Former OPEC Member Indonesia Diversifies its Energy Matrix

Indonesia, which had begun producing oil in the early 20th century, had such substantial production that it was a major impetus for Japan invading the Dutch East Indies, as Indonesia was then known, in December 1941.

Over the last several decades the country has seen its production relentlessly slide, so much so that it left OPEC in 2008, seemingly confirming Marion King Hubbert’s “peak oil” theory.

But, rather than looking back, Jakarta is looking forward on a number of post-oil energy fronts. The archipelago is the biggest country in Southeast Asia and already a huge exporter of oil and liquefied petroleum gas (LPG) to Japan on long-term contracts, along with coal to China and India.

First, India’s leading private power producer Tata Power intends to invest heavily in a joint venture to develop a 240-megawatt geothermal project in Indonesia, along with its consortium partners, Australia's Origin Energy Ltd and PT Supraco Indonesia.

Despite the hazards of navigating Indonesian bureaucratic red tape geothermal energy is hardly a risky venture, as Indonesia has the world's highest number of volcanic hot spots.

Tata Power Managing Director Anil Sardana told reporters, "For the geothermal (project), the total cost is estimated to be about $850 million, out of which 30 percent is equity. So, it will about $240 million and out of that 50 percent will be from our side, the remaining 50 percent from Origin... So, it will be about $125 million (from Tata Power)."

And the Europeans are eyeing the world’s largest Muslim nation as well, beyond its traditional fossil fuels base.

According to Indonesian Trade Minister Gita Wirjawan, Germany is currently one of Indonesia’s biggest European export destinations. Indonesia’s exports to Germany during January-November 2011 were $4.2 billion, an increase of 19.6 percent compared to the same period in 2010. Most impressively, Indonesia runs a trade surplus with Germany, which in 2010 was $1.3 billion.

Which seems set to increase. During a recent meeting between Indonesian and German government officials, among the topics of discussion for future cooperation was the renewable energy sector. Among the Frankfurt presenters, representatives of several German and Hungarian energy businesses gave presentations on their work in Indonesia, including Benreg AG, which works with green energy and a Hungarian company collaborating with Indonesia’s state-run electricity company PT PLN to develop solar-generated electricity in remote regions of Indonesia.

And the government is strongly behind a transition towards renewable and cleaner energy. On 13 February President Susilo Bambang Yudhoyono said at a press conference that on 1 April, “We have to start the process toward energy conversion” from fuel oil to natural gas, a process that would unfortunately take some time.

On 13 February Salamander Bangkanai Energy, operator of the 1,750 square-mile Bangkanai Production Sharing Contract (PSC) on East Kalimantan, announced its plans to drill four development wells in its Kerendan natural gas field concession later this month. A drilling rig, having been refitted for high pressure-high temperature operations, is expected to be mobilized from Batam Island, Riau, to Kalimantan by the end of February and the development drilling will enable the Kerendan gas field to be put into production.

So, what does this mean for the future?

Last month Thomson Reuters StockReports+ reported that, “Indonesia's energy sector stocks look undervalued at current levels based on lowest Forward PGE (Price to Earnings Growth) data… Four out of the top five (Indonesian) companies with Forward PEG at discount to 5-year average are from the energy sector… Currently the energy stocks' forward PEGs are at huge discounts to their historical PEGs. If their forward PEGs return to historical form, the stock prices should increase.”

Apparently Wall St. is blessing Indonesia’s move away from a petroleum-based export economy to a more diversified energy export base, which includes renewables, including a field in which Indonesia could quickly be a world leader, given its geography – thermal power.

Accordingly, all that seems lacking to propel Indonesia’s transition to a post-petroleum energy economy is capital and some foreign expertise. It will be interesting to see who provides it.

By. John C.K. Daly of Oilprice.com