Q+A-Indonesia energy policy a key issue ahead of election

JAKARTA, July 1 (Reuters) - Indonesia has huge hydrocarbon resources, but has become a net crude oil importer and also suffers from frequent powercuts, making energy policy a critical issue for voters ahead of the July 8 election, and for investors.

President Susilo Bambang Yudhoyono and his rivals for the presidency, Megawati Sukarnoputri and Jusuf Kalla, have all highlighted the need to squeeze more from Indonesia's resources sector but have provided few details of how to achieve this.

Here are some questions and answers on energy policy:

WHAT ARE THE KEY ISSUES FOR INVESTORS?

Indonesia needs billions of dollars of investment to exploit its energy reserves -- now often offshore and difficult to access in deep waters -- with the huge Natuna D-Alpha gas project alone estimated to require about $40 billion investment.

Indonesia lacks the domestic funds and technical expertise to develop these fields, but the involvement of foreign investors, who bring capital and technology, is a sensitive political issue.

With presidential elections looming, some politicians have stirred up hopes of renegotiating past contracts, which they consider "unfair", in Indonesia's favour.

The key issues are control of the projects, the royalties, domestic use of energy, and the price paid for oil and gas by domestic consumers.

WHAT ARE THE POLICY RISKS FOR FOREIGN INVESTORS?

The risk is that foreign investors will be muscled out of some big projects.

Indonesia's state oil and gas firm, Pertamina, is increasingly pushing for involvement in projects that were previously awarded to foreign partners, even though it may lack the financial clout to participate. [ID:nJAK113756]

Indonesia has far more gas than oil and is the world's third-biggest exporter of liquefied natural gas (LNG), but there is political pressure to set aside more gas for domestic use.

Kalla is calling for all the gas to go to domestic use in the planned $1.4 billion Donggi-Senoro LNG project in Sulawesi. The project made deals previously to export to Japan. [ID:nJAK502778]

Diverting more gas to domestic consumers could make projects uneconomic and would be bad news for foreign investors because they would receive a lower price for gas sold locally, and would much rather sell to South Korea, China or other foreign buyers.

Yudhoyono has promised to sell more gas to the domestic market but has also said the country should keep exporting LNG.

IS ANYTHING BEING DONE TO ATTRACT FOREIGN INVESTMENT?

Yudhoyono, who is currently well ahead in most opinion polls, has said he wants to resolve the tax issues which currently deter oil and gas investment. Some analysts point to taxation in the exploration phase and also double taxation by local governments following greater decentralisation as investment deterrents.

Indonesia's crude output has slumped by over a third from a decade ago, making it a net importer on a lack of new investment.

So, when oil prices jump, fuel subsidies suck up billions of dollars and strain the budget. The next government will have to decide how to get more investment to explore oil and gas.

State energy firm Pertamina has been seeking to lift upstream activities and has set ambitious targets on building new oil refineries but there has been little progress so far (Click on [ID:nJAK488550] for FACTBOX on refineries)

WHAT IS JAKARTA'S LONGER-TERM ENERGY STRATEGY?

Indonesia has set itself energy targets that some experts think are very tough to meet, given the huge capital investment and specialist technology needed.

It has a blueprint to cut the use of costly oil to 20 percent of its energy mix by 2025 from about 50 percent now. Coal and gas would rise to about 30 percent each and renewable sources such as biofuel or geothermal would make up the rest.

In a bid to resolve a power crisis, Indonesia has two crash programmes to add 10,000 Megawatts (MW) of electricity, with the first using coal-fired power stations and the second phase more renewable energy resources such as geothermal. The first phase is already behind schedule due to financing problems.

WHAT IS THE OUTLOOK FOR FUEL PRICE SUBSIDIES?

Fuel price subsidies are extremely politically sensitive in Indonesia and government officials have been careful during the campaign period to say there are currently no plans to raise fuel prices, even as oil prices rise again.

Yudhoyono's popularity plummeted last year after he raised fuel prices, but his support rebounded after a drop in crude oil prices later allowed him to slash subsidised fuel prices.

However, the next government might have to look at how to cut the burden of subsidies, which are also applied to electricity.

WHO IS LIKELY TO BE ENERGY MINISTER?

The current energy minister, Purnomo Yusgiantoro, has said he expects to quit his post at the end of this term.

Under his tenure, oil production has fallen steadily. If Yudhoyono is re-elected, some commentators have suggested state secretary Hatta Rajasa, investment board chairman Muhammad Lutfi or former Pertamina vice president Iin Arifin Takhyan could take over. But they may lack the sort of reform credentials that could really help attract badly needed investment.

Candidates fitting the bill more in that respect could be Kuntoro Mangkusubroto, a former energy minister whose running of Aceh's reconstruction agency won praise, and Erry Riana Hardjapamekas, who ran tin miner PT Timah and was in charge of plans for the armed forces to divest their business interests. (Writing by Ed Davies; Editing by Sugita Katyal)