AS THE only Asian member and current president of the Organisation of Petroleum Exporting Countries (Opec) oil cartel, Indonesia should be capitalising on the high prices for crude oil and laughing its way to the bank. South-east Asia’s largest country, and by far its most populous, has the world’s 16th largest proven oil reserves.

However, output has declined in the past three years from an average of just over 1.2 million barrels per day to about 1.1 million now, below its Opec quota of 1.27 million. Official figures published in Jakarta last month show Indonesia became a net importer of crude oil for the first time in February and March.

Indonesian petroleum officials said they expect several new fields to come online later this year or next, and this will raise output, turning the country into a net exporter of oil again.

However, they find it difficult to attract foreign investment to boost reserves as old fields become depleted. Unless major new discoveries are made soon and brought into commercial production, Indonesia seems destined to become a permanent and growing oil importer by the end of the decade, possibly earlier.

Of course, it will continue to have huge reserves of natural gas and coal. They can last for many more years, while meeting both export and domestic demand.

However, despite its position as the world’s largest exporter of liquefied natural gas, Indonesia still relies on oil to supply about half its energy needs in key sectors of the economy such as transport, manufacturing and electricity generation. Unlike peninsular Malaysia, its pipeline grid for domestic gas distribution is not well developed.

Indonesia’s seemingly inevitable transition from net oil exporter to importer has political, economic and commercial implications, and could even have geopolitical repercussions for Singapore and other close neighbours if it opts for nuclear power in place of oil.

Meanwhile, oil is one of Indonesia’s biggest exports and most important sources of government revenue. Sales of oil helped Indonesia pull out of the Asian financial crisis of 1997 to 1998 and pay for some services the restive new democracy expects.

This year, however, the government expects combined oil and gas revenues to drop by more than 25 per cent, making it much more difficult to plug the budget deficit.

Among the many challenges Indonesia faces is to bring local petroleum prices more in line with the global market. Petrol, diesel and kerosene (used widely by poor Indonesians as a fuel for cooking) are all heavily subsidised. In the past, moves to reduce subsidies have met with major public protests.

While price subsidies are politically popular, economists said they must be scaled back because they are a heavy drain on limited government resources, they increase demand further and they encourage smuggling.

On the commercial front, Indonesia needs to make its oil exploration and production more attractive to foreign companies with the skills, technology and capital to find new reserves.

United States petroleum giant Exxon Mobil, for example, bought the Cepu field, located on Java, in 2000 and soon after found a huge reservoir of oil that Pertamina, the Indonesian state-owned petroleum company, had failed to discover in 30 years of searching the site.

The field is not yet in production because Exxon Mobil has been unable to agree on contract terms with Pertamina, including how to share costs of development and profits.

Cepu has proven reserves of 600 million barrels, and may contain more than one billion barrels, making it the biggest discovery in Indonesia since the 1960s. However, Cepu alone is not the answer to the country’s declining oil production. Only about half the field’s 600 million barrels are considered recoverable.

Indonesia currently produces about 400 million barrels of oil a year and needs more finds to replace its output. This helps explain its proposal to revive a long-stalled plan to build a nuclear power plant on Java despite concerns over safety in an area hit regularly by earthquakes and volcanic activity, and advice from experts that the country can find cheaper answers to a looming power shortage by using natural gas as a fuel.

In February, South Korean and Indonesian specialists began a three-year feasibility study on the future for nuclear power in Indonesia. If the project goes ahead, Indonesian officials said the nuclear power complex will have six nuclear reactors, each capable of generating 1,000 megawatts. The venture will cost around US$12 billion (S$20.5 billion) and be completed by 2016.

Indonesia’s looming oil crunch signals a wider regional trend. Falling production and rising consumption in the Asia-Pacific area will lead to rapidly expanding oil imports. Led by demand from China, Japan and South Korea, Asia-Pacific imports are, according to analysts at Hawaii’s East-West Centre, projected to rise to as much as 65 per cent of regional consumption – up from the current 59 per cent – by 2010.

Most of this oil will have to be sourced from major producers in the volatile Persian Gulf. If Iraq fails to stabilise and Saudi Arabia or other countries in the region come under intensifying threat from terrorism or political unrest, this may be a dangerous dependence for the Asia-Pacific region.

The writer is a visiting senior research fellow at the Institute of South-east Asian Studies in Singapore. This is a personal comment.