EXTRACTIVE INDUSTRIES

High prices in the extractives industry are generating significant windfall revenues for Indonesia. In mining, which accounts for 0.5% of the national revenue, revenues jumped 74% between 2005 and 2006.¹ Pertamina boasted ending 2007 with $2.5 billion USD, the highest profit ever posted by an Indonesia company.²

As the only OPEC country that is a net importer of oil, Indonesia is strongly pushing the exploration and extraction of its remaining oil and gas reserves. The most recent financial incentives include eliminating tariffs for importing equipment used in oil, gas and geothermal production, such as drilling platforms, offshore production and undersea exploration facilities. This is in response to Indonesia's decreasing production despite untapped reserves. In 2007 production levels dropped to 899,000 b/d, down from 1.01 b/d in 2006 and the peak of 1.69 b/d in 1977.³

Despite declines in production, extractive industries still have a great effect on government revenues. Oil and gas revenues account for approximately 25%⁴ of the projected total revenues for the Government of Indonesia in 2007 and approximately 25% of foreign trade⁵. Current high prices are generating significant windfall revenues. In mining, which accounts for 0.5% of the national revenue, revenues jumped 74% between 2005 and 2006⁶. The benefits from these gains will ultimately be limited, as the Ministry of Energy projects that oil and natural gas reserves will be depleted in 23 and 62 years, respectively.⁷

The oil and gas industry in Indonesia are largely governed by Production Sharing Contracts and require options for a partnering share with the state-owned company, Pertamina. Major actors in oil and gas include: Chevron, Exxon, British Petroleum, PetroChina, Total, Unocal, CNOOC, and ConocoPhillips.

Indonesia's mining sector, which has a reputation for unclear and shifting regulations, is also under explored and extracted. The country's principal mineral resources include coal, copper, gold, nickel, and tin. Freeport Indonesia, a subsidiary of Freeport-McMoRan runs the world's second largest copper mine on the island of Papua. In 1999 Newmont Mining opened another large mine, bringing copper production to over 2.5m tones in 2005. These two mines also contribute to 70% of the 142,895 kg of gold production in 2005.⁸

Indonesia is ranked second in the world, after China, in tin production in a sector dominated by two companies: PT Koba Tin and PT Tambang Timah Tbk, both Indonesian owned and operated.

According to PricewaterhouseCoopers' "Mine Indonesia," published in December 2006, Indonesia ranked as the sixth worst nation for policy framework, in a survey of international mining companies.

After decentralization in 2004, local governments took the authority to provide local licenses for small-scale tin-smelters, expanding the opportunity for widespread illegal mining.⁹ Some local governments are also issuing mining licenses for gold, in places such as North Sulawesi and Central Kalimantan.

Many of these licenses are for small-scale miners, although this practice is illegal at the national level. The same situation applies for coal, where many provinces on the island of Kalimantan have issued local mining permits to small companies. These often overlap with mining concessions granted to larger international companies, resulting in conflict and disruptions to mining operations.

The significance of illegal artisanal mining in Indonesia cannot be ignored. While in most cases no data is formally available, the tin mining industry provides a good illustration: In 2005 official production of Indonesian tin was 74,000 tons, but total annual output was thought to be 120,000 when illegal mining was included.¹⁰ The foremost concerns related to illegal mining are revenue loss and environmental degradation.

1. Tifa Foundation. From Department of Energy and Mineral resources.
2. The Jakarta Post. Friday, January 18, 2008 Pertamina to become RI's most profitable firm
3. Reuters and EIU December, 2007 report
4. Del Granado, Javier Arze et al "Oil and Gas Revenue Management, Domestic Petroleum Product Pricing and Subsidies in Indonesia" World Bank Indonesia. Mining accounts for .49%, of national revenue.
5. As of 2004. Embassy of the United States of America, Jakarta. Petroleum Report Indonesia 2005-2006. June 2006.
6. Tifa Foundation. From Department of Energy and Mineral resources.
7. Minister Purnomo Yusgiantoro. Indonesian Energy Policy and the Influence of Petroleum. Norwegian Indonesian Petroleum Seminar. February 2007.
8. EIU, USGS
9. USGS, 2005
10. EIU, 2007