regulatory change is possible, however it is likely to be incremental rather than exponential.” Implications for the mining sector are:
  • Current official policies are unlikely to be reversed. These include the ban on mineral exports, requirements for divesture of foreign ownership, and Coal Contracts of Work renegotiation.
  • The previous DPI-P led government of Megawati Sukarnoputri from 2001 to 2004 showed a willingness to appoint people from industry instead of politicians to prominent positions in key ministries. If the Widodo led DPI-P coalition government appoints a competent administrator with industry experience to head the Department of Energy and Mineral Resources, this could result in mining friendly changes to the regulatory environment.
  • 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. Any changes are likely to be incremental rather than exponential.
Upstream oil and gas
Wood Mackenzie believes the wider implications of the election result will be felt more in the oil and gas sector. Wood Mackenzie’s Senior Upstream Analyst, Andrew Harwood says, “At a time of growing domestic energy demand, declining indigenous production, and after several years of regulatory instability, the government’s ability to implement Jokowi’s proposed reforms will be key.” Implications for the upstream sector are:
  • Indonesia’s crude output has fallen from over 1 million barrels per day in 2005 to currently just over 800,000. The domestic fuel subsidy bill is approaching US$21 billion (bn) in 2014, and regulatory uncertainty has stalled several major investment projects, such as Chevron’s Indonesia Deepwater development, Inpex’s Abadi FLNG and BP’s Tangguh expansion.
  • Jokowi 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.
  • 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.  The sanction of Chevron’s Indonesia Deepwater development, Inpex’s Abadi FLNG and BP’s Tangguh expansion could generate over US$30bn of new investment in Indonesia’s oil and gas sector.
  • While we would expect PERTAMINA to play a greater role in Indonesia’s upstream sector under Jokowi, the new president also recognises the benefits of working with international investors to secure technological know-how as well as investment.
  • Overall, Jokowi’s victory will generate short-term positivity in the energy sector. However, the new government’s ability to implement the proposed reforms remains uncertain.
Fuels market
Sushant Gupta, Head of Asia Pacific Downstream Research, says, “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$120bn, assuming current domestic prices in Indonesia. This accounts for around three-percent of GDP and is therefore unsustainable.” As a result, Wood Mackenzie expects Jokowi’s government to make changes:
  • The government is expected to push through further price reforms, which will impact near-term demand. However, the income-effect prevails in the medium term and will drive demand growth.
  • If subsidies are sharply reduced, we could see a demand drop of around 60-70 thousand barrels per day (kb/d) in gasoline and 45-50 kb/d in diesel.
  • The current market size of unsubsidised retail fuels (gasoline and diesel) is very small; however, there is a huge upside potential if the government fully deregulates the market. 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.


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