The Role of Oil and Gas Industry in Indonesia

Oil and gas industry in Indonesia has been starting since 1900 and still continuing until
today. Back then before 2000, Indonesia energy consumption based on oil had been so prevalent
that it was considered as the backbone of Indonesia economy. It was estimated that more than 70%
Indonesia income were coming from oil and gas exploitation.
Unfortunately, the oil and gas industry currently isnt the majority of Indonesia revenue
anymore. The production of oil has been steeply declining, whereas the gas production may be at
the peak right now.

Even though it is declining, oil and gas industry still possess a great role in Indonesia
economy. The role of oil and gas industry can be divided into two major segments. First internal
and external role. As internal contribution, oil and gas industries can be divided into six
segments. Internal role of it lies on establishing the foundation structural economy to build
welfare for society. It comprises of fiscal contribution, job creation and skill building,
infrastructure investment, social and community benefits, environmental preservation and
backbone of Indonesia development.
First, fiscal contribution.
Indonesian oil and gas sector on a regular basis a significant contribution to the Indonesian
economy through the world's export earnings and foreign exchange reserves. However, its
contribution has been declining over the last decade in terms of percentage to Indonesia GDP.
 Percentage of Oil and Gas Income Over
30.0
Indonesia's GDP
25.0 24.8
21.0 21.6
Percentage, % 20.0
17.6
15.0 14.8 15.3 16.0 15.4 14.1 13.7

10.0

5.0 4.4 3.8 3.6

-

Year

Acceptance state one of which comes from non-tax revenues (non-tax), which includes
revenue from the oil and gas sector. Based on the results of recapitulation, the ratio of oil and gas
revenues to the state budget dropped dramatically from 2006 to 2017. The peak ratio was in 2006
with a percentage of 24.8% (nearly a quarter of state revenues from oil and gas) and the lowest in
2017 (draft) 3.6%. This is because the production and price of oil and gas continues to decline.
Here is a graph of oil and gas revenues.

Income from Oil and Gas

250
Income, Trillion Rupiah

200
211.6 205.8 203.6 211.7
193.5

150 158.1 152.7

124.8 125.8
100 103.8
78.2 68.7
63.7
50

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Year

This decrease is due to the world oil and gas prices which dropped significantly after the
year 2013 experienced an increase in the height ranges 110 US $. If seen from their constituent
components, the manufacturing industry, trade and agriculture, is still the largest contributor to
Indonesia's GDP. However, this figure is certainly not showing the overall role of the oil and
gas sector for the economy, since oil is also a driver of other sectors, especially the
manufacturing industry, transportation, electricity, and so on.
 Final energy consumption by type, during the years 2000- 2014, was dominated by oil
fuel (gasoline, diesel oil, IDO, kerosene, fuel oil, avtur and avgas) but with the lowest growth
compared to other energy. During this period, the total oil fuel consumption increased from 315
million BOE in 2000 to 308 million BOE in 2014, rose with average of 0.18% per year.
Consumption of natural gas in period 2000-2014 increased with an average growth of 2.6% per
year. The small growth of natural gas consumption as final energy was caused by the limitation
in national gas network infrastructure.

Second, job creation and skill building.

Oil and gas possess role in providing jobs directly and indirectly attributable to its industrial
operations. Drilling operations doesnt only unleash opportunity for petroleum engineer, but
also those related to supporting activities and forward activities.
To quantify the number of jobs created by oil and gas industry, we can utilize input
output analysis. Measuring economic impact can be done using operational impact and capital
investment impact analysis. Operational impact calculates the ramification of economy due to
purchases of intermediate input and payments of labor compensation. Capital investment
impact measures the impact due to its investment in new structures and equipment.
To look at that, we are going to break down the oil and gas industry into three sections,
which are upstream, midstream, and downstream. After that we are going to scrutinize the
derivative industry that desperately require input from oil and gas industry.

Scope Activities Industry related

Upstream Exploration, drilling and productionElectricity, transportation,
logistics, engineering
procurement and construction
Midstream Oil and gas processing, storage and Construction, transportation,
transportation such as piping, LNG, oil refinery manufacturer,
CNG pipeline manufacturer,
equipment such as compressor
and pump manufacturer
 Downstream Oil refineries, petrochemical plants, Construction, transportation,
petroleum product distributors, retail logistics and supply chain,
outlets and natural gas distribution. chemical product, cement,
fertilizer, steel

Oil and gas industries and its derivative industries carry impacts to Indonesia through
the creation of workforce and supply chain development.
1. Creating workforce development
The existence of oil and gas industry in certain area could create workforce for local
communities and suppliers. For example, more than half of BP workforce in Tangguh is
Papuan. This is a direct result of internship and apprentice programs that focus on training
graduates from Papua and Papua Barat. BP, as the leading oil company in that area, is
committed to reaching an 85% Papuan workforce by 2029. As part of BP development,
they have set a target of sourcing 38% of their services and project materials from local
suppliers.
This is just one sample case from BP, fortunately, there are a lot of oil company
resulting the same thing. Area such as Arun, Rokan, Cepu and Balikpapan has been
undergoing the same massive job opportunity since the production of oil and gas in that
location.
2. Supply chain development
Oil and gas industry also provides raw materials needed for others industries as their
feedstock to be further processing, such as petrochemical (polymer and fertilizer industry),
steel, and electricity industry.
Fortunately, more than 50% supply chain development will be felt by local
businesses. Why? Because based on the regulation created by industrial minister, there are
requirements regarding the minimum level of local content used on the oil and gas industry.
This directly affect more local procurement company exist to supply equipment to oil and
gas. Not only sales, but also job opportunity will be affected by this industry.
Oil and gas industry local content from 2006 until 2015

Source : katadata.com
According to data published by Katadata, one of the leading oil and gas news
provider, since 2006 until now, the achievement of Domestic Component Level (DCL) has
been constantly increasing. In 2006, the use of domestic components in the upstream oil
and gas reached 43 percent. As for 2015, the use of domestic components to June reached
 67.71 percent. This exhibit shows the fact that the benefits of the presence of upstream oil
and gas industry in Indonesia can be also felt by the majority of domestic business, either
directly or indirectly.

Third, infrastructure investment.

The industry attempt to create broader societal benefits from its infrastructure investment
in road, power, water and CSR. When the project of development reaches the exploitation
phase, it will not stand by itself. For example, during field development, company improves or
even opens new road to ease the transportation of drilling logistics. For large project in the
frontier area, the construction can be more massive. Gas exploitation on Masela is projected to
be build based on onshore liquified natural gas (OLNG), however, the infrastructure in the
targeted isle is not ready yet. Thus, the building OLNG will include building other supporting
infrastructure such as road, accommodation, harbor and other supporting infrastructure. Those
infrastructures also open up new investment opportunity for motel, restaurants and small
medium enterprises to appear nearby the location.
Fourth, social and community benefits.
Oil and gas industry also contribute on developing the local community nearby. It
contributes to local communities through health sector such as public health center
establishment, health counseling for local communities, and public medical check-up in line
with the effort to reach out to communities in remote areas where the health services are lacking.
It also exposes the local community to education intensively through its corporate social
responsibility program. Education program delivered may encompass from school and
education facilities renovation for the children near the exploitation site. It also opens greater
opportunity for youth to achieve higher education by providing scholarship. The impact doesnt
halt only near the location. Companies also invest some parts of their profits for elevating
academics through procurement of laboratory equipment and students competition.
In terms of economic sustainability, it provides local community with skill training to
empower indigenous business to enable the economic sustainability in the future the moment
the company left the site.

Fifth, environmental preservation.

Oil and gas also contribute on environmental preservation through its perpetual
environmental research and development. The industry boost its R&D sector to find feasible
technology to minimize associated air, land and water pollution and to reduce waste and
preserve biodiversity.
The invention of technology is highly related to usual problem that oil and gas perceived
to be responsible of. One of the notable environment invention is carbon capture and storage,
which allow pollutant such as carbondioxide to be stored in underground formation. The
technology also provides solution for the global warming specter and improve air quality.
The increasing of hazardous and toxic waste (B3) uses also encourage oil and gas industry
to find the righ solution. It spends a lot of money to finance R&D for treating waste generated
or waste that has been exposed to the environment.

Sixth, backbone of Indonesia development.

 Based on Indonesia energy outlook, the consumption of energy is divided into five
major sectors, which are industrial, transportation, household, commercial and others. From
2000 until 2014 Indonesia energy consumption was still dominated by oil and gas. Both of
energy accounts for more than almost half energy sources. In 2014, oil, as the number one
final energy consumed by society, accounts about 32% final energy consumption. It is
followed by coal (23%) and then gas (13%).
The statistics shows that Indonesia heavily rely on oil and gas energy and continue to
have the same trend for decades ahead. That energy, as mentioned before, is used to fuel the
activity encompassing from every stakeholder starting from household and big industry. The
majority of the gas produced by Indonesia is bought to generate electricity for millions of
homes.
1. Transportation
Transportation is one of the key sectors in supporting all energy users.
Therefore, energy demand of transportation sectors is not only affected by population
growth and social welfare, but also affected by the development of agriculture,
construction, commercial, and industrial sectors. Without transportation, none of
economic activity will run.

Today, transportation sector is still dominated by oil fuel-base technology. Oil

and gas have positioned themselves as the blood of economy. If we look at the
graphics, we can see transportation heavily depends on oil. It will continue similarly
in the future, assuring oil as the backbone of the economy.
2. Industrial
The utilization of processing technologies, such as boilers, furnaces, and
motors require large amount of fuel and causes industrial sector has the largest
demand of energy. Due to good efficiency of gas, the share of gas will increase over
time. If the natural gas infrastructure such as gas pipelines has settled, this number
will grow exponentially both as energy or input materials.
 3. Household
Oil and gas industry also penetrate the smallest entity which is household. Based
on the data, about half of energy consumed by household is directly supplied by LPG.
This number will continue to increase in terms of amount, hand in hand with the
government policy pertaining kerosene to LPG conversion.

The external role of oil and gas industry related to energy security.
The increasing of Indonesia oil consumption and by the same time the decreasing of
Indonesia oil production bring impact to national energy security. In the other hand, we also
notice that oil market is really unstable, price can go high and low frantically starting due to
geopolitics affairs such as war in the middle east or another supply disruption.
Understanding the strategic value of oil and gas, its industry in Indonesia should have
more burden to maintain a sufficient production to power Indonesias economy. Their role is
 so crucial because almost all of the activity requires oil and gas as the fuel encompassing
household, transportation, industrial and electricity generation.
The government has been long ago fathom this strategic value, that is why they put a lot
of attention to improve oil and gas production. It begins with restructuring the oil and gas fiscal
system from PSC to Gross Split to provide a better incentive to drill the frontier area, and even
the technical stuff such as spending research and development on Enhanced oil recovery to tap
the untapped oil before.

Tolong put conclusion yaak

Reference:
http://www.kemenkeu.go.id/Publikasi/informasi-apbn-2017
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K+ENERGI+2016&item=BPPT++Outlook+Energi+Indonesia+2016.pdf&order=name&srt=yes
&lang=en
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