FOCUS : REDUCING ENERGY DEPENDENCE ON FOSSIL FUEL

INDONESIAN COMMERCIAL NEWSLETTER

January 2008

FOCUS

REDUCING ENERGY DEPENDENCE ON FOSSIL FUEL

Prices of crude oil still unstable

The high prices of crude oil have forced many countries to review their energy policies to make adjustments to the condition. In the past year the soaring oil prices have drawn the attention of the world as it affects the interest of almost everybody. The surge in the oil polices since the middle of last year followed the bloody conflicts in northern Iraq, tensions between Iran and the western countries over nuclear issue.

The condition was worse with declining supply from some major producers such as Nigeria where production has been interrupted by political conflicts and Mexico where oil installations were destroyed by storms.

The prices of crude oil in July 2007 reached almost US$ 75 a barrel and the prices continued to scale up to US$ 90 in December and to almost US$ 100 late that month.

OPEC price references are: Saharan Blend (Algeria), Girassol (Angola), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and BCF 17 (Venezuela), Girassol ( Angola per 10 Sep 2007).

Early 2008, the oil prices in the world still caused world wide concern especially when the prices hit the US$ 100-per barrel level on Jan. 3 trading. The oil price closed at US$ 3.64 higher at US$ 99.62 per barrels on Jan. 3 in the New York market. The North Sea crude Brent traded at US$ 97.84 per barrels in the London market. The price exceeded the previous record of US$ 99.29 on 21 November.

The market condition necessitates development of alternative energy

The high oil prices and dwindling oil reserves have given more reasons for development of renewable energy sources. Development of alternative sources of energy becomes the only visible solution to the possible energy crisis in the future. The world oil reserves are relatively large at 1.2 billion barrels but demand especially from the industrial sector grows faster. Competition is sharper for controlling oil resources in the world.

The United States remains the world's largest consumer of oil. That country accounts for 25% of the world consumption. The U.S.'s oil requirement has increased 1.7% annually. Meanwhile other major economies like Japan, France, Germany have also showns fast growing requirement.

Emerging economies led by China even caused greater concern in the oil market. China and India, two Asian giants have all of a sudden put them selves in the ranks of world's major economies. Strong demand for oil from the two countries have triggered the oil price hikes in the world and it is feared growing demand from the two world's most populous countries will cause greater problem in oil supply in the future.

Unlike Japan, South Korea and Europe, which has gone past their peak performance and almost running out of steam, China and India are still steaming forward to become the world's giants. Their oil requirement will exceed that of the United States.

Fast growing energy consumption and dwindling oil reserves have also forced Indonesia to begin to take more seriously the idea of developing alternative surces of energy. Indonesia, though still sitting among oil exporter in the club of Organization of Petroleum Exporting Countries (OPEC) has become a net importer of crude oil.

Main Source of Energy Still Fossil Fuel

Indonesia still depends largely on fossil fuel for energy. In 2006, crude oil accounted for 48.7% of its total energy consumption. Coal is still the second main source of energy accounting for 26.5% replacing the position of natural gas lately.

Table - Development of consumption of main source of energy,

2001 - 2006

Year Oil Natural Gas Coal Hydropower and Geothermal Total

000 boe % 000 boe % 000 boe % 000 boe %

2001 386,231 53.2 164,360 22.6 134,453 18.5 41,175 5.6 726,219

2002 392,114 52.5 169,893 22.7 143,945 19.3 41,679 5.6 747,591

2003 397,559 52.5 161,649 21.2 150,853 19.7 54,065 7.1 764,129

2004 433,027 52.1 157,090 18.9 184,034 22.1 57,257 6.9 831,409

2005 414,998 49.2 155,667 18.5 205,908 24.4 66,719 7.9 843,322

2006 404,457 48.7 148,242 17.8 220,825 26.5 58,165 7.0 831,689

Source: Directorate of energy and mineral resources (DESDM)

OBF still strongly dominates energy consumption in the country with natural gas, coal, electricity and LPG remaining a minor contributors. See the followiong table.

Manufacturing and Transport Sectors the Largest Energy Consumers

The manufacturing and transport sectors are the largest users of energy in Indonesia, accounting for amost 78% of the total consumption in 2006. The household sector is the second largest user accounting for 22%.

In 2001, the manufacturing sector began to take the domination with growing consumption of heavy industries like petrochemical, cement, steel and other industries.

In 2003-2004 a sharp increase was recorded in the consumption of energy for the transport sector with the fast growing automotive industry both car and motorcycle sectors.

Table - Energy consumption by sectors

Year Manufacturing Household Transport Total

000 boe % 000 boe % 000 boe %

2001 176,212 38.71 113,726 24.98 165,242 36.30 455,180

2002 187,381 40.58 110,364 23.90 164,051 35.52 461,796

2003 188,147 38.47 114,970 23.51 185,897 38.01 489,014

2004 208,331 39.08 119,363 22.39 205,412 38.53 533,106

2005 209,719 39.36 117,714 22.09 205,432 38.55 532,865

2006 210,726 39.54 114,171 21.31 209,407 39.15 534,304

Source: DESDM

Note: BOE - barrel oil equivalent

Energy requirement of household, transport and manufacturing sectors

Kerosene and electricity, main soruce of energy for household sector

The household sector is the main user of kerosene. Kerosene consumption by the household sector totaled 68,899,000 boe in 2006. The subsidized price of kerosene was Rp 2,000 per liter as against the price ofr the industrial sector of Rp 5,320 per liter.

Kerosene consumption has tended to decline in proportion. In 2001, kerosene accounted for 68.1% of fuel consumption by household sector the percentage declined to 56.4% in 2006.

The government has launched a program to use more Liquified Petroleum Gas (LPG) for household fuel instead of kerosene. The program, annunced in December, 2006 is aimed at reducing the kerosene subsidy which reahced Rp 40 trillion that year. The government estimated that conversion of kerosene with LPG will save Rp 21 trillion a year as LPG subsidy is smaller.

The government offered gas tubes and stove free for low income people to encourage the conversion. The program was projected to be fully implemented in Jakarta and West Java in 2007, to be followed with the rest of Java and Bali in 2009 and the whole country in 2011. Unfortunately the program failed from the start in Jakarta, although the government said it would go ahead with the program.

The household sector is also the largest user of electric energy in the country. Consumtpion of electric energy by the household sector has increased mainly because of the use of more household electric appliances.

In 2001, electricity accounted for only 26.3% of energy consumption by the household sector. In 2005, the percentage grew to 34.1%.

Gasoline and ADO dominate enegry consumption for transport sector

Oil fuels still dominate energy consumption for the transport sector. The use of LPG/CNG (compressed Natural Gas), introduced only in the past few years is still very insignificant.

Gasoline, mainly the type of premium, dominates transport fuel accounting for 60.41% of oil fuel consumption of the sector in 2006. In 2001, gasoline acounted for 48% of oil consumption for the transport sector. The percentage grew to 50.9% in 2002 and to 60.41% or 18,350 boe in 2006. Consumption of Automotive Diesel Oil (ADO), however, tended to decline in proportion -- from 42.6% in 2001 to 38.32% in 2006. State-owned oil and gas company PT Pertamina produces three types of gasoline of high quality -- Pertamax, Pertamax Plus and Pertamax DEX. In 2006, Pertamina began to sell bio fuels, called Bio solar, Bio Premium and Bio Pertamax, but relatively small in quantity.

OBF and Coal largest source of energy for manufacturing sector

The manufacturing sector is the largest consumer of energy in Indonesia. Among the largest consumers are steel, petrochemical cement, ceramic, textile and pulp and paper industries.

Oil fuels (OBF) still account for the largest portion of energy consumption of the manufacturing sector despite growing portion of coal, and natural gas energy especially after the soaring prices of crude oil in the world market.

Oil fuels accounted for 50.2% of fuel consumption of the manufacturing sector in 2006, down slightly from 52.6% in the previous year.

Contribution of coal to fuel consumption of the manuafcturing sector grew steadily from 36,584,000 boe (barrel oil equivalent) or 26.5% of the total consumption in 2001 to 38,627,000 boe or 28.3% in 2006.

Consumption of electric and LPG energy has also grew though small in quantity and portion.

Potential of alternative sources of energy in Indonesia

The presidential regulation No.5/2006 on national energy policy cited a number of potential alternative sources of energy in Indonesia, including :1. Geothermal 2.Bio fuel 3. Solar heat 4.River water 5.Wind 6.Biomass 7.Bio gas 8.Sea waves 9.Sea depth temperature

Geothermal

Geothermal is an alternative source of energy projected to contribute 5% to the country's energy requirement in 2025. Indonesia has the largest geothermal reserves in the world. The country has a total reserve of 27,000 MW or 45% of the world's reserves. A number of geothermal power plants (PLTP) have been built and operational in the country totaling 783.4 MW in capacity or 4.2% of the potential.

A number of areas in Indonesia have potential geothermal reserves such as Seulawah (NAD), Tampomas, Cisolok - Sukarame (West Java), Gunung Unggaran (East Java), Ngebel Wilis (East Java) and Jailolo (North Halmahera).

In addition to Perpres 5/2006, the government has isused the Law No. 27 in 2003 on geothermal, and Government Regulation No. 59 in 2007 on business in geotheraml sector. The law and the regulations were issued to encourage development and the use of geothermal power.

Nuclear

The plan to develop nuclear energy is still a hot public debate in Indonesia, with many citing the risk of leak in nuclear reactor. Indonesia has deposits of uranium the fuel for nuclear reactor. The deposits are found in Kalimantan with a reserve of 24,000 tons equivalent to 9,000 megawatts of electricity.

The government plans to develop nuclear energy to contribute 2% to the country's energy consumption in 2025. The nuclear plant to be built on the foot of Mount Muria in northern coastal area of Central Java will have four units. Construciton is to start in 2010 and it is to start operaiton in 2016.

Water energy

Water energy has been used widely in the country such as the Jatiluhur, Asahan, Karangkates, and Gajah Mungkur dams. The water volume of some of the dams, however, has declined because of denudation of forests the water sources upstream

Liquefied Coal

The country has large coal reserves estimated at 6.7 billion tons enough to supply coal energy for 140 years. A number of technologies have been used to produce coal in liquid and gas. Liquid and gasified coal will be a potential alternative sources of energy in the future.

Biofuel

Biofuel is another potential source of energy. Biofuel has become an important as an alternative source of energy in the world with the soaring price of oil. Biofuel has been used in many countries and Indonesia has started using it as transport fuel.

Oil fuels, however, remains by far the main fuel for the transport sector in the country. Progress has been slow in the use of bio fuel for the transport sector. Biofuel has become an important fuel for transport in Brazil, the Unuted States, Germany, France and Italy.

Impact of climate change summit in Bali on development of alternative energy

Biofuel in Indonesia is produced mainly from palm oil, which is available in abundance in the country. Expansion of oil palm plantaitons in the country, however, may be hampered by allegation that Indonesia has extensively destroyed its tropical forests to give space for oil palm plantation. The allegation has been heard in the climate change summit in Bali in December, 2007. Indonesia could face international sanction for the alleged destruction of its tropical forest, either in boycott of its palm oil-based products including biofuel.

Countries having tropical forests are called on to preserve their forests, while industrialized countries are demanded to pay compensation for carbon emissions they produced to tropical countries having tropical forests under the REDD (Reduce Emissions from Deforestation and Degradation) concept. It was, however, only a gentlement agreement, but in the future expansion of oil palm plantaiton or other plantatons at the expnse of forest will likely draw strong international condemnation.

National energy mix 2025

The government's energy policy has been determined under a Presidential Regulation No 5/2006 on national energy mix in 2025. The policy is aimed at reducing the dependence on fossil fuels considering the dwindling oil reserves and to reduce pollution by gas emission.

Under the policy, the national energy mix in 2025 will be as follows:

o Oil 20%.

o Natural gas 30%.

o Coal 33%.

o Biofuel 5%.

o Geothermal 5%.

o Renewable sources of energy (Biomass, Nuclear, Water energy, Solar energy and wind energy ) 5%.

o Liquefied coa 2%.

Meanwhile, the government has taken a number of steps toward achieving its energy targets. Among the steps are cut in oil subsidy, conversion of kerosene with LPG and development of bio energy. National energy mix based on (the presidential regulaiton No. 5/2006) Source: DESDM

Conclusion

The rising oil prices in the world market is natural consequense of growing requirement and dwindling reserve of oil.

The prices of oil have become more sensitive to supply and demand as until now oil is the main source of energy and could not yet be fully substituted with other fuels.

Development of alternative sources of energy is the only visible solution to problem caused by dependence on fossil fuel. Brazil is one of the most successful in reducing dependence on fossil fuel by mass producing biofuel from ethanol Bioethanol now accounts for 33% of its fuel consumption. * * *