This study attempts to provide a broad,first cut review of the most pressing issues facing thesector, and to recommend ways to ameliorate or eliminate theproblems. The main problems are: 1) petroleum product pricesare heavily subsidized at the aggregate level and distortedat relative levels, and thus need to be rationalized withinan economic framework; 2) the functions and role of thestate oil and gas company (Pertamina) are problematic, andtherefore Pertamina must be fundamentally restructured toeliminate the conflicts of interest and inefficiencies; 3)some of the provisions of the production sharing contractsare relatively regressive and need to be re-evaluated with aview to maximize the contribution of the sector to theeconomy, and to increase upstream investment by the privatesector; 4) existing laws and regulations are inadequate andmust be replaced; 5) petroleum products are of poor qualityand must be improved, particularly by phasing out the leadfrom gasoline; and 6) energy sector institutions are weakand must be strengthened. Although the issues are complexand sweeping changes are needed, given the current politicalclimate, this is an opportune time for Indonesia to beginthe process. As a first step, preparing an official andcomprehensive declaration of government policy for thehydrocarbon sector is critically important--needed are thevision for the sector, policy objectives, and policy actionsrequired to solve the sector's problems.
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