Indonesia & Iraq: A Tale of Two Oil Producing Countries

Indonesia & Iraq: A Tale of Two Oil Producing Countries

By Tim Daiss & Michael Economides

Indonesia and Iraq’s oil trajectories have intersected: one going up, the other going down. While Indonesia, a one-time OPEC member, has seen its glory days fade as a major international oil player, Iraq is making a comeback, like a heavyweight boxer sidelined with injuries going back into the ring again for the title.

This played out late last month when Indonesia’s deputy minister for energy and mineral resources Susilo Siswoutomo said that the Iraqi government guaranteed a long-tem commitment to supply Indonesia with crude oil to meet its domestic needs.

Siswoutomo said that the Iraqi government is willing to supply Indonesia with an unlimited supply of crude oil. “There’s even a discussion to make this partnership last 50 years,” he added.

Siswoutomo said that Pertamina, an Indonesian state-owned oil and natural gas company based in Jakarta, had signed a memorandum of understanding (MoU) to secure 65,000 barrels per day (bbl/d) of Iraqi crude.

The deputy minister also said that Indonesia could obtain 300,000 bbl/d from Iraq just for the first stage of its refining development.

However the major hurdle for Indonesia’s struggling oil and gas sector is not one of supply but of infrastructure.

Dwindling oil player

The Southeast Asian country struggles to attract sufficient investment for infrastructure because of a complex regulatory environment. Consequently, the government is forced to re-orient domestic production away from exports to meet growing domestic demand.

In fact, Indonesia’s total primary energy consumption grew over 50 percent between 2001 and 2010, according to the US Energy Information Agency (EIA). Petroleum continues to account for the most significant share of Indonesia’s energy mix at just under 30 percent in 2011.

Indonesia’s economy grew at an average growth rate of nearly 6 percent per annum for the past five years. Yet infrastructure lagged behind at around 3 percent, well below most of Indonesia’s neighbors, according to the International Monetary fund (IMF).

In an effort to remedy the problem, the Indonesian government unveiled a new development strategy in 2011 (Master Plan for Economic Expansion and Acceleration 2011-2025) that emphasized more private sector involvement, including wider public-private-partnerships in the oil and gas sector.

However, many projects continue to experience delays as the government continues to struggle to attract enough investment to finance the new plans.

Commenting in January on the country’s oil and gas woes, the Jakarta Post examined Indonesia’s fall from oil and gas prominence, stating that the country needs to make a sharp political turn to save the future of its oil and gas industry.

After tracing Indonesia’s sharp decline in oil production since 1995 as well as the country’s decreasing oil reserves (Indonesia’s proven oil reserves have fallen much faster than any other country in the region. Indonesia’s proven oil reserves have fallen by 1.9 billion barrels since 1992), the article places the blame on policy makers.

“Policymakers need to create an attractive investment climate that is appealing to oil companies, both national and foreign so that oil companies are keen to invest their money and technology in Indonesia,” the article reads.

It adds that creating an attractive investment climate would include providing a transparent and stable legal framework, preserving the sanctity of contracts and reducing political distortions.

Iraq’s oil future seems limitless

While Indonesia is a diminishing oil player, Iraq is surging. Last year Iraq’s crude oil production approached its highest level in decades. The country’s oil production surpassed 3 million bbl/d in July 2012, the highest since the end of the Gulf War in 1991.

Unlike Indonesia, which struggles with attracting investment, direct investment in Iraq’s petroleum industry and export infrastructure helped to usher in much of those impressive gains.

Not only is Iraq producing oil at post-war levels, experts say that just a fraction of the country’s known fields are in development and Iraq may be one of the few places left where vast reserves, both proven and unproved, have not been fully explored.

Yet Iraq also has hurdles to overcome as well, including pipeline bottlenecks, export capacity limitations and on-going security issues.

Ironically (since it’s the West, mostly the US, that intervened in Iraq in the past 20 years) the lion’s share of new investment coming into the country is not Western, but Chinese.

Since most Western oil countries think Iraq is still too unstable, China is picking up the slack. It should be noted however that Western companies appear more interested in investing in Iraq’s semi-autonomous Kurdistan region, which poses less challenges than in southern Iraq.

On March 29, the Business Insider reported that China now controls many of Iraq’s newest fields and that one-third of future Iraqi oil production is expected to come from Chinese-owned fields.

The International Energy Agency (IEA) stated that a quarter of Iraqi oil, about 2 million bbl/d, will be heading for China by 2035. Fatih Birol, the IEA’s chief economist said that a new trade axis is being formed between Baghdad and Beijing.

As China has done in other parts of the world, including Nigeria and Sudan, it’s not afraid of going into politically unstable situations that frighten away more timid Western oil players.

It’s a win-win situation for both Iraq and China while the Middle Kingdom simply can’t ignore Iraq’s oil potential. In March, the Iraqi Oil Ministry said that the country would be able to export more than 7 million bbl/d in 2015 after construction is completed on offshore rigs at the end of the year.

While Iraq does hold promise for oil hungry nations like China and even struggling Indonesia, developments from the war-torn country can quickly dampen those hopes.

News broke on March 31 that an Iraqi suicide bomber drove an oil tanker into a police station in a central city, killing at least nine people and wounding 20. In light of this, its seems that both Iraq and Indonesia have their work cut out for their oil industries, while both have the capacity to chart their own course.

Michael Economides is Editor-in-Chief of the Energy Tribune