My final case study examines one of the world’s archetypical resource enclaves: West Papua. I study the British Petroleum (BP) Tangguh project, Indonesia’s first fully vertically integrated (i.e., from raw material to final product) liquified natural gas (LNG) operation. Two unmanned offshore production platforms tap the giant Tangguh LNG gas fields in Bintuni Bay (the “Bird’s head” in Figure 4.1), pump the gas through subsea pipelines to the LNG processing facility located in the village of Tanah Merah, then deliver LNG to markets across Asia and the United States. The gas fields contain over 500 billion cubic meters of proven natural gas reserves (with an extra 300 billion cubic meters estimated) and are being developed by an international consortium led by BP. The facility has operated at full capacity (seven million tons per year) since it became operational in 2009 and is expected to expand with the addition of a third LNG train before 2020.
West Papua provides a unique case study in many respects. It is one of the least populated and poorest parts of Indonesia. Papua and Irian Jaya were retained by the Dutch following independence in 1945, seized by Indonesia in 1961, and today remain one of Indonesia’s last areas of active separatism and civil unrest. In 2000, West Papua province contained three districts, but like many resource-rich areas of Indonesia, the three districts Balkanised into twelve today. Using 2001 district boundaries (the district named Manokwari in 2001), my estimates relate to a generous geographic area covering several modern-day districts. Despite the
larger area, the relative economic importance of this economic shock to the region dwarves my other two case studies. Manokwari extracted no oil or natural gas prior to the Tangguh project (see Figure 4.2), and the natural resource riches in the Bintuni Bay could potentially transform one of Indonesia’s most developmentally challenged regions.
Production at the Tangguh facility officially began in 2009. I use 2008 as the treatment year to capture related economic activity prior to the facility becoming operational (e.g., advance company payments to communities, building the necessary infrastructure around the facility) and because the longer lead time allows. The synthetic control is fitted from from 2001–2007.75
Table 4.6: Impacts of Gas Extraction in West Papua
Treatment minus synthetic control
RMSPE N Pre-T T T+1 T+2 T+3 T+4 Column 1 2 3 4 5 6 7 8 Total output 0.02 0.02 1.67 8.34 14.91 19.26 0.15 96 Agriculture 0.00 0.14 0.13 0.00 -0.05 -0.16 0.06 96 Industry -0.01 0.14 1.58 7.72 14.14 17.07 0.03 96 Services 0.00 -0.01 0.01 0.14 0.12 0.04 0.02 96 Poverty 0.47 -0.02 -0.42 -3.85 -0.08 -3.38 2.13 108 HH exp. 533 14276 53997 10235 10190 101
Poverty matched from 2002 up to the pre-treatment period 2007. All other variables matched from 2001–2007. Pre-T is the average difference between the observed outcome and the synthetic control in the pre-treatment matching period, RMSPE is the root mean squared prediction error, and N is the number of districts in the comparison pool. HH exp. refers to average monthly household expenditure per capita in nominal IDR.
75The land was acquired in 1999, with many resettlement agreements. The village relocation
Figure 4.7: Impacts of Gas Extraction in West Papua
(a) Aggregate Output
0 5 10 15 20 25
Per capita RGDP (million IDR)
2001 2003 2005 2007 2009 2011 Year
Manokwari synthetic control
(b) Agriculture 0 .5 1 1.5 2 2.5 3 3.5
Per capita agriculture RGDP (million IDR)
2001 2003 2005 2007 2009 2011 Year
Manokwari synthetic control
(c) Industry 0 5 10 15 20
Per capita industry RGDP (million IDR)
2001 2003 2005 2007 2009 2011 Year
Manokwari synthetic control
(d) Services 0 .5 1 1.5 2 2.5 3
Per capita services RGDP (million IDR)
2001 2003 2005 2007 2009 2011 Year
Manokwari synthetic control
(e) Household Expenditure
0 100000 200000 300000 400000 500000
Avg. monthly household expenditures (IDR)
2001 2003 2005 2007 2009 Year
Manokwari synthetic control
(f) Poverty 0 10 20 30 40 50 Poverty rate (%) 2002 2004 2006 2008 2010 2012 Year
Economic impacts
The local economic and welfare impacts of the Tangguh project are presented in Table 4.6 and Figure 4.7. Panels A and C of Figure 4.7 show dramatic boosts to total and industry output, expected given the facility’s vertically-integrated nature. Output in the agricultural sector—the largest sector before the mining boom and still accounting for most Papuans’ livelihoods (Resosudarmo et al, 2013)—paints a less positive picture of the Tangguh project (Panel B). Agricultural output breaks from its long-term trend as the large gas project became operational. Panel D shows a small increase in services sector output relative to the counterfactual, although some services may be part of the project (e.g., hotel accommodation for expatriates).
Welfare impacts
Manokwari’s poverty rate has steadily declined from 2002–2012, falling by an impressive 20 percentage points (Panel F of Figure 4.7). But there is no sharp discontinuity or change in trajectory as the LNG facility became fully operational in 2009. Similarly Panel E of Figure 4.7 shows how the commencement of the facility’s operations corresponded to an immediate boost in average household expenditures, but convergence with the synthetic control shortly after. The quadrupling of per capita output has not been met by a commensurate increase in welfare or poverty reduction: any impacts are slight in context of the massive scale of the output ramp up. Unlike for coal mining in Tapin, this result is consistent with the higher poverty rates that are observed on average across mining-dependent districts in Chapter 2.
4.4
Conclusion
The objective of this chapter was to quantify the local economic and welfare impacts of resource booms in three Indonesian districts. I studied Indonesia’s three largest primary exports and used the synthetic control method to construct counterfactual paths for districts’ per capita economic output and its components, as well as average household expenditure and poverty. Each resource boom substantially altered the structure of the local economy. Palm oil expansion in Indragiri Hilir delivered a small boost to all sectors of the economy and strong poverty reduction. Coal mining in Tapin reduced agricultural and services sector output, but also delivered strong poverty reduction relative to the estimated counterfactual. The Tangguh natural gas project in West Papua delivered a massive increase in local economic output, but no major impacts on average household welfare and poverty and a contraction in the agricultural sector.
According to the Indonesian constitution, Indonesia’s natural resources are to “be controlled and utilised by the State for the maximum prosperity of the people” (Gandataruna and Haymon, 2011). My three case studies highlight how natural resource sectors can make important contributions to increasing district GDP per capita and reducing poverty in Indonesia. Relative to their size, sectors with more concentrated rents (e.g., natural gas) appear to provide fewer benefits to local residents than more diffuse, labour-intensive sectors. For regions depending on resource sectors with highly concentrated rents, natural resource sector-led economic growth alone should not be expected to improve the average residents’ welfare and reduce poverty. More active fiscal and social policies may be needed.