Indonesia’s Ambitious Energy Megaprojects: A Risky Bet on Domestic Funding

Indonesia is embarking on an audacious plan to transform its energy landscape with a series of megaprojects worth a staggering US$618 billion, set to commence this year. At the heart of this initiative are coal gasification projects aimed at reducing reliance on imported liquefied petroleum gas (LPG) and the construction of what could become the country’s largest oil refinery. Backed by the newly established Danantara sovereign wealth fund (SWF), the government is prioritising domestic funding and resources, sidelining foreign investors in a bold assertion of self-reliance. But as past efforts falter and economic concerns mount, questions linger over the viability and risks of this high-stakes strategy.

Energy and Mineral Resources Minister Bahlil Lahadalia announced the plans on Monday at the State Palace, underscoring President Prabowo Subianto’s directive to leverage local capital. “The government doesn’t need new investors. The President’s directive is clear: Use domestic funds,” Bahlil told reporters. He emphasised that while foreign technology is welcome, the raw materials, capital, and offtake agreements will remain firmly in Indonesian hands. This marks a significant shift from previous attempts at coal gasification, which stalled after foreign partners, including US-based Air Products and Chemicals, withdrew from joint ventures in 2023.

Coal Gasification: A Long-Standing Ambition

Indonesia, home to the world’s seventh-largest coal reserves, has long sought to process its abundant low-rank coal into higher-value products such as dimethyl ether (DME), methanol, and urea. The goal is to curb dependence on LPG imports, which burden the national budget. However, the journey has been fraught with challenges. A 2018 partnership between state-owned mining company PT Bukit Asam (PTBA) and Air Products collapsed, as did a similar project with PT Kaltim Prima Coal (KPC). Chinese investors also expressed interest but later backed out, leaving the government to shoulder the burden.

Now, the administration is pushing ahead with four coal gasification projects in South Sumatra, East Kalimantan, and South Kalimantan, part of a broader set of 21 natural resource processing initiatives worth $40 billion. Tri Winarno, the energy ministry’s minerals and coal director general, estimated that coal gasification alone would require $11 billion in investment, making it the largest component of this year’s planned projects. Beyond the Danantara SWF, state-owned enterprises (SOEs) will also play a key role in execution, according to Tri.

Yet, industry experts and analysts are sounding caution. Coal gasification is notoriously complex and costly, with uncertain returns. A 2020 report from the Institute for Energy Economics and Financial Analysis (IEEFA) warned that PTBA’s coal-to-DME project could result in annual losses of $377 million. Moreover, global trends of coal divestment by major asset managers and banks have made financing increasingly difficult, casting doubt on the long-term sustainability of such ventures.

A Mega Refinery and Energy Security

Beyond coal, the government is also planning a massive oil refinery with a capacity of 500,000 barrels per day, alongside a crude oil storage facility on Nipa Island in Riau Islands province. This project aims to bolster Indonesia’s energy security by enhancing domestic refining capabilities. Currently, the country relies heavily on imported refined petroleum products despite being a significant crude oil producer in the past. The Balikpapan refinery in East Kalimantan, operated by state-owned Pertamina, remains a key facility, but its capacity falls short of meeting national demand.

The proposed refinery, if realised, would dwarf existing infrastructure and position Indonesia as a regional leader in oil processing. However, details on timelines, environmental impacts, and funding allocation remain scarce. Given the scale of the project, its success hinges on meticulous planning and execution—areas where past Indonesian megaprojects have often stumbled.

Danantara: A Double-Edged Sword?

Central to this ambitious agenda is Danantara, Indonesia’s new sovereign wealth fund, launched with an initial $20 billion derived from savings previously lost to “inefficiencies, corruption, and misallocation,” according to President Prabowo. The fund is envisioned as a catalyst for economic growth, with the administration targeting an increase from 5.03% in 2024 to 8% by the end of Prabowo’s term in 2029. By financing megaprojects domestically, the government hopes to retain control and maximise economic benefits for Indonesian stakeholders.

However, critics argue that using an SWF for such speculative ventures is unconventional and risky. Ronny P. Sasmita, an economist at the Indonesia Strategic and Economic Action Institution (ISEAI), described the decision to fund coal gasification through Danantara as “making no sense” due to the projects’ uncertain viability. “The exit of foreign investors alone signals weak prospects. Besides, these aren’t the kind of projects SWFs typically back,” Ronny told The Jakarta Post. He likened the move to a risky bet on a start-up, warning that potential losses could evade traditional accountability mechanisms under the amended State-Owned Enterprises Law.

Fitch Ratings echoed these concerns in a February report, suggesting that the credit profiles of state-run firms could weaken if Danantara demands higher dividend payouts or pushes SOEs into riskier projects. The interplay between the SWF and SOEs raises questions about transparency and fiscal responsibility, especially if projects underperform.

Broader Downstream Ambitions

The coal and oil initiatives are part of a larger push to accelerate downstream industries, including an iron smelting plant, alumina and aluminum refineries, and copper and nickel processing facilities. These projects reflect Indonesia’s broader strategy to move up the value chain by processing raw materials domestically rather than exporting them unrefined. While the vision is commendable, the scale and complexity of coordinating dozens of megaprojects simultaneously pose significant logistical and financial challenges.

Minister Bahlil, who also heads the task force on downstream industries and energy resilience, hinted at further announcements in the coming months. The government’s determination to reduce reliance on foreign players is clear, but whether domestic expertise and capital can fill the void left by international partners remains to be seen.

Economic and Environmental Implications

If successful, these megaprojects could reshape Indonesia’s economy, creating jobs, boosting energy independence, and driving growth. The conditional benefits are substantial: if coal gasification reduces LPG imports as planned, the state could save billions annually. Similarly, a major oil refinery could position Indonesia as a net exporter of refined products, strengthening its geopolitical standing in the region.

However, these outcomes are far from guaranteed. The financial risks are compounded by environmental concerns. Coal gasification, while potentially reducing import dependency, remains a carbon-intensive process. At a time when global pressure to transition to cleaner energy sources is mounting, Indonesia’s heavy investment in coal-derived products could draw criticism from environmental groups and international partners. The government has yet to clarify how it will balance these projects with its commitments under the Paris Agreement.

A Test for Prabowo’s Vision

President Prabowo’s administration sees Danantara and the energy megaprojects as cornerstones of a self-reliant, high-growth Indonesia. The rhetoric of economic sovereignty resonates with a domestic audience eager for progress, but translating ambition into results will require navigating a minefield of economic, technical, and political challenges.

For now, the government’s insistence on domestic funding and resources is a gamble. If the projects falter, as past efforts have, the fallout could undermine public trust and strain state finances. Conversely, success could cement Prabowo’s legacy as a transformative leader. As Indonesia forges ahead with its $618 billion blueprint, the world watches to see whether this bold bet will pay off—or become a costly lesson in overreach.