Indonesia's Energy Sector Volatility: How Corruption Undermines Trust and Investment in Oil and Gas

Indonesia's oil and gas sector, a cornerstone of its economy, has long grappled with volatility. However, the 2025 Pertamina corruption scandal has amplified these challenges, exposing systemic governance failures that threaten public trust, policy stability, and foreign investment. With estimated state losses of Rp193.7 trillion (US$12 billion) from 2018 to 2023, the scandal has become a litmus test for Indonesia's ability to reform its energy sector and attract capital in an era of global energy transition.

The Pertamina Scandal: A Systemic Crisis

The scandal, involving 18 suspects—including 14 Pertamina executives and 4 private sector actors—reveals a web of fuel adulteration, inflated imports, and politically motivated leasing contracts. Key issues include:
- Adulterated Fuel Sales: Low-quality Pertalite (RON 90) was mixed with Pertamax (RON 92) and sold at premium prices, causing vehicle damage and eroding consumer trust.
- Inflated Imports: Manipulated tenders forced expensive crude oil imports, costing the state billions.
- Political Appointments: Pertamina's board now includes figures like Simon Aloysius Mantiri (a Gerindra Party treasurer) and Mochamad Iriawan (a former police commissioner), raising concerns about institutional independence.

The scandal underscores a broader pattern of corruption in Indonesia's state-owned enterprises (SOEs), exacerbated by the 2025 SOE Law, which shields executives from corruption charges and grants SOEs unchecked privileges.

Public Trust and Policy Instability

Public backlash has been swift. Consumers, particularly in remote areas reliant on Pertamina's monopoly, have shifted to private brands like Shell and BP. Legal experts now advocate for class-action lawsuits, while civil society groups demand structural reforms. Politically, the scandal has become a tool for President Prabowo Subianto's administration to centralize SOE control under a super-holding company, with critics arguing this move prioritizes political consolidation over transparency.

The AGO's lead in the investigation—rather than the weakened Corruption Eradication Commission (KPK)—has further eroded confidence. The AGO's focus on recovering stolen funds, rather than addressing systemic issues, reflects a return to treating corruption as an individual crime, not a structural problem. This approach risks perpetuating a cycle of impunity, deterring long-term institutional reforms.

Impact on Foreign Direct Investment (FDI)

Indonesia's oil and gas sector, once a magnet for FDI, now faces a credibility crisis. The Pertamina scandal has highlighted governance risks, with FDI inflows in the sector declining by 12% in 2025 compared to 2024, according to Bank Indonesia data. Investors are wary of a regulatory environment where SOEs operate with opaque contracts and political interference.

The scandal also complicates Indonesia's energy transition goals. As the government seeks to leverage its nickel reserves for green energy technologies, foreign partners demand assurances of transparent governance. Without reforms, Indonesia risks losing out to competitors like Vietnam and Malaysia, which have strengthened anti-corruption frameworks.

Investment Implications and Strategic Recommendations

For investors, the Pertamina scandal signals both risk and opportunity:
1. Avoid Overexposure to SOEs: Pertamina's governance issues make it a high-risk bet. Instead, consider private sector players with transparent operations, such as PT MedcoEnergi or international partners like Shell and BP, which have maintained market share through reliability.
2. Monitor Reforms: Track progress on the proposed Danantara sovereign wealth fund, which could stabilize SOE revenues if managed transparently. A would highlight its potential.
3. Diversify Energy Portfolios: Invest in Indonesia's renewable energy sector, which remains less entangled in corruption scandals. The government's 2030 renewable energy target of 23% offers growth potential.
4. Engage with Civil Society: Support watchdogs like Transparency International Indonesia, which advocate for KPK restoration and SOE accountability.

Conclusion

Indonesia's energy sector stands at a crossroads. The Pertamina scandal has laid bare the fragility of its governance structures, but it also presents an opportunity for reform. For investors, the path forward requires caution and a focus on transparency. While the sector's volatility persists, those who navigate it with a long-term lens—prioritizing accountability and diversification—may yet find value in Indonesia's vast energy potential.

The stakes are high. Without decisive action, Indonesia risks becoming a cautionary tale in the global energy transition. But with reforms, it could emerge as a model for balancing resource wealth with accountability—a rare but achievable feat in the extractive sector.