The future is looking grim for foreign resource companies with investments in Indonesia. In the current election cycle, it has become increasingly politically popular to push for repatriation of the country’s vast wealth of natural resources.
The California-based Chevron Corporation is just the latest in a rapidly expanding list of companies to lose lucrative contracts to an Indonesian state-run company. State-owned Pertamina will be taking over operations of the Rokan oil block on the island of Sumatra, the nation’s second largest crude producing oil field, as soon as Chevron’s contract expires in 2021. Under the current agreement Pertamina will retain control until 2041. Chevron had pursued a 20-year extension of their Rokan project, which they have been running uninterrupted since 1971, when they were outbid by Pertamina.
Indonesian President Joko Widodo has stated on his Instagram account that Pertamina’s takeover of the Rokan oil block will put the state-owned company on par with the world’s top oil companies by 2021, when it gains 60 percent of Indonesia’s total oil and gas production. Earlier this year Pertamina also secured expiring contracts for Indonesia's largest natural gas project, previously held by Total SA of France and Inpex Corp of Japan.
President Widodo is currently seeking re-election for a second five-year term, and he has been pushing the nationalization of resources hard in the run-up to election day in April 2019. It is expected that greater domestic control over Indonesia’s trillion-dollar economy and a general spirit of economic nationalism will continue to be a primary focus of his platform. Related: Is This The Most Important Geopolitical Deal Of 2018?
Despite the popularity of the movement, so far economic nationalism hasn’t paid off for Indonesia in any literal sense of the phrase. Pertamina greatly outbid Chevron on the rights to Rokan at a time when the bloc is serving up diminishing returns--crude oil drilling by Chevron Pacific Indonesia reached only 207,148 barrels per day in the first half of 2018, noticeably below their target of 213,551 bpd--and despite all the recent acquisitions Indonesia still has not achieved its H1 financial goals. In fact, they missed them by a mile. The country’s investment target was set at $14.2 billion, but figures show that Indonesia reached just $3.9 billion in the first half of the year.
These figures highlight what a gamble Indonesia is taking with their aggressive economic nationalism movement. With underwhelming payoffs and a struggling economy plagued with underemployment and flat-lined consumer spending, among other difficulties, Indonesia may want to think twice about burning its international bridges. Many long-standing and lucrative foreign relationships are at risk of being alienated to the point of no return if Indonesia continues to turn its back on the global market.
No matter how you slice it, politically popular or no, economic nationalism has put Indonesia in a bit of a financial bind. Reviewing the H1 results, it certainly looks like Pertamina has taken on more than they can handle, but of course they are quite unlikely to get any foreign money without ceding control of production. The Indonesian government, to their credit, is already making some course corrections, including a planned budget cut of up to $1 billion dollars in Rokan. Related: Iran’s Latest Tactic To Save Market Share
It bears reminding that nationalization is not a bad word. Despite all the well-founded fears for Indonesia, economic nationalism is not necessarily a bad thing. In fact, state-owned companies played an absolutely key role in building up the Indonesian economy after 300 years of Dutch colonial rule. The nature of Indonesia, with 18,000 distinct islands spread across two oceans (Pacific and Indian), and the fourth largest population in the world, presents unique challenges when it comes to evenly-spread economic development.
Despite significant challenges, Indonesia boasts Southeast Asia’s largest economy, and compared to many other nations with a history of colonization, is doing quite well for itself. If Indonesia can overcome this rough patch (and yes--it’s a big if) and secure the returns that foreign investors have been enjoying for nearly a century, it could be an incredible success story and a source of inspiration for the many resource-rich, cash-strapped developing countries around the world.
By Haley Zaremba for Oilprice.com
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