Indonesia to Quit OPEC; May Rejoin if Oil Output Rises

JAKARTA (The Wall Street Journal via Dow Jones Newswires), May 28, 2008

Reduced to the status of a marginal net oil exporter, Indonesia will quit the Organization of the Petroleum Exporting Countries at the end of this year, Energy Minister Purnomo Yusgiantoro said Wednesday.

East Asia's only OPEC member, Indonesia still exports natural gas, but its aging oil fields and lack of fresh investment in exploration have undermined the country as a crude producer and forced it to slash costly domestic fuel subsidies as global oil prices soar.

Earlier this month, President Susilo Bambang Yudhoyono said the government would soon decide whether to quit the organization because of its declining oil production. Purnomo said he would sign a letter to OPEC on Wednesday informing the grouping of Indonesia's intention to leave when its 2008 membership lapses. "Today we decided that we are pulling out from OPEC," Purnomo said. "We are an (oil) consuming country."

The last country to leave OPEC was Gabon in 1994, citing the cost of membership. Ecuador also quit in 1992 before rejoining the group as its thirteenth member last year.

For Indonesia, Southeast Asia's largest economy, the EUR2 million annual membership fee isn't an issue, analysts said. Instead, Indonesia's interests lie with lower oil prices, putting it at odds with OPEC's mission to keep crude prices higher, said Kurtubi, an independent Jakarta-based oil analyst who goes by a single name. "Our interests are much different" than OPEC's, he said.

Indonesia's decision to pull out will not affect global oil markets because the country's relatively low crude production and exports are the result of a decade of under investment in new oil fields and aren't related to OPEC restraints on output.

But some industry analysts said Indonesia would do better to stay in OPEC, allowing the nation to try to influence global crude prices from inside the organization. OPEC members produce about 40% of the world's oil.

"There is no benefit for Indonesia to quit OPEC," said Subroto, a former Indonesia oil minister and secretary general of OPEC from 1988 to 1994 who goes by a single name. "If we remain in OPEC there is some obligation for members to help each other."

Indonesia is still, on balance, a small net exporter of crude oil, despite steady declines in production since 1995. The Asian financial crisis of 1997-98 hit confidence in the nation and investment in exploration ground to a standstill. In the past decade, lack of regulatory clarity and disagreements between the state-owned oil company Pertamina and major global oil companies like ExxonMobil over contracts have slowed the development of new fields.

Currently, Indonesia is producing just short of one million barrels of crude per day - much lower than a peak of 1.6 million barrels in the mid-1990s, Purnomo said.

But Indonesia, which has relatively few oil refineries, imports large amounts of refined products such as gasoline and diesel. When crude oil was cheap and production high, Indonesia could afford to heavily subsidize the cost of gasoline, diesel and kerosene for Indonesian consumers.

The cost of these subsidy programs has ballooned in recent months as crude oil moved above $130 per barrel. Last weekend, the government was forced to increase fuel prices almost 30% to stop a budget blowout, sparking some protest demonstrations across the country.

Even with the price increases, the government plans to spend about $20 billion on fuel and electricity subsidies this year, almost a third of total government expenditures - a huge amount for a country with a chronically underfunded health and education system.

Indonesia could rejoin OPEC in a few years if it can kickstart crude oil production, Purnomo said.

A few big oil field projects under development are expected to start production in 2009. Among them is the Cepu field on Java island, which is estimated to hold 600 million barrels of crude oil. Pertamina and ExxonMobil agreed in 2005 to spend $2.6 billion to develop the field after a four-year contract dispute.

Copyright (c) 2008 Dow Jones & Company, Inc.


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