Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

The Petroleum Industry in Indonesia before the

Second World War

J. Thomas Lindblad

To cite this article: J. Thomas Lindblad (1989) The Petroleum Industry in Indonesia
before the Second World War, Bulletin of Indonesian Economic Studies, 25:2, 53-77, DOI:
10.1080/00074918812331335569

To link to this article: http://dx.doi.org/10.1080/00074918812331335569

Published online: 21 Aug 2006.

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 Bulletin of Indonesian Economic Studtes. Vol25 No 2, August 1989

THE PETROLEUM INDUSTRY IN INDONESIA

BEFORE THE SECOND WORLD WAR
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J. Thomas Lindbladl

Universiry of Leiden, The Netherlands

The presenl dependence on oil exports in Indonesia is not new. The oil
industry also played a key role in the colonial economy. This article
examines the development of the Indonesian OLI industry up to the Second
World War. It identifies producers and production centres and considers
trends i n ouipul and revenue, changes in the product mix and possible
growrh effects. Its main question concerns the possibilities and limitations
of the oil sector far sustaining economic growth.

THE PRODUCERS

The first drilling for oil in Indonesia was undertaken in Cirebon in 1874,
but reserves were only found at Telaga Said in North Sumatra in 1883,
near Surabaya in 1886 and in Kutai in East Kalirnantan in 1897.
Production began around 19W, at first on a very small scale, but then
expanding quite rapidly, in particular during the interwar years.
When Adriaan Stoop founded the Dordt Petroleum Company in
1887 on the basis of his Surabaya concession, he set an example for the
many. The subsequent decade saw a true proliferation of embryonic oil
companies, in which enterprising engineers brought in concessionary

[The research for this article was done with the assistance of a team of History studens
aithe University of Leiden, Thlhe Netherlands. The participants in the project were SI.
Beurze, D B e d i n k , J.W. Crmer, J.M. Engelbrecht. hl. Fade lamael, R. Kagie, M.J.
van der hleer, A.J. Mo<inkoff.B. van Oorschot. N.M. van der Poll, R. Rarnakers.
L J. Touwen, P. Veder, 1.F. Warmerdam, P.G.H. Wessels, 1. Westerink and W.
W,g",:l"S

53
 rights to drill for oil and Western banks furnished the capital. The Royal
Dutch ('Koninklijke') followed in 1890 with its Telagd Said concession
and a starting-capital of only 1.3 million guilders. In Kutai the engineer
Jacobus Henricus Menten discovered oil by chance in 1897 on his coal
concession overlooking Balikpapan Bay. After having tried in vain to
interest Amsterdam bankers, he eventually found a financier in Marcus
Samuel in London, proprietor of the Shell Trading and Transport
Company. Other newly founded oil companies included the Perlak and
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South Perlak Oil Companies in East Aceh and the Tarakan Mining (later
Petroleum) Company on the island of the same name off the northeast
Kalimantan coast.
At this time the American company Standard Oil also tried to gain a
foothold in the Indonesian archipelago. In 1898 Standard Oil had virtually
concluded negotiations to take over the small Muara Enim Oil Company,
proprietor of a concession in the southern Palembang area. But the Royal
Dutch mobilised popular apprehension against the American giant and the
Dutch government intervened. The contract with Standard Oil was not
authorised and Muara Enim switched to the Royal Dutch.
After 1900, cut-throat competition and fragmentation gave way to
a process of consolidation and concentration. The Royal Dutch and Shell
emerged as the two prime producers, the one on account of its many
successful takeovers of smaller firms, the other owing to its possession of
exceptionally rich oilfields in East Kalimantan. Rivalry between the two
found its most tangible expression in Kutai after the Royal Dutch had
acquired a concession of its own in the Mahakam delta, within a stone's
throw of the one exploited by Shell. A first step towards cooperation was
the conclusion of the 'Borneo Agreements' in 1902, which allowed for
some of the crude from the Royal Dutch concession to be processed at the
Shell refinery at Balikpapan, rather than shipped all the way to Pangkalan
Brandan in northeast Sumatra. On a worldwide scale, cooperation in
marketing through the Asiatic Petroleum Company served to strengthen
both the Royal Dutch and Shell in their rivalry with Standard Oil.
In 1904 the discovery of oil in Jambi revitalised the rivalry between
the existing oil companies and potential entrants. For decades the colonial
government had accepted that actual power in Jambi was exercised by the
deposed Sultan Taha. who lived in exile in the interior. Now the region
was ruthlessly brought under effective colonial rule, ostensibly to
facilitate the exploitalion of its natural riches by private enterprise. The

54
 authorities were confronted with literally thousands of concession
requests, allegedly submitted by 'straw-men' of Standard Oil. The Dutch
government closed Jamhi temporarily to all private exploitation.
The alliance between the Royal Dutch and Shell was formalised in
1907 with the creation of a number of jointly owned subsidiaries,
including the production company HPM (Rataafsche Petroleum-
Maatschappij), which was endowed with 80 million guilders' worth of
equity and assets embracing all the installations and refineries of the two
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parent companies throughout the archipelago. BPM instantly controlled

virtually all production and exports, and its takeover of Dordt Petroleum
in 1911 merely completed the monopolisation of Indonesian oil
(Gerretson 1932, Vol. I, pp. 91-106, Vol. 11, pp. 140-162. 226-241, 309-
332; Lindblad 1985b, p. 188).
The original oil concessions had been granted 6y local sultans or the
colonial authorities for large stretches of land and protracted periods of
time against moderate tributary obligations. For example, Menten's
concession, 'Nonny', along the Kutai coast, covered 135,Mx) hectares;
only in 1899 was the duration of a petroleum concession limited to 75
years. Most contracts fixed tributes at 1.25 guilders per ton of crude,
which corresponded to 2.5% of the world market price during the first
decade of the twentieth century. As the industry expanded and profits
mounted, government awareness of foregone tax opportunities grew. In
1910 an amendment to the Mining Law paved the way for more direct
government participation. This was formalised in 1918 under the so-
called '5 A-contracts', stipulating shorter production agreements (40
years) and a variable production tax of 4%. combined with a sliding scale
of additional government claims on the producer's net proceeds (Ter
Braake 1944. pp. 21-29).
The new mining policy cast its shadow on the dispute about who
was to exploit the newest oilfields, those of Jamhi. Public tenders were
called in 1912, with six firms responding, including BPM and the
Colonial Petroleum Company (the 'Koloniale'), a newly founded
subsidiary of Standard Oil. BPM offered a higher bid than Standard Oil,
and the Dutch press was full of rather chauvinistic expressions of support
for BPM. At the same time, apprehension was mounting about the
monopoly position enjoyed by the Royal Dutch/Shell combination. In
1915 the Dutch Parliament determined that state exploitation was to be
preferred for lambi. A proposal was formulated for contracting the

55
 actual work to a private firm, whilst retaining maximum public control
and profit-sharing at the lowest possible risk. No private firm was
prepared to participate under such conditions. Finally, the Dutch
government approached BPM with a joint venture proposal, but now the
latter's terms were far less advantageous than in 1912.
After tedious negotiations, a new oil company was founded in 1921,
the NIAM (Nederlandsch-Indische Aardolie-Maatschappij), jointly
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owned by BPM and the Dutch government. Production began slowly and
output was only to expand appreciably in the late 1930s. when the pipeline
to Palembang had been improved and new fields in northeastem Sumatra
had come into production (Gerretson 1973, Vol. V, pp.170-213:
Gerritsen 1921, pp. 170-171; NIAM Annual Reports 1923-1940).
Even if Standard Oil was barred from entering Jambi it could not,
in the long run, be kept out of Indonesian oil altogether. Eventually pure
chance intervened. At some time in the past, the Standard subsidiary,
Colonial Petroleum, had acquired the concession of Talang Akar in
Palembang, which was considered worthless by BPM. In 1922, however,
oil was found on this concession, and from then on the operations of
Colonial Petroleum increased rapidly. In 1926 the company's new
refinery at Sungei Gerong began competing with the nearby BPM
establishment at Plaju. Total output on the South Sumatra fields controlled
by Colonial Petroleum rose to 1.2 million metric tons of crude in 1933
and 2.2 million tons in 1937 (Penrose 1968, p. 93: Wellan 1932, p. 345).
The emergence of NIAM and Colonial Petroleum threatened the
privileged position held by BPM. l'be share of the Royal Dutch/Shell
subsidiary fell from its pre-1930 level of 85% o r more to some 55%
during the years 1936-38. The Standard subsidiary now ranked second,
commanding about 30% of the total, and leaving another 15% to NIAM.2
The evolution of an industrial structure in Indonesian oil production may
thus be depicted in terms of a circular movement, from intensive
competition via a near-rnonopoly to an oligopoly.
The rise of the Indonesian oil industry formed an integral pan of a
general process of expansion that radically transformed economic life in
the colony during the period 1905-1930. This expansion was strongly
export-oriented and its momentum relied on a diverse range of
exportables for which both world demand and domestic supply were

20utput figures from Juurboek van her Mijnwezen in Nederlundrch Om-Indid (1914-
1939).

56
 rising fast. The expansion was accompanied by a profound shift in the
commodity composition of exports, away from traditional staples such as
sugar, coffee and tobacco into new ones such as oil and rubber. The
average combined share of new staples climbed from less than 15%
before 1910 to more than 40% in the 1930s. Oil and rubber ranked
immediately after sugar as prime earners of foreign exchange.
The contribution of oil alone to aggregate export revenue displayed
considerable variation over time. At first the share of oil rose
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continuously as oil exports increased faster than average, from 5% of the

grand total in 1903 to 17% in 1913 and as high as 28% in 1918. The
immediate postwar boom, however, brought an even faster expansion for
sugar than for oil, while in the 1920s oil revenue fell faster than other
export revenue. As a consequence, the share of oil in the total fell from
16% in 1919 to less than 10%in 1927 and 1928.
Oil regained its strong relative position within the total after the
boom had passed, during the Depression of the 1930s. Oil prices now
proved less vulnerable than those of sugar and rubber. Total export
revenues now fell faster than oil revenues, resulting in a restoration of
oil's share of exports to about one fifth of the total. In 1938, the rapid
general recovery even brought the percentage share of oil to one quarter
(Burger 1975, Vol. 11, p. 79; Lindhlad 1986, Vol. 11, p. 672; Lindblad
1988a. p. 262,267).

THE PRODUCTION CENTRES

The very first derricks in Indonesia stood near Rembang in Central Java.
However, even before the turn of the century, the emphasis in production
had shifted decisively to the Outer Provinces. One of the first production
sites on Sumatra was Telaga Said, in the sultanate of Langkat in the
northeast. The remotely located Langkat lacked the most rudimentary
infrastructure and was time and again affected by the Aceh War. A self-
contained enclave of pioneers evolved around the Royal Dutch
establishments in North Sumatra. with the refinery at inland Pangkalan
Brandan and port facilities at Pangkalan Susu. This type of settlement
becarne characteristic of the Indonesian oil production centres, whether in
North Sumatra, Palembang. East Kalirrianran or on Tarakan (Gerretson
1932, Vol. I, pp. 221-234, Vol. 11. pp. 205-21 I ; Lindhlad 1985a, p. 88).
 In 1898 a production crisis threatened the viability of the Royal
Dutch presence in North Sumatra, and by implication also the very
existence of the enterprise. Telaga Said was drying up, and an alternative
only rnaterialised when Perlak in East Aceh was opened up for private
investment. The Royal Dutch concentrated refining on Pangkalan
Brandan. In 1914 the refinery at Pangkalan Brandan employed about
3,000 labaurers. primarily Javanese, and 125 Europeans for supervision.
Operations pivoted around the refinery rather than the surrounding
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oilfields. This was reinforced during the postwar expansion. In 1929 the
refinery at Pangkalan Brandan had 8.200 immigrant labourers and 350
European supervisors. whereas the oilfields offered employment for
1.500 men, mostly of local origin. Budgetary constraints during the
Depression forced extreme cutbacks, and by 1933 no more than 3,300
labourers in total found employment at the BPM installation in North
Sumatra (Banlett et o f . 1972, p. 44; Mededelingen 1919. Vol. 111. p.
213).3
The second production centre on Sumatra was situated in the
Palembang region. From 1905 onwards the oilfields of Muara Enim and
Musi Ilir began delivering on an appreciable scale, and before long a
major new refinery complex was constructed at Plaju. In the 1920s the
process of expansion was accelerated in Palembang as a result of the
advent of NIAM crude from Jambi and the erection of Standard Oil's
refinery at Sungei Gerong. Total employment in Palembang climbed to
almost 27,000 labourers in 1929 with BPM accounting for the lion's share
(63%) and Colonial Petroleum by far outranking NIAM (28% against
9%). During the Depression, however, BPM and NIAM cut back more
rigorously than Standard Oil. This brought the regional total to a mere
12,000 labourers io 1933, of which BPM and NIAM together accounted
for 55% and Colonial Petroleum for the rest (Gerretson 1941, Vol. 111,
pp. 301.303, 373; Wellan 1932, P. 347; NIAM Annual Reports 1929,
1933).4
Kutai in Fast Kalimantan had prospered ever since the Royal Dutch
and Shell joined forces in exploiting the rich oilfields in and near the
Mahakam delta. Balikpapan emerged as the true boom town of Indonesian

3Memorandum on leaving aftice [Menwrie van Overgove] by Governor C. BaaJbergen

of the Easr Coast of Sumatra (1933). State Achives of lhe Haguc: Colonial Archive
[Koloniin] 1901-1963, Memoranda KIT No. 170.
4M~morandumby Resident W. Stcinbuch of Palembang (1936). Colonial Archive
1901-1963, Vol. AA 215.

58
 oil, an industrial centre entirely dominated by BPM, where the pace of
life was quicker than in nearby Samarinda o r the regional capital
Banjamasin. The elaborate refinery complex on the quayside set an early
example for other production sites. Even before 1920 it included an
Edeleanu factory, a sulphuric acid refining unit, a paraffin and
lubricating oil plant and even a candle factory (which was later moved to
Shanghai). By 1929 employment had risen to 9,300 men in the refinery
and 8,400 in the oilfields. Here, too, the Depression meant
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uncompromising and dramatic cutbacks, while the eventual recovery

brought only a very cautious restoration of employment levels - hack to
about one half of previous levels by 1937 (Broersma 1927, pp. 135-154;
Lindblad 1985a, pp. 86-89).5
Tarakan is located some 500 km to the north of Balikpapan. It was
only inhabited after the discovery of sizeable reserves of Tarakan crude, a
heavy asphaltic grade fit for immediate use as liquid’fuel. The island was
fully developed by BPM and production began climbing in 1908, reaching
the one million ton annual target in 1924. Tarakan crude was delivered
directly to vessels anchoring in the natural harbour of Lingkas, where a
self-contained miniature society of some 12,OOO persons developed. Most
of the crude was destined for ships from Japan, Singapore and Hong Kong
(in that order) whereas a smaller portion ended up in the refinery at
Balikpapan. Tarakan too was badly hit by the Depression, but here the
recovery was accompanied by intensified exploration in order to
safeguard future supply (Broersma 1927, pp. 242-245; Oosten 1924, pp.
7-8,263-264).6
Despite its early lead, Java never became a prominent production
centre like Sumatra and Kalimantan. There was little extraction, but
relatively more refining. Production was concentrated on the large BPM
refinery at Cepu (Rembang), followed by smaller plants at Wonokromo
near Surabaya (BPM) and Kapuan (Colonial Petroleum). Javanese
deliveries rose particularly fast during the 1920s, and by 1932 the BPM
compound at Cepu housed almost 5.000 employees. Both output and
employment were subsequently reduced at the nadir of the Depression.

5Janrboek van her M i p w z r n in Nederlnndsch Oosr-Indi8 (1915-1930); Srnrisrisch

Janrovernchr (192U23-1929); Memorandum by Assislant-Resident M.E.L. Israel of
Samarinda (1938). Colonial Archive 1901-1963, Memoranda KIT No. 513.
6Kolr,niaal Ver.rlax [Pmceedings of the States-General]. Appendix C (1920-1925);
Memorandum by P.Th.1. Feldbrugge on Tarakan (1939). Colonial Archive 1901-
1963, Memoranda KIT No. 524. Prior to 1923 foreign deliveries from Tarakan were
not separstely specified in iheofficial uade statistics.

59
 The combined share of the refineries on Java in the export total of the
entire archipelago never exceeded one tenth.’
The distribution of foreign exports among the various production
centres undenvent a number of conspicuous changes over time (Figure 1).
There was a marked southward shift on Sumatra during the 1920s,
interchanging the positions of Pangkalan Brandan and Palembang.
Meanwhile, however, Kutai remained firmly in the first rank,
commanding little short of one half of the total export value of Indonesian
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oil. A second shift occurred during the 1930s. when Palembang and Kutai
exchanged positions while Pangkalan Brandan regained some of its earlier
share. Tarakan and Java were about equally important in the 1920s. but
not in the 1930s. The successive rise of South Sumatra at the expense of
North Sumatra and East Kalimantan anticipated a trend that was to be
sustained after the Second World War.
The discovery of oil and the emergence of oil enclaves often
influenced regional policy. In 1898 the Royal Dutch urged the authorities
to guarantee security for private investors in Perlak (East Aceh); this
certainly contributed to the escalation of the war in Aceh around 1900.
(To the dismay of the Aceh commander, later Governor-General.
General J.B. van Heutsz, however, the Royal Dutch chose to process all
crude from Perlak outside Aceh.) Jambi was brought into the orbit of
Dutch colonial rule only after oil had been discovered. The apparatus of
colonial administration on the east coast of Kalimantan increased as
Balikpapan rose to prominence.
Once beyond the pioneering phase, the local oil establishments
often exerted a less direct influence on regional policy. Tributary
payments made for the concessions did inflate the assets of local sultans, in
particular those of Kutai. but these resources were rarely used for
purposes of public policy. The tributary payments were fixed for very
long periods and constituted an almost negligible proportion of total
profits in the oil industry. On occasion the regional authorities and the oil
companies cooperated in setting up projects for the improvement of local
infrastructure, for instance, the construction of the main road from
Banjarmasin to Balikpapan. an undertaking that went on for twenty years
in the interwar period (Lenstra 1986, pp. 165-216; Lindblad 1988b. Ch.
IV).

7Mernarandurn by Resident F.A.E. Lacuelle of lapara-Rembang (1932). Colonial

Archive 1901-1963. Vol. AA 198.
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26
A&
1920-1929

61
1
49

1930-1939
1910-1919

NonhSumatra
South Sumatra

5
 OUTPUT AND REVENUE

The dynamic character of the oil industry was above all reflected in its
capacity to react to external market signals. There was an incessant
interplay between price movements abroad and changes in volume at
home. Together the two determined final revenue.
Aggregate crude output climbed from an annual average of only
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350,000 metric tons in 1901-1905 to ten times as much in the mid-1920s

and eight or nine million metric tons (50-60 million barrels) on the eve of
the Second World War (Ter Braake 1944, p. 73).S Total cumulative
recoveries of crude before the Second World War exceeded 140 million
tons (900 million barrels), which in turn corresponds to about 5% of the
proven recovery to date of reserves in the archipelago (Lukman and
McGlinchey 1986, p. 79).
Total export volumes rose concomitantly with the expansion of
crude output (Figure 2). Crude exports were vimally replaced by refmed
oil exports at the time of the First World War. The postwar boom in 1919
and 1920 stimulated an immediate increase in foreign deliveries, even
including some crude shipments. This upward trend was only temporarily
interrupted by the slump of 1921. In 1923 total export volume
approached two million metric tons, more than twice the prewar level.
The subsequent phase of expansion culminated in almost four million tons
in 1930, and again crude was replaced by refined oils. A second wave of
expansion gained momentum at the nadir of the Depression, bringing the
export total to six million metric tons in 1939 and 1940, a figure
corresponding to 120,000 barrels per day, or 15% of Indonesia's oil
exports in 1985 (Lukman and McGlinchey 1986. p. 85).
The persistent increase in volume formed the logical reaction to
changes in world market prices. Oil price levels at first rose and then fell.
One litre of benzine or gasoline, to take but one example, cost 3 (Dutch)
cents in 1909, 26 cents on average in the years 1918-1922, 12 cents in
1926 and only 3 cents from 1932. In general, oil prices around 1920 were

8Srarisriek van den tiondel, de Scheepvaorr /en de In- en UiNoerrechrenl in

Nederlandsch-lndit over her Jnar 1901 ...1913. Batavia 1902-1914, Vol. I B. I1 and I1
R: Jmrhock w n her Milnwmen !n Nederlandrch Oosr-Idit (1915-1940). Aggregate
output figures are extrapolated from expon data for the years 1900-1913 Prior to 1908
no specifications of refined 011 exports are given. which probably means that our
estimates we too c ~ n s e r ~ a t i vFor
r the y e a s 1908-1913 we assume the Same stable
exponJooutput ratio as can be demonstrated for the years 1914-1921.

62
Downloaded by [University of Nebraska, Lincoln] at 01:52 01 November 2015

I 900 I910 I920 I Y10

more than 50%above the level that had prevailed in 1913. The decline
became marked from 1923 and only came to a temporary halt in 1928.
The Depression brought another rapid price fall, and by 1935 most oil
products fetched a mere fraction of the 1913 price. Prices remained low
after the recovery in the late 193Os.9

90il price developments were calculated from values and quantities as registered in the
foreign statisucs of the Netherlands Indies (see Appendix). Benzine prices were above
kerosene prices, which in turn were higher than 'rude and liquid fuel quotations.

63
 Volume was enlarged for different reasons at different times.
During the first two decades of expansion, from 1900 to 1920, quantity
targets were raised as much as capacity allowed, in response to favourable
market prospects. During the interwar period, however, capacity and
volume were adjusted upwards at an ever faster rate so as to compensate
for the loss in revenue per unit. It was a strategy which presupposed initial
wide margins between cost-price and selling-price levels and also a high
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degree of efficiency in refining.

Total revenue from export sales was determined by the interaction
between quantities and prices. At f i n t quantity and price movements took
turns in pushing revenue in an upward direction. This became especially
apparent during the postwar boom. The 1918 increase in revenue was
fully due to higher prices, whereas the further rise in 1919 depended
entirely on a larger volume. In 1920, however, volumes and prices fell
simultaneously, thus reducing revenue quite considerably.
Total export values rose towards a peak in 1919, but fell in a rather
zigzag fashion during the interwar period (Figure 3). The increase began
moderately, with total exports not exceeding 100 million guilders (at
current prices) until 1913. The wartime level was impressive, owing in
particular to the high kerosene and benzine prices. The violent postwar
upsurge brought total revenue beyond the 300 million mark for a while,
but the 1920s as a whole witnessed a succession of swift leaps from low to
high levels and back again. Each cycle oscillated around an average which
was lower than the previous one: 213 million guilders in 1921.1923. 170
million in 1924-1927 and 160 million in 1928.1931. The downward
tendency was aggravated by the Depression, when total values approached
prewar levels. The recovery in 1937 was sustained at an average level of
more than 160 million guilders.
The vicissitudes of the 1920s reflected the limited success of the
strategy to offset adverse price movements by adjustments in quantity.
Revenue inevitably fell when volumes were not enlarged, as in 1921 or
1924, let alone when cut back as in 1931. This also happened when
quantities were insufficiently increased in the face of drastic price drops,
as in 1923 or 1927. Only sizeable increments at a time of relatively stable
prices, as in 1925-1926 or 1929-1930, could produce a higher level of
revenue than before. During the Depression years, however, the price
drops were so dramatic that a full compensation in quantitative terms was
no longer attainable. The increase in revenue from 1937 was highly

M
 FIGURE 3 Tor01 VofueofOifErponsfromfndonesia,1900-1940;
Toad ond Crude Oil (m'lfiomofguilders ai current prices)

1
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3w

I900 1910 1920 1940

dependent on a prolonged expansion of physical output, while the hesitant

recovery of prices served primarily as a stimulus to increase deliveries. In
the oil industry of colonial Indonesia, supply was enlarged for virtually
any reason. Expansion formed more than the key to success. It was the
precondition for survival.
The persistent increase in output of Indonesian oil was not
exceptional within the oil industry at large. At first Indonesia was
unrivalled as the foremost producer in Asia and Africa. Before 1913 its
share in total crude output amounted to at least 50%. In 1922 Indonesia

65
 had to relinquish its first rank among Asian and African producers to
Iran, and in 1930 the Indonesian slice of the total amounted to less than
40%.The rise of other Middle East producers during the 1930s pushed
Indonesia's share further down, so that by 1940 less than one third of all
Asian and African crude had been extracted from reserves in Indonesia
(Mitchell 1982, pp. 288-291). The scope for influencing foreign price
movements was more and more curtailed, leaving Indonesia little choice
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but to manipulate supply.

THE PRODUCTS

Adaptation to external price signals is likely to imply more than merely

raising physical output targets. It may prove necessary to alter the pmduct
mix of supply in response to shifts in demand. It appears that the oil
industry in colonial Indonesia was swift to take action in this sphere,
which in turn testifies to the flexibility of both production and delivery.
Demand for oil products did indeed change continuously during the
infancy of the world's oil industry. The traditional leading refined
commodity, kerosene or lamp-oil, was surpassed by benzine around 1910,
and this was reinforced by the war. Liquid fuel eventually came to be used
in a great variety of ways in shipping, industrial processing and private
consumption, which particularly benefited the delivery of high-quality
residue from the refineries. Other refined oil products included
lubricating oils, paraffin and even candles. Motor fuel gained ground
from the late 1920s and liquid natural gas followed suit during the 1930s.
Patterns of delivery varied considerably from one oil product to
another. The kerosene trade depended heavily on the East Asian market -
Singapore, Hong Kong and mainland China - whereas much of the benzine
ended up in Europe and in British colonies in Asia or Africa. Japan
purchased reasonable quantities of liquid fuel and paraffin.
Refined oil products soon gained precedence over crude exports
(Figures 2 and 3). The balance between the two was determined not only
by the higher unit prices for the processed commodities, but also by the
capability of the refineries to handle large volumes. The plants at
Pangkalan Brandan, Palembang, Balikpapan and Cepu were already in
operation by 1900, but refinery capacity remained the real bottleneck
until about 1910. Then the possibilities for processing crude oil expanded
so fast as to shift the problem tn capacity constraints imposed by derricks,
 oilfields and pipelines. All cmde was needed in the refineries, and crude
exports dropped fo zero.
After the First World War, oilfield output increased, whereas the
requirements of the refineries stayed roughly the same. This explains the
temporary restoration of crude deliveries abroad during the first half of
the 1920s. But later in the 1920s, the necessity to compensate price falls by
volume increases called for such increases in capacity that again vittually
all crude was needed in refining. At Balikpapan alone capacity expanded
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by 60.7096 between the mid-1920s and 1940. By the latter year a total of
30,000 metric tons or 190,000 barrels of crude was being processed per
day in the archipelago, Three refineries, Balikpapan and the two
overlooking the Musi River in Palembang (Plaju and Sungei Gerong),
accounted for 80% of the total refined output (Ter Braake 1944, p. 75;
Broersma 1927, p. 149; Petroleum 1945, p. 91).
The equation in oil processing contains more variables than
volumes of crude input and sheer physical capacity of the refinery.
Technology plays a role too. At first benzine, kerosene and residue were
procured in that order from fractioned continuous distillation in a chain
of batteries. Some of the residue was used to obtain lubricating oils and
paraffin. In later years increasing use was made of Trumble distillation,
with a separation of distillates in inverse order of volatility. The Edeleanu
process for solvent refining proved effective from 1913 in reducing the
aromatic content of kerosene, thus enhancing its quality. The quality of
the residue was successively improved and from the 1920s some of it
became marketable as liquid fuel, while lesser varieties entered vacuum
distillation chains for conversion into batching and motor oils (Forbes and
OBeime 1957, pp. 298-318, 353-374. 432-439; Gerretson 1941, Vol.
Ill, pp. 323-345).
The most comprehensive expression for the state of technology in
refining is the inputloutput relationship between crude and refined oil.
This ratio appears to have fallen significantly in Indonesian oil only
during the late 1920s and the 1930s. Prior to 1925, possibly as much as
two tons of crude were needed to obtain one ton of refined oil. From 1932
the crude requirement dropped to 1.2 tons per ton of refined.'@

'@Thisestimation presupposes a conversion into weight measures using standard

specific gravities (see Appendix). The trade statistics allow the calculation of d m a l
specific gravities for the years 1926-1940. The specific gravities averaged 0.77 for
crude. 0.01 for kerosene. 0.74 for benzine, 0.93 for liquid fuel and 0.89 for moruruil.
No allowance was made far deliveries inside the ahipelago.

61
 Actual physical output of kerosene, benzine and liquid fuel
depended on two factors in particular: the international price level as an
indication of world demand conditions and the inputbutput ratio as an
expression for the technical constraints in supply at home. Output rose as
prices fell and efficiency increased (i.e. when the inpuUoutput ratio
declined). It can be demonstrated Lhat these two factors alone accounted
for at least one half of the annual variations in the supply of Indonesian
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kerosene, benzine and liquid fuel.11

The adjustments in production had an immediate impact on the
compositior1 of refined oil exports (Figure 4). In terms of value, benzine
continuously occupied the first position. accounting for one half or more
of the total. Relatively speaking, kerosene suffered a permanent decline
about 1920. and was eventually even surpassed in second place by liquid
fuel. Motor oil came to the fore in the Sate 1920s and even began to
challenge the positions held by kerosene and liquid fuel towards 1940.
The Depression bit the most refined commodities - paraffin and
lubricating oils - particularly hard, thus weakening their combined
position against the large bulk goods. In terms of physical volume the
overall picture looked slightly different, with benzine claiming a smaller
proportion and most other products a larger one. Liquid fuel even ranked
first with respect to sheer bulk during the years 1926-1932. Paraffm and
lubricating oils, however. were comparatively valuable in relation to
their bulk.
The composition of output was not the same in all refineries. We
may distinguish three patterns of production in the main refineries of
Sumatra and Kalimantan. At Pangkalan Brandan, the oldest plant, there
was a tendency to concentrate on no more than two products at a time, of
which one dominated the other. At first, kerosene and benzine
combined. in that order. Then. in the 1920s. the emphasis shifted to a
combination of motor oil and benzine, with the former reflecting
fluctuations in the total output better than the latter. The second pattern
prevailed at Palembang, where production was strongly oriented towards
benzine, with remaining productlon fairly evenly distributed over several

~~~ ~ ~ ~~ ~ ~~~~ ~

0.96 T (I@-= 0.68): benzine: Q = 2 21': 5.24 P I 0.36.T (R2 = OY7S). All parameters
are statistically significant at the 5% IcvcI, except that for the technical consminl of
benzine.

68
 1910-1919
53
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14 8

25

1920-1929
<?

I Benzine
El MotorOil
I LquidFuel
0 Kerosene
14

19

1930-1939
50

7
10

Sources:See Appendix.

69
 commodities, such as liquid fuel and kerosene. A third pattern, with a
well-balanced combination of all main products at the same time, evolved
at Balikpapan. Liquid fuel and benzine were continuously included, each
boasting a share in the total of 2530%. These two were followed first by
kerosene, and later by motor oil, which both claimed a share of about
equal size.12
The variation in product mix, both over time and between
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refineries, testifies to the high degree of flexibility in the Indonesian oil

industry. The impetus to change emanating from price movements abroad
was translated into a sophisticated policy of continuous adaptation at
home.

GROWTH EFFECTS

Expansion by export production is likely to have a less clear-cut impact on

economic growth in general than expansion by way of import
substitution. We distinguish between two types of growth effects,
affecting aggregate demand and supply conditions respectively. We
expect relatively more imports of consumer goods if the export
production is labour-intensive and employment high, but more imports of
capital goods if the opposite holds true. Supply conditions at home are
likely to improve as a result of investments in infrastructure financed out
of export earnings. Both types of growth effects reveal whether the
export-led expansion is capable of generating more expansion.
Oil was a highly capita-intensive line of production even in the
early twentieth century. The scope for employment was restricted, but
considerable investment in machinery was required. The growth in oil
production probably stimulated demand for capital goods more than that
for consumer goods, but this is difficult to ascertain for individual supply
regions, as the evidence of incoming and outgoing trade flows is blurred
by a fair amount of intra-insular trade. Machinery for the oil industry
often entered North and South Sumatra or East Kalimantan via Batavia or
Surabaya. In all three major supply regions, however, there was an

'ZRegressionson total physical output at the significant refineries during the years
1927-1940 render statistically significant linear models for volumes of motor oil at
Pangkalan Brandan (F = 137, Rz = 0.93). benzine volumes at Palcmbang (F = 750, R2
= 0.YR) and volumes of liquid fuel and benzine (as separate regresson) at Balikpapan
(F = 32, R2 = 0.90). The Palembang pattern adheres most closely to the overall pattern
for refining in Indonesian oil.

70
 unmistakable link between aggregate exports and imports during the early
phase of expansion. This at least reaffirms that the general momentum of
expansion that in pan was embodied in oil exports did affect regional
demand too.13
It goes without saying that local economic life received a powerful
stimulus from the presence of oil establishments, especially on the remote
production sites in Sumatra and East Kalimantan. At its zenith in 1929,
total employment at the oil establishments exceeded 57,000 men, most of
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them Javanese. In Palembang alone the total wage bill amounted to 10.9
million guilders, or the equivalent of 23% of the region's oil revenues in
that year (Wellan 1932, pp. 346-347).14 In 1927. downtown Pangkalan
Brandan counted 160 shops, and later a cooperative store under BPM
auspices was added. The settlement at Tarakan owed its very existence to
the oil, and in Kutai, Sultan Parikesit and his family at Tenggarong
amassed a fortune from tribute payments for the concessions situated in
the sultanate.
Profitability was high in Indonesian oil, but it is next to impossible
to assess how much of total sales revenues accrued to the capital owners
outside the colony. Apparently much of the sales revenue realised on
foreign markets never entered Indonesia at all. The statistical evidence is
largely lacking to permit the identification of the Indonesian slice within a
worldwide concern such as the Royal DutcNShell. Suffice it to quote some
scattered facts. During the years 1907-1914, when production still relied
primarily on Indonesian sites, dividend payments of the Royal Dutch
averaged 34% of equity annually, which resulted in cumulative returns of
159 million guilders. Profits at NIAM climbed above 10 million guilders
per year after 1934, albeit accompanied by an exceptionally fast
depreciation of fixed assets (Gerretson 1941, Vol. 111, p. 579; NIAM
Annual Reports 1927-1940).
Improvements in regional infrastructure formed the most tangible
beneficial effect of the presence of oil enclaves. Substantial investments
were made in roads, ports, airfields, telecommunications, hospitals and
schools. Initiatives at times emanated from the companies themselves, at
other times from the local authorities. Most projects, however, were

I3 Regression models of aggregate imports as a function of aggregate exports for the

years 19oO-lY19 render the following coefficients of determinaiion: Notth Sumatra:
0.76: Souih Sumatra (including Jambij: 0.63; East Kalimantan (including Tarakan):
0.84. No statistically significant resul~scan be obtained for the interwarperiod.
''Jmrhoek van hetMi,nwwen m Nedcrlandrch Oorr-ldd@(IYZY).

71
 strictly geared towards the specific needs of the oil company, and non-
company residents could only by way of exception make use of the
facilities. At Balikpapan. for instance, non-company motorists were
requested to purchase a special permit before using the BPM road north to
Samarinda. In Cepu. the BPM power station offered electricity only to
company employees.
Examples of investments in physical infrastructure included the
new road to Pangkalan Susu in North Sumatra (1933). the maintenance of
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a 450 km road network in Palembang, the new highway from Jambi to

Palembang (1938), the Manggar airfield outside Balikpapan (1936,
today's Sepinggan Airport) and virtually all roads as well as the airstrip at
Tarakan. From 1924, the refinery power station in Balikpapan was used
for the benefit of the town community as well as the company.
The financing of infrastructure projects was often administered by
kabuparen funds built up from payments of concessionary tribute. In
Palembang such payments averaged 1.5 million guilders per year at the
end of the 1920s (Wellan 1932, p. 346). The size of the direct contribution
made by the oil company varied from a token charge to almost the entire
cost of construction. NIAM contributed only 6% to the cost of
constructing a new highway which shortened the distance between Jambi
and Palembang from 975 to 285 km. On Tarakan, however, BPM
furnished 290,000 of the required 370,000 guilders needed for a new
main road across the island.
Health and educational facilities were set up at virtually all
production sites, whether in oilfields or next to refineries. At Balikpapan.
BPM ran its own hospital as well as separate primary schools for
European and indigenous children. It also maintained 80 police agents on
its payroll, primarily for guarding the refinery in Balikpapan. A similar
force was created at Cepu, jointly financed by BPM and Colonial
Petroleum, but it was among the first victims when budgets were cut
during the Depression.15
The macro-economic effects of the. oil industry have been formally
assessed for post-colonial Indonesia. The results are disappointing (Arief
1982, pp, 88-93, 182-191). The available data do not permit a similar

'5Details in Memoranda submitted by local administrators: Colonial Archive 1901-

1963. Memoranda KIT, Nos. 172, 175 (East Coast of Sumatra), ME. SOY. 524 (South
and Easi Kalirnanlan); hlemorandum by Resident W. Steinbuch of Palembang (1936).
Vol. AA 215; Memorandum by Resident W.P.A. Kloprogge of Rembang (19271, Vol.
A A 197.

72
 exercise for the colonial oil industry as a whole. A partial analysis along
formal macro-economic lines of the expansion in Southeast Kalimantan
alone does however support a similar conclusion. Revenues were high in
the oil industry, but so was the drainage of profits away from the region
(Lindblad 1988b, Ch. V).16

CONCLUSION
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In the 1980s depressed oil prices are exposing the vulnerability of the
Indonesian economy. The effects on both the balance of payments and the
public budget are dramatic, and call for a reorientation of policy. Once
again oil has proved its dual quality as a prime earner of export revenue
and an equally powerful destabilising force. This is not new, but rather an
illustration of a fundamental continuity with colonial times. The
characteristic blend of great possibilities and great limitations remains a
recurrent theme in the history of Indonesian oil.
The Indonesian oil industry emerged around 1900 and expanded
fast through the Depression of the 1930s. The industry displayed a
remarkable capacity to adjust to external price signals, thus sustaining
growth in the sector. Volumes rose continuously, at first because of
favourable market conditions, later to compensate for declining prices.
The product mix was also adjusted to changing circumstances. The
emphasis shifted from crude to refined oil and from kerosene and liquid
fuel to benzine and motor oil. Efficiency in refining rose, allowing for
ever higher output targets even after the drastic budgetary cuts in the
1930s.
The dynamic character of the colonial oil industry became manifest
in sheer structural and geographic terms. The Royal DutchIShell emerged
as the winning monopolist from the initial competitive race, and a true
oligopoly matured only in the 1930s. There was a successive shift in
geographical predominance from North Sumatra to East Kalimantan
(Kutai and Tiuakan) and from there to South Sumatra (Palembang).
But while the oil industry was well able to sustain the momentum of
its own expansion, its capacity to generate growth outside the oil sector

I6This analysis considers aggregate regional product and income in Southeast

Kalimantan during the period 1900-1936. Needless to say, oil was responsible for a
sizeable propanion of bth. Klein's 'Model I'. a classic in macm-economic theory, is
applied.

73
 was severely limited. The effects on demand for both consumer and
capital goods remained marginal as long as much of the revenue never
entered the original supply regions. Infrastructure was indeed improved
at the production centres, but the resulting facilities tended to serve few
other purposes than the specific needs of the industry. In contrast with
present trends, public expenditure levels in colonial days were barely
affected by fluctuations in Indonesian oil.
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REFERENCES

A r i d S. (1982), The Perrolewn lndusrry and rhe Indonesian Economy: An lmpacr

Study, Rosecons, Sydney.
Banlett 111. A.G.. et al. (1972) Perramim: Indonesian Nar;onaI Oil, Amerasian,
Jakana.
Braake, A. ter (1944). Mining in the Nerherlands East Indies, Netherlands and
Netherlands Indies Council of the Institute of Pacific Relations. New York.
Broek, 1.0M (1942). Economic Developmenr ofrhe Nerherlandrlndies, Netherlands
and Netherlands lndies Council of the Institute of Pacific Relations, New Y o h .
Bmrsrna, R. (19721, HandeI en Redridin &id- en Oosr-Borneo, Naeff, n e Hague.
Burger, D.H. (1975). Sociologisch-economische Geschiedenis van Indonesia,
Landbouwhogeschml, Afdeling Agrarische Gexhiedenis. Wageningen, 2 vols.
Forbes, R.J., and D.R. OBeirne (1957). The Technical Development of the Royal
DurchlShell, Brill, Leiden.
Gerretson. C. (1932-1973), Geschiedenis der 'Koninklijke'. 5 vols, Bosch and
Keuning, Uuechr/Baam.
- (1958). History ofrhe Royal Durch. 3 vols, Brill, Leiden.
Gemtsen, 1. (1921) "et Djambi-ontwerp'. De Economist 71.
Lenstra, R. (1986). 'Jacob Theodoor Crerner. het Kolonial Beheer en het Nederlands
Belang in Atjeh, Economisch- en Snciaal-Hinorisch 49.
Lindblad, J. Th. (1985a). 'Economic Change in Southeast Kalirnantan 18801940',
Rullerin oflndonesian Economic Studies 21 (3).
~ (1985b). 'Strak Bekid en Batig Slot. De Cost-Borneo Maalschappij, 1888-
1940, Economisch- en Sociaal-Hisrorisch Jaarbnek 48.
~ (1986). 'International Trade and Colonial Emnomic Growth The Case of
Indonesia. 1874-1914'. in W. Fischer, R.M. McInnes and I. Schneider (4s). The
Emergence o f a World Economy 1500-1914, Steiner. Wiesbaden. Vol. 11.

74
 -(1988a). 'De Handel tussen Ncderland en Nederlands-Indie. 1874.1939'.
E c o m i s c k - en Socionl-HisrorischJaarboek 51.
-(1988b). Berween Day& and Dutch: The Economic History of Sourheast
Kalimnnlnn 1880-1942. Foris Publications, Dor&ezhr/Pmndence.
Lokman, N., and J.M. McGlinchey (1986). The Indonesian Petroleum Industry:
Cumnt Problems and Future Prosp%ts'. Blrllcrin of Indonesian Economic Studies
22 (3).
Mededelrngen van her Bureau voor B a r w s z a k n der Buirenbezirringen (1916-1919),
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Batavia
Mitchell, B.R. (1983, lnrernarionalHisrorical Slarinics: Africa and Asia, New Y d
Univenity Press, New YorWLondon.
Oosten. W.H. (1924). Monograjie van he1 EilondTmnLnn. Balikpapan.
Penrose. E.T. (1968). The Large lnrernarional Firm in Developing Countries: The
Inrernarional Perroleum Industry, G. Allen and Unwin, London.
Perroleum Faciliries of Borneo and Celebes (1945). Enemy Oil Committee.
Washington, D.C.
Wellan. J.W.J. (1932). Zuid-Sumatra: Economisch Overzichr van de Cewesren
Djornbi, Palembang, de Lnmpongsche Disrricren en Benkoelen, Veenman,
Wageningen.

75
 APPENDIX Foreign Expons of Oilfrom the Netherfa& Indies. 1900-1940
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1900 109.1 4.6 0.0 4.6

1901 270.9 11.4 0.3 11.7
1902 229.8 9.7 1.5 11.2
1903 235.4 9.9 5.1 15.0
1904 424.2 17.9 3.3 21.2
1905 419.0 17.6 3.8 21.4
1906 446.1 18.8 5.1 23.9
1907 498.0 21.0 6.8 27.8
1908 552.0 23.2 244.7 10.6 33.8
1909 475.4 20.0 184.4 10.0 30.0
1910 465.3 19.6 311.5 18.0 37.6
1911 529.8 27.9 278.0 18.4 46.3
1912 0.0 0.0 859.1 52.2 52.2
1913 0.0 0.0 696.8 113.3 113.3
1914 0.0 0.0 786.9 136.6 136.6
1915 0.0 0.0 944.3 141.9 141.9
1916 0.0 0.0 900.8 152.9 152.9
1917 179.5 7.5 745.5 151.0 158.5
1918 0.0 0.0 792.7 189.1 189.1
1919 0.0 0.0 1,383.7 347.1 347.1
1920 633.8 66.7 677.9 188.9 255.6
1921 612.2 45.1 655.7 157.0 202.1
1922 639.8 47.1 766.1 212.0 259. I
1923 1,253.4 39.6 707.8 138.7 178.3
1924 1,234.5 33.8 699.1 122.8 156.6
I925 1,254.3 34.3 812.1 137.7 172.0
1926 0.5 0.0 1,987.2 201.9 201.9
1927 0.6 0.0 2,213.8 148.7 148.7
1928 10.6 0.3 2.754.4 142.9 143.2
1929 27.9 1.1 3.492.2 177.2 178.3
1930 98.0 3.9 3,717.7 179.7 183.6
1931 80.9 2.6 3,134.0 140.6 143.2
1932 314.7 5.8 3,341.2 90.6 96.4
1933 521.8 9. I 3,601.2 94.0 103.1
1934 610.5 8.9 3,985.0 89.5 98.4

76
 APPENDIX (cont.) Foreign Exporrs of Oilfrom the Ncrherlandr Indie& 19W-IWO

crudeoil Refined Oils Total

-
Volum Value Vol- Value ValW
(WX, tons) ('ooO.ooO ('ooO tons) ('ooO,ooO ('000,000
guilders) guilders) guilders)
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1935 305.7 3.5 4,576.8 82.9 86.4

1936 188.6 2.3 4.861.0 94.1 96.4
1937 119.2 2.5 5,467.0 162.2 164.7
1938 65.2 1.3 5,532.9 160.0 161.3
1939 109.1 1.8 5,897.7 152.9 154.7
1940 361.1 6.9 5,662.7 168.5 169.4

Note: The aggregation of refined oil expon volumes is based on a conversion into
weight measures according to standard specific gravities: 0.81 for kerosene. 0.79 for
benzine, 0.97 for liquid fuel and 0.89 for mom oil. Crude oil is assumed to have a
specific gravity of 0.95
Sources: Srarisriek vun den Handel, de Scheepvaan /en de In- en Uimoerrechred in
Nederlundrch-lndie' over her Jaar 1900 ... 1923 [Statistics of Trade, Shipping and
Import and Export Dunes in the Netherlands Indies]. Batavia 1902-1925; Vol. II and II
B. III: 'Jaaroverzicht van den In- en UiNoer van Nederlandxh-IndiC gedurende he1
Jaar 1924 .__1938 [Annual Suwey of the Imports and Exports of the Netherlands
Indies During the Years 1924-19381,Mededelingen vu" her Centrad Kanroor voor de
Srarisriek, Vol. 27, 32, 39, 44, 51, 54, 63. 67, 79, 84. 87, 91, 98, 105, 114. 121.
129. 138, 142. 145, 152. 159. 176, 180, Vol. '1939 and '1940'. W e l t e d e n 1925-
1942.