Introduction
Sustaining a Positive Role for Energy in Indonesia's Rise

Indonesia’s strong economic growth and successful democratic transition have made the country a major political and economic power in Southeast Asia and in the broader Asia-Pacific. It is now a key strategic and economic partner for the United States and has become increasingly important in shaping a peaceful, prosperous future for Asia. The successful national elections in 2014—encapsulated by the rise of President Joko “Jokowi” Widodo—coupled with signs that Indonesia is potentially entering a revitalized era of domestic policy and governance reform, confirm the country as a leading force in the region’s continued and stable development.

A central element for understanding Indonesia’s success story is the positive role that energy has played in supporting the country’s rise. Indonesia has traditionally been a leading energy supplier in the Asia-Pacific, with a diverse wealth of resources, including oil, natural gas, coal, and geothermal potential. Meanwhile, progress on expanding domestic access to supplies critical for a range of sectors has been essential to sustaining industry, improving public health, and satisfying growing demand for electricity. As a result, the rich potential of Indonesia’s energy resources has played a critical role in the country’s economic growth while contributing to higher levels of prosperity across Asia.

However, rapidly rising domestic energy demand, combined with slowing oil and gas production, threatens to undermine the energy sector’s capacity to support domestic economic growth and poses serious challenges to Indonesia’s role as an important energy exporter to the region. As noted by the U.S. Energy Information Administration, the International Energy Agency, and other organizations, Indonesia’s total primary energy consumption grew by almost 50% between 2003 and 2013. Moreover, new demand growth in the coming decade will quickly dwarf these numbers, as the essays in this report explore. Although Indonesia’s potential to harness domestically available energy resources remains substantial, legal and policy uncertainties surrounding the development of the country’s energy sector are continuing to affect Indonesia’s ability to attract the investment needed to reinvigorate domestic production of oil and gas. As highlighted during President Jokowi’s October 2015 visit to the United States, as well as in a number of newly announced policy initiatives throughout the year, encouraging such investment is a shared interest of both Indonesia and the United States; it is also an issue to which policymakers will need to pay even greater attention.

Indonesia is looking to strengthen its environmental policymaking as well. As Indonesian parliamentarian Satya Widya Yudha, experts at the World Resources Institute, and other leading policymakers and specialists have recently noted, the country is facing very real challenges related to public health concerns about rising air pollution and carbon dioxide (CO2) emissions. These concerns have been exacerbated by a range of factors, including the dramatic expansion of Indonesia’s transportation sector and infrastructure and unsustainable practices employed by both industry and the public. These challenges admittedly go well beyond the energy sector, yet they require Indonesia to continue to think holistically about its approach to natural resource management. Undertaking this process will undeniably have far-reaching impacts on the country’s energy and economic systems. However, questions remain on identifying best practices for moving forward and on securing the funding and other resources available to effectively pursue these options.

Ultimately, as a natural leader in Southeast Asia and a key partner to the United States, Japan, and other countries in the Asia-Pacific, Indonesia’s economic and energy success is of vital concern not just for Indonesia but for the region as a whole. With these issues in mind, the National Bureau of Asian Research (NBR) convened its 2015 Energy Security Program under the theme “Indonesia: A Regional Energy Power in Transition.” Each year this program examines a major development in Asian energy markets and details how key regional stakeholders might work together to better respond to the economic, environmental, and geopolitical implications of ongoing market and policy developments. For 2015, program discussions focused on a range of market and policy issues facing Indonesia, with key themes including the role that energy plays in Indonesia’s development, issues driving the country’s reduced oil and gas production and the implications for the economy, the outlook for policy and regulatory reform, strategies for strengthening energy and environmental security, and questions related to energy governance.

To explore these issues in depth, NBR commissioned four essays from authors representing the diverse range of stakeholders involved in these discussions, including experts from the policy community, industry, and the research community. The arguments in these essays were then debated and discussed in greater detail at a high-level workshop that was jointly convened by NBR and the US-ASEAN Business Council on July 23, 2015, to promote further examination of recommendations for public policy. Based on these discussions, as well as conversations with senior advisers and leaders from the policy community and industry, NBR then worked with authors to revise the draft essays to reflect both key workshop findings and major developments in the second half of the year. These essays are published here collectively for the first time as an NBR Special Report.

In the opening essay, Alexandra Stuart of the US-ASEAN Business Council provides an exceptional overview of Indonesia’s energy outlook and policymaking environment. She begins by detailing the country’s energy supply and demand picture as well as identifying the key stakeholders and policy framework that shape the country’s near- and long-term planning. Within this context, Stuart then highlights six core challenges for the Jokowi administration as it strives to achieve the objectives of the new national energy policy: reducing energy subsidies, developing infrastructure, reforming the overall regulatory environment, clarifying production-sharing contracts, resolving tensions surrounding resource nationalism, and addressing governance issues in the energy sector. She concludes by offering a range of recommendations for consideration that highlight both the daunting undertaking that the Jokowi administration has embarked on and the continued need for greater, more collaborative efforts to address anticipated challenges.

In the second essay, Mikkal E. Herberg of NBR explores the evolution of the oil industry in Indonesia through the lens of ongoing efforts to manage the country’s transition from being a net oil exporter to a net oil importer. He notes that the Jokowi administration and the Indonesian parliament have taken a number of vital steps—perhaps most critically, reducing inefficient oil subsidies—to address long-term concerns for the sector. He also highlights that the current global environment of low oil prices presents further opportunities to continue these efforts in ways that mitigate negative impacts on poor and vulnerable populations. Yet as Herberg observes, the challenge for Indonesia is not just reinvigorating investment in oil production. It is also reshaping unsustainable growth rates in oil consumption and demand from the transportation sector that further complicate the country’s oil security outlook.

Next, Natalie Bravo and Nikos Tsafos examine the central role of the power sector in driving Indonesia’s increasing demand for energy supplies and describe the complicated nexus between natural gas, coal, and electricity. With the country pursuing ambitious plans to expand access to electricity to cover several million people currently without reliable access, Indonesia’s electricity demand is expected to roughly triple between 2011 and 2035. It is hard to imagine a scenario that does not require a dramatic increase in demand across a range of fuel sources to meet this goal. Furthermore, if the rise in energy demand is not well managed, it is difficult to imagine a scenario that does not lead to a substantial increase in energy-related CO2 emissions. Yet as Bravo and Tsafos note, Indonesia’s continued potential for greater utilization and development of natural gas supplies suggests an opportunity to expand access to electricity while avoiding the environmental damage that would come with unmitigated reliance on cheap, low-efficiency coal supplies. However, pursuing this option will require policy action. It will also not negate the fact that coal is anticipated to play a heightened role in the country’s energy mix, suggesting that greater attention is still required to manage the impacts of the growth in coal consumption through lower-carbon technology and more effective policies.

Finally, Hanan Nugroho of the National Development Planning Agency of Indonesia offers a very thoughtful assessment of how the country is looking to craft a cohesive approach to energy policymaking that fully integrates environmental considerations. He argues that a number of the so-called traditional definitions of energy security fail to take into account that a driving consideration for Indonesian policymakers is not just securing energy supplies but ensuring that the supplies engaged address sustainability and social license concerns. With this in mind, Nugroho invites readers to reassess Indonesia’s energy security using an “A4&S” framework—that is, a strategy for pursuing a cleaner energy mix based on what is available, accessible, affordable, acceptable, and sustainable. In addition to the great potential for natural gas assessed by Bravo and Tsafos, Nugroho argues that Indonesia has incredible (and largely untapped) potential in renewable energy resources, including but not limited to wind, solar, hydroelectric, and geothermal potential. Indeed, if the country is to meet ambitious targets to raise renewable energy to around 23% of its energy mix by 2025, it likely will need to draw heavily on each of these resources. Yet as Nugroho aptly observes, where and to what extent each of these options is developed will be a function of both structural and geographic considerations and the degree to which investment needs, financing, and other market opportunities can be fully realized.

These four essays collectively paint the picture of a country in the midst of a historic moment. Whether Indonesia can capture this moment will depend on its ability to harness market opportunities and implement policies to achieve domestic aims and strengthen its natural role as an energy leader in the wider Asia-Pacific. Although major challenges remain to Indonesia adequately satisfying its growing domestic demand for energy and electricity, the country also has the potential to meet this demand in ways that are more sustainable and responsive to environmental considerations than has been true in the past. Achieving these goals will depend on continued political will and even more robust collaborative efforts. The latter would not only improve Indonesia’s energy security and satisfy rising energy demand but also help the country reduce air pollution and uphold its climate commitments.

While NBR’s Energy Security Program is always the culmination of the efforts of dozens (if not hundreds) of participants, partners, and collaborators, this year we owe a special debt of gratitude to several groups and individuals who deserve particular recognition. First and foremost, we are grateful for the generous support of our sponsors—the Asian Development Bank, Chevron, ConocoPhillips, and ExxonMobil. Year after year, their contributions have enabled us to examine the central energy security challenges facing the Asia-Pacific—and to do so in a manner that brings together critical stakeholders from across the region. This makes the program more than just an academic exercise; it facilitates dialogue among stakeholders that develops and tests real-world recommendations for public policy. We are also grateful to the US-ASEAN Business Council, which not only served as a true partner in co-hosting the program’s July workshop and the report’s fall launch on Capitol Hill but also shared with NBR countless insights and recommendations from its on-the-ground expertise in bringing together policy and industry in Jakarta. Additionally, NBR senior advisor Meredith Miller provided invaluable support and expertise in the development of this year’s theme. Her thoughtful comments helped to both strengthen the overall program and integrate perspectives of key stakeholders.

Next, we are appreciative of the insights and perspectives of the senior Indonesian policy leaders and specialists who shared their first-hand experience with the issues raised in this report. Over the past several years, Satya Widya Yudha, deputy chairman of Commission VII (which oversees energy, mineral resources, and the environment within the Indonesian House of Representatives) has been an invaluable contributor to NBR’s Pacific Energy Summit. We are grateful for the ideas and the insights that he shared with us through the course of this initiative, including by joining in the program’s July workshop in Washington, D.C. We are also especially appreciative of the time and contributions of Arto Suryodipuro, as well as the larger staff of the Embassy of Indonesia in Washington, D.C. Their guidance and feedback before and during the workshop significantly enriched the caliber of this report. Finally, we are deeply appreciative of our program authors and workshop panelists. These individuals not only gave their time and expertise but pushed us toward new ways of thinking about energy security—and hopefully toward a clearer view of areas for new efforts to yield mutual gains. As you read this report, we encourage you to view these essays as an opportunity to reflect on the incredible progress that has occurred over the course of the past year, while also still appreciating the ongoing challenges that lie ahead. We look forward to continuing to build on these conversations together in our efforts to strengthen U.S.-Asia relations.

Clara Gillispie is Director of Trade, Economic, and Energy Affairs at the National Bureau of Asian Research (NBR).