After 46 Years, Indonesia Bids Adieu to OPEC

♠ Posted by Emmanuel at 5/29/2008 12:36:00 AM
While not one of its original members, Indonesia was one of OPEC's earlier participants, having joined the producer's association way back in 1962. A lot has changed in the 46 years since Indonesia decided to join OPEC. Ecuador joined, left, and rejoined the organization (in 2007). Angola became a recent member. More pertinently, declining oil production in Indonesia meant that it went from being an oil exporter to being a net oil importer in 2005. Although it has already paid its OPEC membership dues of EUR 2 mio this year, it has signalled that it won't be paying up next year. It is, after all, against its interests to continue to support an organization which champions higher oil prices while the country is having trouble making ends meet by subsidizing the costs of fuel. However, there is less reason to feel to sorry for the country as it remains the second largest exporter of LPG and thermal coal. From the Financial Times:

Indonesia on Wednesday said it would withdraw from Opec at the end of this year because, as a net oil importer, its interests were no longer served by being a member of the oil producers’ cartel. Purnomo Yusgiantoro, energy and mineral resources minister, said Indonesia – the cartel’s only Asian member – would like world oil prices to fall while Opec’s 12 other members would like prices to remain high.

Analysts said the decision would have little effect on either Indonesia or Opec since Indonesia’s production, of about 1m barrels a day, was only 3.1 per cent of the group’s 31.9m b/d April output.

Mr Purnomo said Indonesia would like to quit now but since it cannot recoup its 2008 membership fees, it would remain active until its dues expire. However, he said Indonesia might follow the example of Ecuador, which left Opec in 1992 and rejoined last November.

Indonesia’s oil production peaked in 1976 and, after fluctuating for two decades, started to decline in 1995 due to aging fields and a lack of investment. It became a net oil importer in 2005. The energy ministry said production would average about 1m barrels a day while usage would be at least 20 per cent higher than this. Current reserves are 8.4bn barrels.

The country remains a net energy exporter due to its massive gas and coal reserves. It is the world’s second largest liquefied natural gas exporter and second largest exporter of thermal coal, which is used mostly for power generation. Mr Purnomo said Indonesia’s gas and 2008 coal production was expected to be equivalent to 1.5m and 2m barrels of oil a day, respectively.

Kurtubi, the director of the Centre for Petroleum and Energy Economic Studies in Jakarta, said Indonesia’s decision was appropriate in light of its net importer status but that it would have little impact on either the country or Opec. “It’s the right decision because Indonesia wants oil prices to fall to stop its state budget bleeding as much as it has been recently,” he said. “It will also act as a warning to the industry and society that the country must do something to increase production.”

Indonesia raised prices of subsidised fuels, which account for 95 per cent of consumer use, by an average of 28.7 per cent last Saturday. This cut its fuel subsidy bill by Rp35,000bn ($3.76bn), or about 20 per cent.

Mr Kurtubi said it would be at least 10 years before Indonesia recovered its net oil exporter status because the 2004 oil and gas law was less investor friendly than previous legislation. Oil companies are now taxed during the exploration phase in addition to the production period.

Bloomberg adds more colour to the story. An oft-heard refrain against the notion of "peak oil" is that there is still much to go around; instead, the problem is that much of the supply which can be tapped lies in countries that are not exactly welcoming multinationals with the best exploration and exploitation technologies. This holds to some extent in Indonesia as well, although it cannot be ruled out that it will return to OPEC in the future if and when it decides to start exploiting this resource on a large scale once more:

Indonesia, the only OPEC member in Southeast Asia, will pull out of the group as aging fields and declining production force the region's biggest economy to boost imports. Energy Minister Purnomo Yusgiantoro will sign a decree today to exit the Organization of Petroleum Exporting Countries, he told reporters in Jakarta. The nation, a member since 1962, has been considering leaving the body in the past three years.

Indonesia imports about a third of its oil and production has slumped 49 percent from a peak in 1977 partly as disputes with Exxon Mobil Corp. delayed field developments and deterred investments. Subsidies to cap domestic diesel and gasoline prices may exceed $13 billion this year as a lack of refining capacity forces the nation to import fuel.

``Indonesia no longer fits in as an OPEC member because it has become a net importer,'' said Julian Lee, a senior energy analyst at the Centre for Global Energy Studies in London. ``It won't affect OPEC's ability to put more oil onto the market if it chooses to do so.''

The withdrawal from OPEC will help the nation save 2 million euros ($3.1 million) on membership fees a year, according to Purnomo, who failed earlier this year to convince the group to increase oil output in order to lower prices.

OPEC members account for more than 40 percent of the world's oil supply. Crude production from the 12 members within its quota system declined 1 percent last month to 29.74 million barrels a day, according to Bloomberg estimates.

Indonesia's exit follows the addition of two members. Angola became an OPEC member in January 2007 and Ecuador rejoined the organization in December after a 15-year absence, swelling OPEC's ranks to 13. War-torn Iraq is the only OPEC member without a quota.

Crude oil prices have doubled in the past year to reach a record $135.09 a barrel in New York on May 22 as demand growth outstrips supplies. A weaker U.S. dollar has also prompted investors to buy commodities as a hedge against inflation. Oil for July delivery was at $127 on the New York Mercantile Exchange at 12:13 p.m. London time. OPEC Secretary General Abdalla el-Badri in Vienna had no immediate comment.

Indonesia's daily crude output has been less than 1 million barrels since February 2004, according to Bloomberg estimates. Production probably fell 0.9 percent to 859,853 barrels a day in April from March, oil and gas regulator BPMigas said April 29.

``If production comes back to give us the status of a net oil exporter then we can go back to OPEC,'' Purnomo said at the Jakarta Foreign Correspondents Club today. ``We are not happy with the high oil price.''

Indonesia raised fuel prices by almost 30 percent this month to reduce the government's subsidy burden of capping pump prices. Without the increase the government may have to spend 190 trillion rupiah ($20 billion) this year, more than the 126.8 trillion rupiah it had budgeted for 2008, before next year's general election.

``This move really plays to the domestic audience,'' said Tony Regan, an energy consultant with Nexant Ltd. in Singapore. ``How can they show concern about domestic oil prices and expect people to pay more at a time when they are also part of an oil cartel that is trying to push prices up.''

Indonesia produced an average 883,000 barrels of crude oil a day in 2006, while its consumption of refined oil products that year was 1.061 million barrels a day, according to the latest edition of OPEC's Annual Statistical Bulletin.

``For OPEC, the loss of the organization's only Asian member leads to the loss of an Asian perspective at meetings and within the secretariat,'' said Lee of CGES. ``It represents a narrowing of the group's geographical and ethnic outlook'' at a time when Asian demand is becoming paramount, though ties forged over 40 years won't disappear, he said. The last OPEC member to quit the group was Gabon, which left during 1994-1995.