What you need to know
Oil Price columnist, Gaurav Agnihotri, notes that Indonesia needs more foreign investment, and OPEC also has to access new markets. Therefore, Indonesia's return is a win-win strategy.
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After OPEC reactivated Indonesia’s membership last month, oil companies have accelerated their paces in investing in the country. In addition to state-owned Saudi Aramco signing a preliminary agreement with Indonesia’s biggest oil and gas company, Pertamina, to jointly venture a refinery located outside Java, Exxon Mobil has announced that it will begin productions in the Banyu Urip oilfield in East Java. It’s estimated to increase Indonesia’s daily oil exports to 13 million barrels per day.
Oil production is not the main reason OPEC has allowed Indonesia to return. According to the International Energy Agency (IEA), this year Indonesia’s daily oil production is 85 million barrels, but its daily consumption is 164 million barrels, which will make it hard for Indonesia to remain a net oil importer. Indonesia’s Governor for OPEC, Widhyawan Prawiraatmadja, says that stabling the oil supply to support the rising domestic demands is the main reason Indonesia has decided to return to OPEC.
Oil Price columnist, Gaurav Agnihotri, also notes that Indonesia needs more foreign investment, and OPEC also has to access new markets. Therefore, Indonesia’s return is a win-win strategy.
However, Indonesia’s return will partially affect some OPEC members’ plan to cut production to boost the oil price. Despite Indonesia’s current daily oil production ranking only 13th among the OPEC member countries and not being a net exporter, its joining will provide countries that disapprove cutting productions reasons to raise the organization’s total oil production. Saudi Arabia is one of the countries that oppose cutting productions.
Energy analyst at Bernstein, Neil Beveridge, points out that Saudi Arabia has a stable high oil production, and it attempts to curb the oil industry’s excessive investments in the recent years through lowering the price to balance the oil market.
Therefore, Indonesia’s return plays a significant role in Saudi Arabia’s oil strategy. After it stopped playing a role similar to the oil market’s central bank, Saudi Arabia started a cut-throat price competition against the US’s shale oil, hoping to defeat the high-costing shale oil with cheaper oil prices and curb the development of alternative energy and energy saving technologies.
The lower oil price also goes along with Indonesia’s current interests. Last week, Prawiraatmadja said that if Saudi Arabia and other low-cost oil exporters cap on their oil production of low-cost, they are actually making high-cost oil producers produce oil. This is inconsistent with the logic of economics. He further proclaimed that Indonesia would not support any policy of OPEC that aims to increase the international oil price.
Translated by Vic Chiang
Edited by Olivia Yang