Indonesia backs out of OPEC amid production cut

Indonesia has temporarily withdrawn from the Organization of the Petroleum Exporting Countries (OPEC) following the group’s decision to cut production by 1.2 million barrels of oil per day (bopd) next year.

During the 171st OPEC conference in Vienna, Austria, on Wednesday its members agreed to reduce its output to a ceiling of 32.5 million bopd starting next January to rebalance the market, which has long suffered from oversupply.

With the move, Indonesia is subject to lower its production by 5 per cent, or around 37,000 bopd from next year’s target of 815,000 bopd, much higher than it can tolerate at 5,000 bopd for next year.

President Joko “Jokowi” Widodo said although Indonesia reactivated its OPEC membership earlier this year, which he claimed aimed at knowing the crude stock conditions of each member country, Indonesia opted to freeze its membership to focus on its state budget.

“Due to our need to fix our state budget, we don’t find it a problem at all if we leave again,” he said on Thursday.

Energy and Mineral Resources Minister Ignasius Jonan said slashing production would affect state revenues obtained from the oil and gas industry.

“The need for state revenues is still great and the production target in the 2017 state budget draft is already a 5,000 barrel reduction from the one in 2016,” he said in a press statement.

The Finance Ministry aims to collect tax and non-tax revenues from the oil and gas sector of 101.93 trillion rupiah ($7.5 billion) next year.

Jonan further explained that as a net importer, it would not be beneficial for Indonesia to reduce its production as it would increase the price of crude.

Separately, Finance Minister Mulyani Indrawati said OPEC’s move to cut production would positively affect state revenue, although she admitted that the membership suspension had not been discussed between the two ministries since.

“OPEC was very last minute, so there was an element of surprise. I have not spoken to Jonan,” she said.

This is the second time Indonesia has suspended its OPEC membership, which requires it to pay $1.2 million annually. It initially made the move in 2008 and only reactivated its affiliation early this year.

The country was first forced to suspend its active engagement in the oil cartel almost a decade ago after it shifted its status from a net exporter to importer of crude oil to fulfill national refined fuel demand of around 1.6 million bopd.

The latest data from the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) indicated that domestic ready-to-sell production, locally known as lifting, reached around 830,000 bopd, only slightly higher than this year’s target of 820,000 bopd.

Indonesian Chamber of Commerce and Industry (Kadin)’s deputy chairman for the oil and gas sector, Bobby Gafur Umar, said OPEC’s efforts to boost prices by cutting its output would positively affect the oil and gas industry, as the higher value would encourage exploration activities to be bountiful once again.

“Sure, the industries that need oil might feel the heat. However, the oil and gas industry has been half dead for the past three years and we hope that there will be more exploration once crude becomes more economical again,” he said.