OPEC Welcomes Indonesia Reentry

OPEC Welcomes Indonesia ReentryOPEC Welcomes Indonesia Reentry

OPEC has been the most talked about oil and gas organization in recent times, as it pursues market share and struggles to stem the slide in prices.

Back in June 2015, it was reported that Indonesia (which was previously a member of OPEC) was looking to rejoin the organization as soon as possible, Gaurav Agnihotri wrote for OilPrice.

“We have received an official confirmation from the OPEC secretary-general (Ban Ki-moon) that all the members (of organization) welcomed the reinstatement of Indonesia as a full member,” said Indonesia’s Minister for Energy and Mineral Resources Sudirman Said who also confirmed that his country would be officially participating in the upcoming OPEC meet to be held in Vienna in December 4.

Will the reentry of Indonesia act as reinforcement for OPEC or is it really of very little significance?

Indonesia was a net oil exporter until 2003, when rapidly expanding consumption overwhelmed its declining oil output and flipped it into a net importer. Indonesia’s OPEC membership ended in 2009 when its oil imports far exceeded its oil exports.

Although Indonesia is the biggest producer of oil in Southeast Asia, it is also a major consumer of oil. Data from BP show that Indonesia produced close to 852,000 barrels of oil per day in 2014 while it consumed nearly twice that amount in the same year.

Indonesia’s reentry would make it the only member who would be a "net importer" of crude oil.

  The Indonesia Factor

It is not clear why OPEC would even want Indonesia as a member. But its growing domestic oil consumption provides the organization with a major reason to include Indonesia.

As the most populous country in Southeast Asia and fourth most populous country in the world behind China, India and the US, Indonesia is facing the tough challenge of attracting sufficient foreign investment to satisfy its internal demand for oil.

The current market turmoil has created a rare opportunity for savvy energy investors.

While the mainstream media prints scare stories of oil prices falling through the floor, smart investors are setting up their next winning oil plays. With Indonesia in its corner, OPEC members (especially Saudi Arabia) would find a major internal consumer of their crude oil. Indonesia is already looking forward to signing new supply agreements with OPEC members so that it can import more crude oil for its upcoming refinery expansion plans (for which it also seeks investments).

Saudi Arabia and Nigeria are already the largest source of oil imports for Indonesia. With its inclusion in OPEC, crude oil exports to Indonesia are set to increase even further and Saudi Arabia and Nigeria, which have traditionally been more aligned with Indonesia anyway, are set to benefit the most out of it.

  Internal Turmoil

Indonesia’s inclusion comes at a time when OPEC is dealing with intense internal turmoil over the issue of pursuing market share amid a glut of crude oil supply.

Led by Saudi Arabia, OPEC’s decision to maintain its high production levels (31.5 million barrels per day in August) is proving to be extremely costly for certain OPEC members, such as Venezuela and Algeria, who have already expressed their discontent and started demanding production cuts as they face worsening financial and economic crises.

OPEC members like Venezuela and Nigeria require crude oil prices to be in the range of $90 to $100 per barrel to break even.

Interestingly, even Saudi Arabia, in a bid to maintain its market share, is losing foreign reserves at a staggering pace. Indonesia, as a major oil consumer, would prefer that OPEC continue to produce at a high level. However, its preference will not necessarily carry a lot of weight when the group meets in Vienna this December. Saudi Arabia, OPEC’s most powerful member, will pursue market share if it believes it needs to do so.

On the positive side, Indonesia can attract investments from OPEC members in its exploration and refining sectors to expand its sagging domestic production.Indonesia recently cancelled a $7.4 billion project to be undertaken by the state-owned Pertamina, which included a $5 billion pipeline project and a $2.4 billion fuel storage project.

OPEC members would, therefore, be very cautious when dealing with Indonesia because of its difficult regulatory environment and the previous cancellations/postponement of some major oil and gas projects.