Introduction

Map of Indonesia. (Source: EIA)

Indonesia's economic growth surpassed expectations in 2004, and accelerating growth has continued into 2005. Indonesia's real gross domestic product (GDP) grew at a rate of 5.1 percent in 2004, up from 4.9 percent in 2003. Real GDP growth is forecast to be 5.5 percent for 2005, although imbalances in the macroeconomic picture, such as increasing budget deficits caused by oil price subsidies on the local market, could lead to future problems.

President Susilo Bambang Yudhoyono took office after winning election in September 2004. He had served as a cabinet minister under former President Megawati Sukarnoputri, but had resigned in March 2004 to run for election. A peace agreement between the Indonesian government and separatist rebels in Aceh was reached in August 2005, and a demobilization of combatants in the natural gas-rich province is underway. Other security challenges remain, however, including a separatist movement in Irian Jaya, which also has the potential to become a natural gas-exporting region. An Al-Qaeda linked terrorist group, Jemaah Islamiyyah, also continues to present a threat, after attacks against foreign interests in Bali in 2001 and 2005, and Jakarta in 2003.

Tension exists between the central government in Jakarta and leadership at the regional level. The distribution of oil and gas revenues between the central government in Jakarta and regional governments in areas which produce oil and gas has been regularly disputed. Since Indonesia's transition to democracy in 1999, the country's regional governments have been pressing for a greater share of oil and gas revenues.

While Indonesia is still a member of the Organization of Petroleum Exporting Countries (OPEC), it became a slight net importer of oil in 2004, and its oil production has continued to decline. The current government is reportedly considering leaving OPEC, but no decision to do so has been announced.

Oil

Indonesia's Oil Production and Consumption, 1992-2005. (Source: EIA)

Indonesia currently holds proven oil reserves of 4.7 billion barrels, down 13% since 1994. Much of Indonesia's proven oil reserve base is located onshore. Central Sumatra is the country's largest oil producing province and the location of the large Duri and Minas oil fields. Other significant oil field development and production is located in accessible areas such as offshore northwestern Java, East Kalimantan, and the Natuna Sea. Indonesian crude oil varies widely in quality, with most streams having gravities in the 22° to 37° API range. Indonesia's two main export crudes are Sumatra Light, or Minas, with a 35&degl API gravity, and the heavier, 22° API Duri crude.

In the first eight months of 2005, Indonesian crude oil production averaged 944,000 barrels per day (bbl/d), down from the 2004 average of 967,000 bbl/d and continuing the decline of the past several years. The decline is due mainly to the natural fall off of aging oil fields, a lack of new investment in exploration and development, partially due to regulatory hurdles. Besides crude oil, Indonesia also produces approximately 194,000 bbl/d of natural gas liquids and lease condensate, which are not part of its OPEC quota. Indonesia is the only Southeast Asian member of OPEC, and its current OPEC crude oil production quota is 1.45 million bbl/d, well above its production capacity. Since becoming a net oil importer in 2004, Indonesia has reportedly been considering eventually leaving OPEC, but no final decision to do so has been made.

The majority of Indonesia's producing oil fields are located in the central and western sections of the country. Therefore, the focus of new exploration has been on frontier regions, particularly in eastern Indonesia. Sizable, but as of yet unproven, reserves may lie in the numerous, geologically complex, pre-tertiary basins located in eastern Indonesia. These regions are much more remote and the terrain more difficult to explore than areas of western and central Indonesia.

A study released in August 2002 by Indonesia's Directorate General of Oil and Gas shows that oil reserves in the Cepu block alone, located in Central/East Java, are close to 600 million barrels, about half of which are considered recoverable. After lengthy negotiations, Pertamina and ExxonMobil signed a contract in September 2005 for the development of these reserves. ExxonMobil had owned the rights to the block before, but had refrained from further development due to the fact that their contract ran out in 2010. Recent changes in Indonesian law allowed for an extension of ExxonMobil's concession, which would have exceeded the 20-year sunset provision under previous law. The Cepu block is expected to begin production by 2009, eventually reaching a peak output of 180,000 barrels per day (bbl/d). ExxonMobil and Pertamina will each have a 45 percent stake in the project, with the remaining 10 percent held by the provincial governments of East Java and Central Java.

China National Offshore Oil Corporation (CNOOC) became the largest offshore oil producer in Indonesia in January 2002, after purchasing nearly all of Repsol-YPF's assets in the country for $585 million. Pertamina is a CNOOC partner in each Production Sharing Contract (PSC).

Companies producing from existing fields are attempting to increase recovery rates and to prolong the life of the fields. Caltex, which has the largest operation of any multinational oil company in Indonesia, undertook a steam injection project at the Duri field on Sumatra, but production continues to decline as the field's reserves are depleted. Overall, Caltex's production now stands at around 530,000 bbl/d, down sharply from 660,000 bbl/d in early 2001.

Smaller fields have offset some of the decline in production from the more mature fields. Unocal's West Seno field, under development offshore from East Kalimatan, has been producing around 60,000 bbl/d since early 2005, when development was completed. Even with small new discoveries under development, and the major Cepu block fields on the horizon, Indonesia's oil production is not likely to rise markedly, due to the continuing decline of mature fields.

Oil Sector Reforms

The liberalization of Indonesia's downstream oil and gas sector has been under discussion for several years. In October 2001, the Indonesian legislature passed the much-anticipated Oil and Gas Law 22/2001 which limited Pertamina's monopoly on upstream oil development (which requires it to be included in all PSCs) by the end of 2003. Also, Pertamina's regulatory and administrative functions were transfered to other entities, while its regulatory role was spun off to a new body, BP Migas. Legal changes adopted in 2005 have allowed for the extension of contracts beyond the previous 20-year limit, which helped to facilitate the deal with ExxonMobil for the development of the Cepu fields.

Pertamina maintained its retail and distribution monopoly for petroleum products until July 2004, when the first licenses for a foreign firm to retail petroleum products are due to be awarded to BP and Petronas of Malaysia. The government is still promising to open the sector to full competition, although progress has been very slow to date. Political interests with ties to Pertamina are likely reluctant to see the state-run firm lose its assured revenue streams. Pertamina itself was changed to a limited liability company by presidential decree in 2003, and is slated to be fully privatized by 2006.

Indonesia's Ministry of Mines and Energy has taken over the function, formerly carried out by Pertamina, of awarding and supervising PSCs with foreign oil companies. Foreign firms also are to be freed from some of the regulatory approval requirements which they argue hinder their efficiency. One concern foreign oil companies have with the new law is the granting of a limited authority to regional governments to tax oil companies' profits.

Consumption Subsidies

Indonesia historically has maintained very large consumption subsidies for domestic retail fuel consumers, with products being sold at a steep discount from world market prices. After a series of modest increases in petroleum prices over the past two years, the new Indonesian government of President Yudhoyono announced a sharp rollback of subsidies in September 2005. This more than doubled the retail price of gasoline and diesel. The subsidy reduction is likely to temper the rapid increases in petroleum product demand seen in recent years in Indonesia.

Refining

Indonesia has seven refineries, with a combined capacity of 992,745 bbl/d. The largest refineries are the 348,000-bbl/d Cilacap in Central Java, the 240,920-bbl/d Balikpapan in Kalimantan, and the 125,000-bbl/d Balongan, in Java.

PT Kilang Minyak Intan Nusantara, a joint venture of Al-Banader International Group of Saudi Arabia (40%), China National Electrical Equipment Corporation (40%) and PT Intanjaya Agromegah Abadi (20%), are planning to invest a total of $3 billion to build a refinery at Pare-Pare, South Sulawesi. It would be export oriented, taking Saudi crude and refining it for sale primarily to the Chinese market. Iran also has been discussing the possibility of financing an export-oriented refinery in Indonesia, which would process Iranian heavy crudes for export into Asian markets.

Pertamina has decided to resume construction of the partly built petrochemical facility in Tuban, East Java. The project has been stalled since 1998, but a joint venture was established in September 2005 between Pertamina and Sinopec of China to conduct a feasibility study on completing the plant.

Natural Gas

Indonesia has proven natural gas reserves of 90.3 trillion cubic feet (Tcf). Most of the country's natural gas reserves are located near the Arun field in Aceh, around the Badak field in East Kalimantan, in smaller fields offshore Java, the Kangean Block offshore East Java, a number of blocks in Irian Jaya, and the Natuna D-Alpha field, the largest in Southeast Asia. Despite its significant natural gas reserves and its position as the world's largest exporter of liquefied natural gas (LNG), Indonesia still relies on oil to supply about half of its own energy needs. About 68% of Indonesia's LNG exports go to Japan, 19% to South Korea, and the remainder to Taiwan. As Indonesia's oil production has leveled off in recent years, the country has tried to shift towards using its natural gas resources for power generation. However, the domestic natural gas distribution infrastructure is inadequate. The main domestic customers for natural gas are fertilizer plants and petrochemical plants, followed by power generators.

Indonesia is facing a declining share of global LNG markets, despite its past status as the world's leading LNG exporter. The decline can be attributed partly to questions over the reliability of Indonesian supply and lower investment in the Indonesian energy sector. Uncertainties over political support for the sanctity of contracts, regulatory transparency, and relatively unfavorable PSC terms have undermined investment support. As a result, Indonesian LNG exports have been partially replaced by exports from Oman, Qatar, Russia, and Australia on world markets. Since early 2005, exports from the export terminal at Arun in Aceh have been cut back below the level of contractual commitments, due to continuing production problems in the area, despite the end of the insurgency there. The sector has also faced restructuring under the terms of Indonesia's World Bank and International Monetary Fund (IMF) lending agreements, with BP Migas taking over the supervisory and management roles formerly filled by Pertamina.

Despite Pertamina's reduced authority, the company's key role in the gas sector was reinforced in June 2004 when BP Migas announced that PT Pertamina has been appointed as the sole sales agent for LNG sales to South Korea and Taiwan. Pertamina will negotiate sales for Total, Unocal, Vico and BP Indonesia. Current contracts with South Korea and Taiwan are due to expire in 2007 and 2009, respectively.

One project that holds tremendous promise for Indonesia's future in worldwide LNG markets is BP's Tangguh project in Papua province (also known as Irian Jaya). Tangguh contains over 14 Tcf of natural gas reserves found onshore and offshore the Wiriagar and Berau blocks. The project will involve two trains with a combined capacity of 340 billion cubic feet per year (Bcf/y), expandable to 680 Bcf/y. BP's current plans call for the project to be completed by 2008. Initial planning was stalled when BP lost the bids to supply Guandong Province and Taiwan in early 2003. However, in late 2003 and early 2004, BP secured supply agreements with Fujian, China for 127 Bcf/y, with leading Korean steel producer POSCO for 75 Bcf/y, and with Sempra Energy for 180 Bcf/y over 15 years to begin in 2008. These supply agreements made possible the $2.2 billion investment to develop the fields. Under the new oil and natural gas legislation enacted earlier in 2005, the Indonesian government in March 2005 extended BP's contracts to 35 years for three natural gas production blocks associated with Tangguh.

The 400-mile Natuna pipeline is one of the longest undersea gas pipelines in the world, bringing natural gas from blocks operated by Premier Oil, ConocoPhillips, and Star Energy to customers in Singapore. Singapore is a major consumer of Indonesian gas, which it uses for its growing electricity generation needs. New pipeline proposals that would link East Natuna with the Philippines are under consideration, but the high financing costs and security concerns in regions to be traversed by the lines make the projects unlikely.

In another possible use for Indonesia's natural gas resources, Shell is examining the possibility of building a gas-to-liquids (GTL) plant in Indonesia. The plant, if the project goes forward, would produce 70,000 bbl/d of diesel and other middle distillates using the Fischer-Tropsch GTL process.

Coal

Indonesia has 5.9 billion short tons of recoverable coal reserves, of which 58.6% is lignite, 26.6% is sub-bituminous, 14.4% is bituminous, and 0.4% anthracite. Sumatra contains roughly two-thirds of Indonesia's total coal reserves, with the balance located in Kalimantan, West Java, and Sulawesi. According to U.S. Embassy reports, Indonesia produced 132 million short tons of coal in 2003, up 16% from 2002. More than three-quarters of the country's coal production is exported, primarily to Japan and Taiwan, but also South Korea, the Philippines and Hong Kong. With coal exports from China declining over the last two years, Indonesia is now the world's second-largest coal exporter.

Indonesia plans to double coal production over the next five years, mostly for export to other countries in East Asia and India. The new capacity will come primarily from private mines. The Clough Group of Australia was awarded a $215 million contract for improvements at the Indonesian firm GBP's Kutai mine in East Kalimatan. Another foreign firm with major interests in Indonesian coal mining is Australia's Broken Hill Proprietary (BHP).

July, 2003 saw the divestment of Australian mining company Rio Tinto and BP from their joint venture in Kaltim Pima Coal (KPC). The shares were sold to Indonesian firm PT Bumi Resources for $500 million. According to several reports, the divestment was prolonged and acrimonious as the government objected to Rio Tinto's divestment plan, and threatened to mobilize public action to block the mine's operations. Ultimately, Rio Tinto and partner BP sold their combined 100% stake for about half of its assessed value.

Electricity

Indonesia has installed electrical generating capacity estimated at 24.7 gigawatts, with 80 percent coming from thermal (oil, gas, and coal) sources, 18% from hydropower, and 2% from geothermal. Prior to the Asian financial crisis, Indonesia had plans for a rapid expansion of power generation, based mainly on opening up Indonesia's power market to Independent Power Producers (IPPs). The crisis led to severe financial strains on state-utility Perusahaan Listrik Negara (PLN), which made it difficult to pay for all of the power for which it had signed contracts with IPPs. PLN has over $5 billion in debt, which has grown markedly in terms of local currency due to the decline in the value of the rupiah. The Indonesian government has been unwilling to take over the commercial debts of PLN.

Indonesia is facing an electricity supply crisis, due to underinvestment in power generation capacity. Intermittent blackouts are a problem across Java. Demand for electrical power is expected to grow by approximately 6-7 percent per year. The majority of Indonesia's electricity generation is currently fueled by oil, but efforts are underway to shift generation to lower-cost coal and gas-powered facilities. Hydropower also is being expanded. Sumitomo's 1,320-MW Tanjung Jati B plant in Central Java, a 730-MW plant at Cilegon in West Java financed by Mitsubishi, and a Chinese-funded 600-MW station at Cilacap on the southern coast are all due to be commissioned in mid-2006. However, after these projects are completed, after long delays, there is a lack of adequate new capacity "in the pipeline" to meet the country's needs.

In January 2003, the World Bank announced that it was planning to finance three micro-hydropower plants in the Indonesian province of Papua (Irian Jaya). A feasibility study on all of the area's water sources has already been conducted, and the results are being studied. By building these facilities, the World Bank hopes to improve services to the local population as well as to encourage development activities in the province.

In October 2003, the World Bank approved a $141 million loan to Indonesia for the purpose of improving the power sector on Java and Bali, which use approximately 80% of Indonesia's power generation capacity. The project includes support for a corporate and financial restructuring plan for PLN and technical assistance for a restructuring program for state gas company, Perusahaan Gas Negara (PGN), that will provide for increased natural gas supplies for electricity generation. The restructuring plan requires that PLN must restructure two of its subsidiaries, PT Indonesia Power and PT Pembangkit Jawa Bali (PJB). The two together supply about 80% of the power supply for Java and Bali, according to reports.

In 2003, the government renegotiated 26 power plant projects with the IPPs. Of those, five projects will be taken over by the government, in cooperation with PLN and Pertamina. Legislation enacted in September 2002, which would have facilitated competition in electricity generation by 2007, was overturned by the Indonesian constitutional court in December 2004. Substitute legislation was enacted in February 2005 which clears the way for full private ownership of electricity generation assets. The Indonesian government sees the need for 24 gigawatts of additional generating capacity by 2013, but foreign investors have largely avoided the Indonesian power sector in recent years due to the poor financial condition of PLN and the uncertain legal climate.

Aside from the lack of adequate investment in generating capacity, long-haul transmission also remains a problem. For example, the 3,200-MW Paiton power plant in East Java, which is the country's largest, has inadequate transmission lines to central and western Java, preventing transmission of electricity from an area with a local surplus to an area with inadequate supplies.

Environmental Issues

Between 1980 and 2001, the population of Indonesia grew 46%, from 147 million to 215 million. This made it the fourth most populous country in the world (after China, India, and the United States) in 2001. As a result of rapid, trade-led industrialization, Indonesia's real gross domestic product (GDP) grew even faster than its population during the same period. Real GDP increased an average of 3.3% per year between 1980 and 2001, from $194 billion to $561 billion.* During this period of demographic and economic change, a broad array of environmental and natural resource legislation was enacted. Because it was not rigorously enforced, however, Indonesia experienced significant environmental degradation during the 1980s and 1990s.

The Asian financial crisis of 1997 and 1998 worsened Indonesia's environmental problems. In an effort to try to rejuvenate local enterprises, Indonesia set aside its regulations on industrial behavior. This led local firms to pursue cheaper but more environmentally damaging production and harvesting methods. Indonesia's tumultuous political situation also has complicated environmental protection. The lack of clear authority among Indonesia's central, regional and local governments helped produce weak regulatory institutions. This problem intensified after the fall of President Suharto in 1998. For example, in 2002, President Megawati Soekarnoputri dissolved the Environmental Impact Control Agency (Bapedal) without clearly delineating which body(s) would take over its responsibilities. In theory, the Office of the State Minister for the Environment assumed the duties, but it was not given law enforcement powers.

The scope of Indonesia's environmental problems is large. According to the Jakarta Post, a report compiled by Indonesia's State Minister for the Environment states that the natural environment is deteriorating on all fronts. The report cites illegal logging of Indonesia's forests as one of the largest problems facing the country. This problem derives from the relative poverty of much of Indonesia's population, the abundance of timber (Indonesia contains 10 percent of the world's forest cover, and has the third largest tropical rain forest) and the weakness of enforcement.

Logging impacts Indonesia's environment in many different ways. The deforestation that results from unregulated logging has been closely linked with floods and landslides. One such landslide caused the deaths of at least 150 people in November 2003. Illegal logging is also linked to Indonesia's very serious air pollution problem. The slash and burn tactic exacerbate already high levels of emissions from industry and motor vehicles, leading to levels of smog and air pollution that have affected neighboring countries. Deforestation is also associated with industrial runoff that pollutes Indonesia's water supply.

Air Pollution

Indonesian City. (Source: World Bank Indonesia Environment Monitor, 2003)

Air pollution is perhaps Indonesia's most severe environmental problem. According to an official at the World Bank office in Jakarta, "air pollution imposes costs of at least $400 million on the Indonesian economy every year." It also has very a serious impact on public health. For example, inflammation of the respiratory tract, which is directly linked to air quality, was the sixth leading cause of death in Indonesia (after accidents, diarrhea, cardiovascular disease, tuberculosis, and measles).

Motor vehicles are one of the chief sources of air pollution in Indonesia. Between 1995 and 2001, the number of vehicles in Indonesia grew from 12 million to almost 21 million. Many of these vehicles are motorcycles or scooters, which lack the catalytic converters required for cleaner emissions. Moreover, almost no motor vehicles in Indonesia use unleaded gasoline. Instead, the vast majority of these vehicles rely on either leaded gasoline or diesel fuel, leading to unhealthily high concentrations of airborne lead.

The air in Jakarta had especially high concentrations of lead prior to the government-mandated phasing out of leaded gasoline in 2001. This was one of the few successful environmental initiatives in recent years. Before the ban, a study by the U.S. Centers for Disease Control found that over a third of the children examined had blood lead levels high enough to potentially adversely affect cognitive development.

Efforts to extend the ban on leaded gasoline throughout all of Indonesia by the end of 2003 were not successful. One of the reasons why wider inhibition of leaded gasoline has proven difficult is that Pertamina, the state-owned oil company, has very limited refinery capacity. Pertamina would have to upgrade at lest one of its refineries to produce sufficient quantities of unleaded fuel. Finding sufficient funding for the upgrade became a serious problem after the financial crisis and remains a major problem. In the meantime, there is resistance to authorizing private refiners to either produce or import unleaded gasoline. It is not expected that Indonesia will be free of leaded gasoline until at least 2005.

Despite the phasing out of leaded gasoline, Jakarta's air remains among the dirtiest in the world. The concentration of particulate matter is high, as are the levels of carbon dioxide, hydrocarbon, sulfur dioxide, and nitrogen dioxide. In July 2003, the Jakarta Post placed much of the blame on the fact that city authorities can only force public vehicles to comply with emissions standards. At that time, public vehicles accounted for only 315,000 of the almost 5 million vehicles in the city.

Forest fires also contribute to Indonesian air pollution. Often these fires result from illegal logging of Indonesia's rain forests. During 1997 and 1998, the fires were especially severe. Nearly 10 million hectares burned, producing a haze that impacted all of Southeast Asia. The World Bank's Indonesia Environment Monitor 2003 states that the costs of 1997-8 fires exceeded the combined legal liabilities assessed for the Exxon Valdez oil spill and the Bhopal chemical disaster.

Indonesia's industrial sector, which contains chemical, petroleum, coal, plastic and rubber products, and food industries, also is a significant polluter. Unfortunately, there is limited quantitative data on their overall impact. The Blue Sky Program was initiated by the Ministry of Environment in 1992 to improve air quality in Indonesia's five largest cities: Jakarta, Bandung, Semarang, Surabya, and Medan. The Blue Sky Program imposed controls on 20 industries.

Water Pollution

Indonesia's water quality is deteriorating. One of the most serious problems is the lack of sewerage systems in urban areas. The Indonesia Environment Monitor notes that Indonesia ranks among the worst countries in Asia in sewerage and sanitation coverage. Few Indonesian cities possess even minimal sanitation systems. For example, according to a 2002 World Bank report, less than 3% of Jakarta's population is connected to a sewer system. The absence of an established sanitation network forces many households to rely upon private septic tanks or to dispose of their waste directly into rivers and canals. The commonality of the latter practice has led to significant contamination of Indonesia's surface and groundwater, as well as to repeated epidemics of gastrointestinal infections. As of 2001, an estimated 90% of Jakarta's shallow wells were polluted by domestic waste.

Indonesia's relative absence of controls on industrial emissions also has led to the degradation of water resources. The forthcoming report by Indonesia's State Minister for the Environment is reported to acknowledge that many factories continue to dump their liquid waste into rivers without treatment. A lack of regulations on agricultural chemicals has led to damage of water resources in Indonesia's farmlands. In large part because the growing numbers of artisanal and small-scale mines operate with little or no environmental precautions, Indonesia's mining sector is an increasingly large source of water pollution.

Indonesian coastal waters are highly polluted, especially in high traffic areas such as the Malacca and Lombok Straits, the major shipping pathway between Asia and the Middle East. Unsustainable fishing practices (e.g., blastfishing), industrial effluent, sewage, and agricultural discharges also have placed the ecosystems of Indonesia's reefs, the most biologically diverse in the world, in jeopardy. According to a 2002 report by the World Resources Institute, 86% of Indonesia's reef area (19,700 square miles) is at medium or high risk.

Energy Use and Carbon Emissions

In 2001, Indonesia consumed 4.6 quadrillion Btu (quads) of energy and released 87.1 million metric tons (mmt) of carbon dioxide, accounting for 1% of the world's total energy consumption and 1% of the world's total energy-related carbon emissions. In the past two decades, Indonesian energy consumption and carbon emissions grew very rapidly. Between 1980 and 2001, they increased 315% and 271%, respectively. This rapid growth reflects Indonesia's industrial development during the period.

Indonesia derives the vast majority of its energy consumption from fossil fuels. Oil accounts for 47% of energy consumption (2.2 quads); natural gas contributes 30% (1.4 quads); and coal makes up 20% (0.9 quads). Together, hydroelectric and non-hydroelectric renewables (e.g., geothermal, wind, solar) account for the remaining 3% (0.15 quads) of Indonesian energy consumption.

Energy and Carbon Intensity

Energy Consumption per Dollar of GDP. (Source: EIA)

Indonesia's energy consumption per dollar of gross domestic product (GDP) (energy intensity) increased significantly during the 1980s and 1990s. In 1980, Indonesia consumed 5,760 Btu per $1995-PPP. In 2001, Indonesia's energy intensity had risen to 8,250 thousand Btu per $1995-PPP. Compared to other Asian nations, Indonesia's energy intensity is fairly low.

Relative to other Asian nations, the level of Indonesia's carbon emissions per dollar of GDP (carbon intensity) is moderately high. This likely reflects Indonesia's almost complete dependence on fossil fuels. Between 1980 and 2001, Indonesia's carbon intensity grew from 0.12 metric tons of carbon per thousand $1995-PPP to 0.16 metric tons of carbon per thousand $1995-PPP. In 2001, Indonesia's carbon intensity was higher than India's (0.09 metric tons per thousand $1995-PPP), Japan's (0.1), and Thailand's (0.14), but less than China's (0.18) and South Korea's (0.18).

Per Capita Carbon Emissions and Energy Consumption

Carbon Emissions per Capita. (Source: EIA)

Indonesia's per capita energy consumption and carbon emissions remain low, especially in comparison to more industrialized countries. In part, this reflects the large proportion of Indonesia's population that continues to live in areas with little or no electricity. In 2001, Indonesia's per capita energy consumption was 21.5 million Btu. This was significantly less than the most economically developed areas in the region like South Korea (170.2 million Btu per capita) and Taiwan (181.5), but higher than India (12.6) and Vietnam (9.6).

Indonesia's per capita carbon emissions grew significantly between 1980 and 2001, rising from 0.16 metric tons per person to 0.41 metric tons per person. Much of this growth likely stemmed from the rapid increase in motor vehicles. Despite their rapid growth, Indonesia's 2001 level of per capita carbon emissions was still significantly lower than in South Korea (2.55), Taiwan (3.18), and Thailand (0.77). Indonesia's per capita carbon emissions are higher than India's (0.25), however.

Renewable Energy

Because Indonesia is a large oil and natural gas producing country, most of its energy needs are met through fossil fuel combustion (77%). However, economic crisis, depletion of oil reserves and environmental needs are leading Indonesia towards greater exploitation of renewable energy sources.

The World Bank has contributed to several large-scale renewable energy projects, including the "Solar Home System" project that aims to electrify remote areas through renewable energy. Solar/photovoltaics (PV) technology is an attractive option in Indonesia because the country is fragmented among numerous small islands, making a comprehensive grid difficult to construct.

Indonesia possesses significant hydroelectric potential, but has done little to exploit it. There is a government-built, 5,600-megawatt (MW) hydropower plant in Irian Jaya to support economic development. Java also has several hydropower facilities. Their combined installed capacity is 2,550 MW.

Indonesia has significant geothermal energy potential. The "Ring of Fire," the world's most active volcanic zone, stretches along the southern coast of the islands of Sumatra and Java. Exploitation of geothermal resources remains highly tentative, however. According to a February 2002 report by the U.S. Embassy in Jakarta, Indonesia had developed 787 MW of geothermal capacity. This represented only 4% of its estimated geothermal potential of 20,000 MW. About 40% of this potential is located in Java and Bali, the two most populous islands in the Indonesian archipelago.

Prior to the financial crisis, the Indonesian government awarded contracts for 11 geothermal projects that would have had a generating capacity of 3,400 MW. Due to the tight fiscal constraints imposed by the crisis and the political change that followed, 7 of these projects were suspended. One possible source of the funds necessary to develop Indonesia's geothermal resources may be the Kyoto Protocol's Clean Development Mechanism (CDM) or other initiatives aimed at reducing greenhouse gas (GHG) emissions. Should Kyoto come into force, the CDM would allow energy providers from developed countries to invest or purchase "GHG emission reductions" credits from renewable projects in developing countries as a way of offsetting GHG emissions elsewhere.

Environment Outlook

Indonesia possesses a remarkable and valuable natural environment. The country is home to the world's largest reef system and one of the world's largest rain forests, both of which are home to thousands of unique species. Moreover, Indonesia's huge forests function as one of the world's main "carbon sinks" (natural means of sequestering world carbon emissions). The preservation of such sinks is an important aspect of avoiding climate change.

Two decades of rapid economic development, significant population expansion, and regulatory neglect have placed much of Indonesia's environment in jeopardy. As the country recovers from the economic and political turmoil of the late 1990s and early 2000s, the Indonesian government faces the challenge of enacting and enforcing stricter environmental legislation. The legal system in Indonesia will have to improve enforcement of environmental regulations against the intentional setting of forest fires and the use of leaded gasoline. While the Indonesian government already has had some environmental, such as the elimination of leaded gasoline in Jakarta, considerable scope for improvement remains. In particular, Indonesia will have to address the infrastructure-related problems of deforestation, renewable energy, and inadequate sewerage.

Further Reading

• CIA World Factbook - Indonesia\
• Country Commercial Guides and Market Research on Indonesia
• EIA - Country Information on Indonesia
• Perusahaan Gas Negara (PGN)
• U.S. Department of Energy - Office of Fossil Energy - Indonesia
• U.S. State Department Consular Information Sheet