indonesian oil back on track?

This article is a few weeks old, but pertinent.
R,

Indonesian Oil Back On Track?
May 17 2005 - Australasian Investment Review – (AIR)

Despite being a member of the Organisation of Petroleum Exporting Countries (OPEC), Indonesia has been a net oil importer since 2004, analysts at Singapore-based DBS Research say, amidst falling production and rising domestic consumption.

"The dismal performance of the Indonesian oil industry can be attributed to the lack of fresh investment and a sustained boom in oil consumption," the analysts say.

However, the new Indonesian administration has begun to implement supply and demand side measures to address the oil issue, which has exerted pressure on the government’s budget as well as on the rupiah, and the analysts are encouraged by the steps taken so far as they are seen as reflecting some urgency attributed to the issue.

On the supply side, incentives have been granted to lift production in marginal oil fields and additional schemes have been implemented to boost production from ageing fields, the analysts say.

"More blocks have been put up for tender for exploration, with attractive contract terms. Fast tracking of dispute settlement is also gaining momentum," the analysts say, "with the president imposing a deadline for the resolution of the Pertamina versus ExxonMobil saga over the Cepu block," a major Indonesian oil field.

On the demand side of the problem, the government raised fuel prices in March, with the analysts seeing more price rises as possible if fuel prices continue to soar.

On DBS’ calculations, if domestic fuel prices are gradually brought into line with market prices, demand could be reduced by as much as 35%.


In addition to this, the government is implementing an alternative energy policy to boost demand for gas and coal. This said, the analysts don’t expect Indonesia to cease being a net oil importer until 2008.

"The worst is not over for the oil industry, as the ongoing decline in production will continue in 2005 before moving to an upswing only in late 2006," the analysts state.

Over the coming five years consumption is expected to moderate, in part due to higher fuel prices and the larger contribution from alternative energy products.

However, the macroeconomic impact of this is not expected to be as pronounced as it was in the past, the analysts say.

"Indonesia has been gradually diversifying away from oil, and thus limiting its vulnerability to any structural weakness in the domestic oil sector."

Oil revenue now only accounts for 9.8% of exports, compared to 2003’s 12.5%.

Given this diversification, the slow turnaround in the oil sector is not expected to have a material impact on GDP growth, the trade balance or the fiscal deficit, the analysts say.

As such the analysts are maintaining their overweight call on Indonesian equities, and GDP growth is expected to come in at a better than expected 5.8% for 1Q05. DBS’s full year GDP growth forecast of 5.6% remains intact.

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com