Maritime Energy Resources in Asia: Energy and Geopolitics

Indonesia: Domestic Transformation and the Implications for Maritime Energy Security in Southeast Asia

61 the national bureau of asian research nbr special report #35 | december 2011 DINI DJALAL is a freelance journalist based in Washington, D.C. She was the Jakarta correspondent for CNBC Asia, a regular contributor to the Far Eastern Economic Review, and a television and radio producer for Voice of America. She can be reached at . Indonesia: Domestic Transformation and the Implications for Maritime Energy Security in Southeast Asia Dini Djalal EXECUTIVE SUMMARY This essay will analyze the energy industries and markets of Southeast Asia, with emphasis on trends in Indonesia; examine sovereignty and production disputes over the Ambalat area in the Sulawesi Sea and the Natuna Islands; and illustrate the evolving interests in and approach to such disputes on the part of the region’s two most important powers: the U.S. and China. MAIN ARGUMENT Southeast Asia is a vital component of global energy security, and it is rife with sovereignty disputes. Increasing domestic demand by Southeast Asian countries underlines the jockeying for specific sovereign rights across the region. The varying claims in the South China Sea have evolved over the decades, in step with political developments among the respective countries. In Indonesia, democratization has allowed for economic nationalists to push for an inward, protectionist economic policy, and the results have been beneficial for China and, for now, detrimental to the United States. This economic nationalism is dictating the progress of these claims, resulting in slower exploration efforts regarding the contested resources and, ultimately, underinvestment from wary potential investors and reduced production capacity. Indonesian territorial disputes over Ambalat and Natuna highlight these heightened tensions and their adverse affects on energy production. POLICY IMPLICATIONS • Indonesia’s energy sector needs a comprehensive energy strategy that focuses on reducing the inefficiencies of the system and increasing production capacity. • Even if the current administration or future administrations do not wholeheartedly agree with economic nationalists’ demands, they have to incorporate these concerns into policy. • U.S. re-engagement with Indonesia and Southeast Asia as a whole can do no harm, and perhaps will lessen the anti-Western sentiment brewing in Indonesian opposition political circles and lead to a more favorable investment climate. • China should deliver concrete business investments and enhance economic partnerships in the region as well, while the current business environment remains in its favor. 63 INDONESIA: DOMESTIC TRANSFORMATION AND THE IMPLICATIONS u DJALAL H ome to vital sea lanes that see the passage of essential oil tankers and military vessels of many nations, as well as to vast oil and gas resources, both tapped and untapped, Southeast Asia is a vital component of global energy security. The economic powerhouses of Northeast Asia—China, Japan, and South Korea—all depend on Southeast Asia for their energy supply. That demand will grow even more in coming years as Southeast Asia’s economies expand and flourish. While global oil consumption rose by some 10% in the last decade, consumption growth in the Asia-Pacific region exceeded 15%.1 Consumption in China and India increased the most— by 52% and 14%, respectively—but Southeast Asian nations are also consuming at a faster rate than they are producing.2 Nowhere is this more evident than in Indonesia, once a juggernaut oil and gas supplier that in previous years exported 70% of its oil and gas production. Today, Indonesia is a net importer of oil and no longer a member of the Organization of Petroleum Exporting Countries (OPEC). The needs of local industries and communities have grown so exponentially that more and more of the country’s gas and oil production is being reserved for domestic consumption, thus complicating the dynamics of energy supply and demand in the Asia-Pacific region. At the same time, Southeast Asia has experienced immense political change in the last decade. Gone are the long-time rulers who kept their nations in a tight grasp: President Suharto of Indonesia, President Ferdinand Marcos of the Philippines, Prime Minister Mohamad Mahathir of Malaysia, and Prime Minister Lee Kuan Yew of Singapore. In their place are emerging democracies and political configurations struggling to find a balance between globalization and national interests. Indonesia is relevant in any discussion of regional energy security, not only because of its considerable resources, but also because of the singular developments that the country has weathered in recent years. The democratization that has taken place in Indonesia is unparalleled in the region, and its neighbors—if not the world...