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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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OPEC’s Newest Member That Actually Likes Low Oil Prices

As expected, OPEC’s decision to stick to its ‘high’ production levels in its December 4th meeting in Vienna didn’t go down well with the markets as oil prices plunged after the announcement.

It is also quite evident that there is now a growing resentment within OPEC as members like Venezuela, Libya, Algeria and Angola were hoping for a production cut, which could have helped their ailing economies.

But in another interesting development, OPEC announced the re-entry of Indonesia into the oil cartel. Many experts consider this to be an unusual move as Indonesia is a net importer of oil and consumes almost double of what it produces, much unlike any other OPEC members. In fact, Indonesia’s OPEC membership had come to an end in the year 2009 when its crude oil imports far exceeded its crude oil exports. So why was OPEC, which is dominated by the likes of oil exporters such as Saudi Arabia and UAE, so keen to reinstate a member that prefers the oil price to remain low? Related: Tick Tock: Time Running Out for Struggling Oil and Gas Drillers

Why does OPEC need Indonesia?

It makes commercial sense for OPEC to invest in Indonesia from a long term perspective as Indonesia’s demand for energy is growing faster than most of the other Asian economies. As OPEC members scramble hard to find new markets for its crude oil, Indonesia is slowly but steadily emerging as one of the hottest energy markets in Asia. Related: Why Texans Might Soon Be Driving On Mexican Gasoline

Following a series of scandals mainly due to internal corruption, red tape and an uncertain business climate, the government of Indonesia is now trying hard to revive its ailing oil and gas sector and is looking to find new investors for upgrading both its upstream and downstream sector. The country is set to offer 21 oil and gas blocks (both conventional and unconventional) through an open tender in 2016. Indonesia has missed its 2015 oil production target as project delays resulted in more than 10 companies revising their production targets, as reported by The Jakarta Post. Oil giants like Chevron, Total, Conoco Phillips, BP and ExxonMobil are already present in Indonesia with Chevron being the largest producer of oil in Indonesia as on 2013

Saudi Aramco plans to invest big time into Indonesia’s downstream sector

Saudi Arabia, the unofficial leader of OPEC, sees tremendous business opportunities in Indonesia as it has already announced its plans to invest in the Southeast Asian nation. Saudi Aramco has signed an initial agreement with Indonesia’s PERTAMINA for a joint upgrade of the Cilacap Refinery located in Java province, Indonesia. This would enable the refinery to produce close to 370,000 barrels per day from the current capacity of 348,000 bpd.

This collaboration would also include an agreement that would enable Saudi Aramco to export its crude oil to the Cilacap refinery. "Indonesia is an important country for Saudi Arabia, a rising global economy; we would like to be a part of the growth of Indonesia," said CEO of Saudi Aramco, Amin H Al Naseer. Related: This Suggests An Oil Price Recovery Might Be On Its Way

Apart from this, Saudi Aramco is also looking to bid for the upcoming new refinery project in Indonesia’s east Java region. Moreover, Indonesia’s energy minister Sudirman Said had visited Iran in October this year for exploring any potential collaboration on energy investments with the Middle East. “We will work hard not only in high level meetings, but also on operational level to bring about the mandate of the President (Indonesia’s) to professionally package any investment information given to Middle East countries such as Saudi Arabia, United Arab Emirates, Qatar, Oman, Iraq, Iran and other countries to realize a high level agreement among the Head of States,” Energy Minister Sudirman Said stated before his visit to Iran. Indonesia now plans to buy Iranian crude once the western sanctions against Iran start get lifted from early 2016.

Conclusion

It is pretty clear that OPEC needs new markets while Indonesia needs to attract more foreign investment. Indonesia’ re-entry into oil cartel could thus be a win–win proposition for both OPEC and Indonesia. Moreover, OPEC members have been at loggerheads with each other over the appointment of a new Secretary General and have been blocking any new candidates from Iran, Iraq and Saudi Arabia. Indonesia’s inclusion into OPEC could bring a factor of ‘neutrality’ and remove any political rivalry when it comes to appointing a new Secretary General.

By Gaurav Agnihotri of Oilprice.com

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