Executive Summary
Government Policy, Regulation and Program
Market Challenges
Market Entry
Competition in the Market
Regional Perspective
Trade Related Events
Tools & Useful Resource Links
U.S. Commercial Service Contact
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Executive Summary
Government Policy, Regulation and Program
Market Challenges
Market Entry
Competition in the Market
Regional Perspective
Trade Related Events
Tools & Useful Resource Links
U.S. Commercial Service Contact
Executive Summary
Indonesia is Southeast Asia’s largest economy with a Gross Domestic Product of US$1.042 trillion in 2018, ranking 7th in the world based on Purchasing Power Parity. Economic growth in 2019 decreased slightly to 5 %, compared to the previous year at 5.2%; growth over the last five years has been just above 5% per annum, credited to strong private consumption. President Joko Widodo (known as “Jokowi”) took office again in October 2019 for his second presidential term and has pledged to improve human capital infrastructure, diversify the economy, and reduce barriers to doing business in Indonesia as a means of increasing economic growth.
Over the past decade Indonesia has enjoyed steady economic growth, though less than needed to pull the country solidly into the upper middle-income status. Sound macroeconomic policies, combined with growing domestic demand and high commodity prices, propelled economic expansion in recent years, but protectionist policies, corruption at all levels of government, limited infrastructure, weak rule of law, and labor rigidity continue to pose challenges.
Following President Jokowi’s reelection in April 2019 and the subsequent changes in key leadership positions within his cabinet, policy changes have begun to be implemented that indicate Indonesia will become more welcoming to foreign investment. In early 2020 the Government of Indonesia began to develop several Omnibus Laws that will make significant changes to Indonesia’s labor laws, restrictions on foreign investment and tax policies. Indications are that the business climate will improve in the coming years as Jokowi pursues a less protectionist path forward.
In 2018 and 2019, investment in Indonesia’s oil and gas industry reached around $12.3 billion and $12 billion respectively, decreasing from around $16 billion in 2016. Indonesia still has significant reserves of oil and gas but needs substantial investment and technology for the exploration. Much of the remaining reserves will require sophisticated technology that Indonesia’s SOE operators do not have and protectionist policies are discouraging global energy companies from pursuing opportunities, limiting the country’s output. Overall, the country’s oil production is declining by 11% per year due to ageing oil fields and the lack of new oil field exploration. In 2019, the country’s oil production was 746,800 barrels per day (bpd), lower than 2017’s production of 803,000 bpd. 2018 production decreased again with 778,000 bpd. Gas production for 2018 was 1.14 million barrels of oil equivalent per day (mboepd) which decreased slightly, 0.01 mboped from the previous year.
With oil prices remaining relatively low coupled with declining exploration and production options, the Indonesian government has sought to further develop its gas sector for greater domestic use. This includes seeking increased investment in unconventional gas (coal bed methane, shale gas, oil sand, tight gas, and biogenic gas) and exploring ways to expand domestic gas distribution infrastructure. The market for oil and gas equipment and services in Indonesia remains stable but faces increasingly stringent domestic content requirements. On the other hand, as the economy has been growing, it has been directly impacting domestic energy fuel demand growth such as crude oil and LNG.
Official trade statistics understate market opportunities and American presence given the large number of U.S. shipments that are recorded as U.S. exports to Singapore, which ultimately enter Indonesia, as well as U.S. sales in Indonesia that U.S. multinationals source via third countries.
Despite Indonesia being one of the largest natural gas resources and exporters in the world, it still lacks in LNG infrastructure. This has been a major challenge for the LNG sector.
Indonesia is an ideal location for U.S. companies to enter the market. However, the biggest obstacle facing U.S. companies in Indonesia is currently with some of the Government of Indonesia’s (GOI) policies, such as protectionism. For major foreign energy investments in Indonesia, the majority of project ownership is required to be owned by Indonesia or the Indonesian state owned companies as assigned by the government. There are also other barrier sources, such as local content regulation (LCR), compulsory standard certification, land and permit issue, foreign worker permit, procurement transparency etc.
In addition to those barriers mentioned above, due to recent trade balance deficits and weakening local currency toward the US Dollar, the government has created policies to reduce imports. This includes the import duty tariff for certain products such as high calorie coal, lubricant, etc., as was previously 2.5 - 5 percent to 7.5 - 10 percent and requires some industries to use the at least 20% palm oil or biofuel to be mixed into the transportation fuel.
Government Policy, Regulation and Program
In 2015, the Government of Indonesia announced its intention to increase electricity generation ratio by 35,000 MW 2019. As an archipelago country consisting of around 17,000 islands, Indonesia’s geography is extremely challenging for both power production and distribution. The government estimates that currently there are still more than 2,500 villages, located mostly in remote eastern islands, that have no or very limited access to electricity. Efforts to address this issue by investors and NGOs have been frustrated by government bureaucracy and SOE monopolization of the power sector.
*sources from PGN
*Jargas is the short name for the gas network infrastructure mainly for households.
Market Challenges
Indonesia has a strategic location, located in the Indian and Pacific Oceans with Australia in the south. The Indonesian government has a strong will to improve the economy and country by improving infrastructure, business regulations and policies, and having a transparent legal system and skilled workforce. To improve overall transparency and company performance, the leadership of SOE energy companies has been reformed. This should bring better transparency and business practices that will prove favorably for U.S. companies.
With The GOI’s 35 GW electrification program to meet 99% electrification ratio by 2019, and with the limited large-scale LNG infrastructure, Indonesia has focused more on the development of small scale LNG infrastructure. This 35 GW program, which the government has assigned primarily to its state-owned electricity company, Perusahaan Listrik Negara (PLN) and Independent Power Producer (IPP), to carry out the program where PLN would be the only main off-taker, has been supporting growth in power generation projects, conventional, and renewables and is expected to continue for the next decade. Hence the GOI’s 35 GW electrification program also brings good opportunities for the development of the LNG sector in Indonesia.
*sources from PLN
PLN’s electricity supply plan (RUPTL) of 2019 – 2028 aims to grow the electricity sector by 6.42%, adding 56 GW of power plants and having 22% gas in the fuel mix. This gas portion is mandated by the National Energy Policy, which aims for 22% of total electricity production to be produced through natural gas by 2025.
Construction of additional oil and gas facilities in Indonesia should bring significant commercial opportunities for U.S. companies that supply engineering services and equipment, such as compressors, metering systems, and pumps.
Major companies that would be interested in using products American companies have to offer in the oil, gas, and petrochemical industry include:
*sources from PGN
Market Entry
U.S. companies must visit the Indonesian market in order to properly choose an appropriate agent or distributor in Indonesia. Qualified representatives will not take U.S. principals seriously unless they make a commitment to meet in-person for an initial meeting to build a good business relationship and visit the market on a regular basis going forward. Patience, persistence, and presence are three key factors for success in Indonesia.
Important factors affecting purchasing decisions in Indonesia are pricing, financing, technical skills, and after-sales service. Firms should be prepared to invest in training for their local staff from entry-level personnel to experienced managers.
Non-financial Indonesian firms often depend on trade financing with nearly 50% of their financing obtained from abroad via loans, bonds, and other credit. U.S. Ex-Im Bank and OPIC are active providers of trade and investment financing for local projects.
Although it is possible for U.S. companies to sell directly to the government and state- owned companies, local agents or distributors are often critical (and at times, required by law) for successful project development and delivery of products or services. Many government tenders are awarded based on the proven track record of providers or long-established relationships between the government agency and an agent or distributor.
Price, quality and service are the three main selling factors of Indonesia, but it is equally important for U.S. companies to build a long-term relationship first with potential partners. These partners could be in the form of agents or distributors who can serve Indonesia and the Southeast Asia region such as Singapore, Malaysia, Indonesia, Vietnam and Thailand.
Competition in the Market
With the growing population and industrial sectors, Indonesia is predicted to face a shortage in energy supplies, especially natural gas, in 2024. The Indonesian government, through its state-owned energy companies such as Pertamina, has been working with some American companies, including Anadarko, Cheniere and ExxonMobil, to secure LNG for Indonesia. The contract with those U.S. companies to import LNG are put on hold generally. However, with a high LNG price for industries in Indonesia, the country seems to be bit more accommodating on LNG importation.
There is strong competition from other countries in the region and beyond - Japan, China, Korea, Australia, Russia, France, and Singapore, primarily. The competition is intense, and U.S. firms often have to significantly adapt their business model and pricing scheme to compete effectively. However, U.S. technology, products and service in the oil and gas sector are preferable due to its well-known quality.
Despite competition between the 2 countries, Japan and U.S. formed the Japan–U.S. Strategic Partnership (JUSEP) program that was recently implemented in Indonesia. As a result of the implementation of that program and through cooperation with the Indonesian government via Indonesia’s Ministry of Energy of Mineral Resources (MEMR), on March 5th, 2019, U.S. and Japan Embassies held the Indonesia–U.S.–Japan LNG workshop and reception.
Regional Perspective
Most of the developing economies in Asia are highly dependent upon oil imports, more energy-intensive and less energy-efficient than most industrialized countries. Regional analysts and industry players believe that petrochemical and oil and gas business remains bright, especially in Asia. As such, fundamentals for sustained exploration and downstream production activities are also expected to remain strong as shown by the various ongoing offshore projects in the ASEAN region. Indonesian companies are well placed to serve as agents and distributors of U.S. technology, products and services for these projects.
Price, quality and service are the three main selling factors of Indonesia, but it is equally important for U.S. companies to build a long-term relationship first with potential partners. These partners could be in the form of agent or distributors who can serve Indonesia and the Southeast Asia region such as Singapore, Malaysia, Indonesia, Vietnam and Thailand.
Trade Related Events
U.S companies interested in the Indonesia market should consider participating at Indonesia trade shows. These trade shows provide a very good perspective as to who the major players in the industry are and also serve as a venue to meet many trade visitors (both local and foreign) including government officials. CS Indonesia regularly attend the trade show to meet and support US companies that participating at the show.
U.S. Trade Events: www.otcnet.org
International Trade Events:
Asia EDGE Trade Mission to Indonesia (Southeast Asia) https://www.trade.gov/asia-edge-trade-mission
GasTech Exhibition and Conference (GasTech) 2020Indonesia Trade Events: https://convex.ipa.or.id/
Enlit 2020 (Formerly PowerGen Asia 2020)www.powergenasia.com
Tools & Useful Resource Links
U.S. Government Assistance
United States Trade and Development Agency (USTDA) - www.ustda.gov
U.S. Exim Bank - www.exim.gov
U.S. International Development Finance Corporation (US DFC) (formerly Overseas Private Investment Cooperation (OPIC) - www.opic.gov
Government & Statutory Agencies
Indonesia Ministry of Energy and Mineral Resources - www.esdm.go.id
Indonesia Upstream Regulator for the oil and gas operation (Satuan Kerja Khusus Pelaksana Kegiatan Hulu (SKK Migas)) - www.skkmigas.go.id
Gas Marketers & Distributors
U.S. Commercial Service Contact
U.S. Commercial Service Contact Name: Mario Simanjuntak Position: Commercial SpecialistEmail: Mario.Simanjuntak@trade.gov Phone: +62-21-5083-1000Location: Indonesia
