The resource-making state: liquefied natural gas production networks and state strategies for domestic market development in Indonesia

2.1 Market development and state strategies in global production networks

Since the outset of the GPN approach, states have been considered significant actors in shaping and capturing value from GPNs, particularly in relation to natural resources which are often embedded in the proprietorial, institutional, and cultural-political structures of nation-states (Bridge 2008; Bridge and Dodge 2022; Coe et al. 2008; Stephenson and Agnew 2015). GPN scholars have explored the variety of roles (facilitators, regulators, producers, and buyers) that states play in enabling the conditions for capital accumulation in GPNs (De Marchi and Alford 2022; Horner 2017). More recently, scholars have explored the role of states in governing market development in global production networks (Alford and Phillips 2018; Dodge 2020; Horner 2017). For example, Horner (2017) notes how states, through public procurement, often make large-scale purchases from private firms which constitute considerable opportunities for market development in GPNs. While sustaining market development is a key competitive dynamic driving the evolution of firm strategies and inter-organizational dynamics in GPNs (Coe and Yeung 2015), private firms may insufficiently allocate resources to market development in ways that address societal challenges (climate change, regional disparities, etc.) due to risk aversion, coordination failures and focus on short-term gains (Mazzucato 2015). In these cases, states may intervene in market development through various schemes and mechanisms ranging from early-stage funding, loans and guarantees, subsidies, tax incentives, etc. The state is particularly prevalent in developing markets where lumpy investments^[1] in capital intensive infrastructure is required to deliver essential goods and services to consumers (Bakker 2003; Bridge et al. 2018). In countries with significant disparities regarding the access and affordability of infrastructure, infrastructure development can be closely tied with the project of nation-building (Bridge et al. 2018).

2.2 Resource-making in global production networks

Thus far, the focus on the role of the state in market development in global production networks has largely focused on various state actions and mechanisms where the state is a key procurer of goods or services or facilitates market development in the private sectors through various incentives and schemes (Alford and Phillips 2018; Horner 2017). In various industrial sectors market development is not only a question of resource allocation to address societal needs, but also a matter of material transformations and resource-making, where physical entities and nature are not easily produced and consumed as resources without significant technological and financial interventions (Bridge 2009). The provision of energy and water, management of waste, carbon capture and storage are all examples of sectors where nature/physical entities must be transformed into resources before they can be commercialized through markets. In such cases, attention should be paid to the processes of resource-making in global production networks.

Accounting for resource-making processes entails attention to the different technological, organizational, and political interventions that different firm and non-firm actors deploy to transform physical entities and nature into exploitable resources that can be owned, commercialized, and commodified in markets (Irarrázaval 2020; Valdivia et al. 2021). At the outset, resource-making entails that not all natures are immediately and easily accessible as resources, but whose “becoming” as a resource are co-constituted with the knowledge, technologies, infrastructures, and valuation systems deployed by firm and non-firm actors to bring resources to markets (Richardson and Weszkalnys 2014). Resource-Making is inherently non-deterministic, materials may be transformed into resources in a myriad of ways, the presence, form, character, and meaning of which are politically and historically constituted. At the same time, processes of resource-making are shaped by the materiality of nature and physical entities which refers to the ways in which their biophysical characteristics are implicated in the biological, chemical, and mechanical processes involved in the material transformations and the social relations by which resources are produced, transported, and consumed (Bakker and Bridge 2006; Hudson 2008).

While resource-making opens for non-reductionist perspectives on nature-society relations, it can also be equipped for identifying and explaining political-economic possibilities and limitations by exploring the ways in which materiality “enables and constrains the social relations necessary for resource production” at specific historical and geographical junctures (Bakker and Bridge 2006, p. 21). In the global production network literature, Irarrázaval (2020) builds upon the resource-making literature to compare inter-firm dynamics in the natural gas industry in Bolivia and Peru. Irarrázaval (2020) unpacks how the greater depth and higher quality of natural gas deposits in Bolivia which required more specialized drilling services for a longer period, in combination with a more proactive state in developing supporting infrastructure and attracting foreign investment, led to the development of a more robust and specialized local supplier industry in Bolivia in comparison to Peru. Similarly, Bridge (2008) notes that states play a key role in the production of oil as they have often proprietary rights over natural resources and are involved in configuring relations of control and appropriation within GPNs.

The focus of Bridge (2008) and Irarrázaval (2020) is primarily on how states work facilitate the production of resources, and less on how states actively shape markets for natural resources. As Dodge (2020) notes, nation-states can also play a crucial role in reconfiguring the positionality of resource peripheries in global production networks from exporters to emerging markets by creating domestic markets for resources. Here the question is then on market governance and the relationships between public and private actors by which markets for resources are created.

2.3 Market governance in global production networks

In the GPN literature, several scholars have observed that state roles tend to combine and overlap with forms of private governance in ways that shape global production networks (Dodge 2020; Hess et al. 2021; McGregor and Coe 2023). McGregor and Coe (2023) conceptualize the blending of public and private governance as ‘hybrid governance’, which refers to the “ways in which the diverse apparatuses of the state operate, intersect, and come together in the governance of GPNs” (McGregor and Coe 2023, p. 718). Through hybrid governance, states play different roles (regulators, producers, investors, buyers, etc.), pursue different levels of ownership (minority interest to full ownership), and exercise various degrees of control (active or passive) in the pursuit of realizing specific state strategies. Hybrid governance is part of a broader trend of state capitalism where states are increasingly playing a more active role as promoter, supervisor, and owner of capital (Alami and Dixon 2024). In this paper, we conceptualize market governance as a particular form of hybrid governance, were states, together with firms, shape the development of markets in pursuit of policy objectives. Following the work of Jessop (1999) on governance, we posit that the extent to which market governance is successful is dependent upon the capacity of both firms and governments to jointly govern and coordinate complex inter-organizational networks to balance the realization of political strategies with the processes of capital accumulation in markets.

2.4 Ownership, commodification, and risk allocation

To explore how resource-making is implicated in the possibilities and limitations for the governance of market development in global production networks, we outline three critical dimensions: ownership, commodification, and risk allocation, that constitute the mechanisms by which market governance and resource-making are intertwined in ways that shape market development outcomes. Within scholarship on critical resource geographies, ownership and commodification have been central questions to exploring the political economy of nature (Bakker 2005; Castree 2003; Valdivia et al. 2021). Here scholarship has focused neoliberalism and privatization, but state-capitalism has revived interest on relations between public and private ownership in market development (Christophers 2024; McGregor and Coe 2023). At the same time, scholars examining energy transitions have been particularly focused on the role of state-owned enterprises, public-private partnerships and “de-risking” – placing a greater emphasis on complexity of public-private relations and risk allocation (Christophers 2024; Gabor and Sylla 2023; Hunt and Tilsted 2024). As we will discuss in the rest of the section: ownership, commodification, and risk allocation are highly intertwined and co-dependent, such that the causal power of the three dimensions is a function of their particular configuration and combination in different cases.

2.5 The resource-making state

Firm actors in global production networks, particularly those with low costs and high capabilities, are continuously driven to develop new markets and to benefit from first-mover advantages in terms of market creation (Coe and Yeung 2015). However, with the rise of state capitalism, climate change, and geopolitical positioning, states are likely to be driven to play a larger role in market development in key industrial sectors where resource-making entails high capital costs and high risks, and the private sector is either unwilling or unable to develop markets without state intervention (Alami and Dixon 2024; Christophers 2024; Gabor and Sylla 2023; Mazzucato 2015). We coin the term The resource-making state to describe state with governments that play an active role in resource-making and governance related to the development of markets.

Based on the literature review presented earlier and the findings from our empirical study which will be presented in the later sections, we conceptualize that resource-making states will play two key roles in global production networks related to market development and creation: a) facilitating resource-making by supporting the implementation of key technologies and infrastructures related to the production, transport, and delivery of resources (instead of other, alternative technologies) and b) Governing market development by jointly coordinating, together with private firms, complex inter-organizational networks to balance the realization of political strategies with the processes of capital accumulation in market. The configurations of ownership, commodification, and risk allocation constitute the mechanisms that determine the extent to which resource-making and market governance are successful in shaping market development outcomes in global production networks. Figure 1 below outlines our conceptual framework for the resource-making state.

Figure 1:

Conceptual framework of the resource-making state: own illustration.

As explained previously, the biophysical characteristics of certain natures (water, natural gas) and physical entities (electricity, hydrogen), such as their density, weight, energy content, etc. will entail the need for specific infrastructures and technologies for their commercialization in markets. While the specific infrastructure and technologies required will change based on technological and organizational development over time, resource-making as a process will nevertheless have implications for state-capital relations regarding ownership, commodification, and risk allocation. Resource-making in certain sectors may entail capital intensive infrastructure, high transport costs, networked infrastructures, etc. which in turn has implications for market failures, risk and uncertainty, and profitability in delivering resources to specific markets.

Resource-making will then have implications for the extent of public and/or private ownership, the extent of vertically integrated or disintegrated value chains, and the allocation of risk between parties. If private parties are unwilling or unable to develop markets due to capital intensive and lumpy investments in the infrastructure needed for resource-making, states may have the option (or a combination of options) to a) publicly invest in infrastructure and procure resources through public ownership b) exert monopoly power through state-ownership (in electricity markets and/or resources) to coerce private enterprise to invest in infrastructure and deliver resources to markets or c) “de-risk” private investment to facilitate market development.

Resource-making states, in conjunction with private capital, may see the delivery of resources through vertically integrated monopolies or through privatized, vertically disintegrated value chains that unbundle the ownership of different infrastructures and services. Vertical disintegration can facilitate commodification, allowing goods to be traded in markets, however this will be dependent on the practices coordinating the relationship between buyers and sellers (i.e. long-term, inflexible or short term, flexible supply and purchase agreements). Commodification is related to risk allocation as the extent to which states can distribute risk to private partners in certain sectors may depend on the extent to which private partners can hedge their risk through commodity trading. Certain resources, however, will present difficulties to the processes of commodification, and therefore commodification will be shaped by resource-making processes.

While highly interrelated and dependent upon each other, the configurations of ownership, commodification, and risk allocation that states draw on will vary based on ideological, political, and economic reasons related to state strategies. Nevertheless, the success of these strategies will ultimately depend on the alignment of public-private interests. In the following sections we will draw on an empirical case of state strategies for LNG market development in the peripheral regions of Indonesia to highlight the strategies and resource-making practices behind the particular configurations of ownership, commodification, and risk allocation used by the Indonesian government for market development, and show the contradictions between resource-making and governance that led to project failure.

5.1 State strategies for market development

In an annual independence day speech in 2016, the president of Indonesia, Joko Widodo (Jokowi), claimed that “We will develop areas such as Entikong, Natuna, and Atambua so that the world sees Indonesia as a great nation that pays attention to every inch of its land” (The Business Times 2016). Jokowi’s statement reflects a situation where large economic disparities persist between the core and peripheral regions of Indonesia despite high economic growth. During his 2015 presidential run, Jokowi promised to relieve poverty in Indonesia by “modernizing” physical infrastructure, particularly in rural Indonesia (Yusuf and Sumner 2015). Warburton (2016) characterizes Jokowi’s approach to governance as appeasing a nationalist, state-centric development narrative that was focused on reducing unprocessed mineral exports and enhancing the countries industrial capacity through infrastructure development. At the time, key challenges for national development included substantial energy infrastructure deficits and a high reliance on expensive imported fuel oil for electricity generation, particularly in the peripheral regions of the country (Ray and Ing 2016; Seah 2014). The use of fuel oil subsidies accounted for 18 % of government expenditure in 2014 (Seah 2014), which was considered by authorities as a significant hinder for increasing the electricity generation capacity needed for industrial development (ESDM 2016).

Between 2002 and 2015, LNG trade expanded from 100 million metric tons per annum (MTPA) to 248 MTPA (Bridge and Bradshaw 2017). As LNG demand in Japan, Korea, and China had been slowing, particularly after 2014, LNG producers were dependent upon the significant expansion of LNG markets in order to maintain their capital gains (Dodge 2020). In the context of emerging market imperatives in LNG production networks, President Jokowi’s government launched plans in 2015 to reconfigure the country’s energy system through a 35 GW (GW) fast-track power project to be installed by 2019, with 13 GW to be supplied by natural gas (see Figure 2 below) (Seah 2014). According to an interviewee at the national electricity utility, these plans were based on the government’s strategy to reduce the use of expensive fuel oil which was almost double the price of LNG and to increase access to electricity, particularly in the peripheral regions of Indonesia. A report by a global energy consultancy, Wood Mackenzie, noted that replacing half of the current oil product consumption with LNG in the central and eastern parts of Indonesia would save the government nearly US$365 million per year in fuel procurement^[2] (WoodMackenzie 2015).

Figure 2:

National gas infrastructure road map (drawn by authors based on plans from PLN).

Despite the potential cost savings of replacing fuel oil with natural gas, a significant challenge for developing the nationwide distribution and supply of natural gas in Indonesia was the lack of infrastructure needed to distribute natural gas to domestic markets across the Indonesian archipelago (Choy 2011). To secure the financing and technology required for distributing natural gas to the peripheral regions of Indonesia, the Jokowi regime directed the state-owned electricity company, Perusahaan Listrik Negara (PLN), to launch a “request for proposals” for LNG supply to 21 power plants on the islands of Kalimantan, Sulawesi, and Nusa Tenggara in March 2015 (Poten and Partners 2015).

The LNG supply tender attracted considerable interest from major LNG-related companies, such as Shell, Gas Natural Fenosa, Marubeni Corporation, and Osaka Gas, who desired to capture value through market development opportunities (Hwee 2015). However, despite considerable interest in the project, interviews with LNG firms both directly and indirectly engaged with the PLN tender during the research period revealed that little progress was being made on the project and the tender was never awarded. In the next sections we will explore the intersection between resource making and market governance to explore why the capacity of the Indonesian government to develop markets for LNG in the peripheral regions of the country was limited.

5.2 New resource-making strategies in Indonesia

While traditional resource-making processes have entailed the exclusion of peripheral markets from LNG production networks, the industrial relations by which natural gas has historically been produced and commercialized are not fixed. New technological interventions and infrastructures in global production networks may enable new possibilities and limitations for developing markets in previously excluded places in global production networks. As mentioned in Section 4, resource-making in LNG production networks relies on economies of scale to reduce logistics costs, which is why supplying LNG to small demand centers has been historically considered unprofitable. According to interviews with several LNG technology companies and a report published by the multi-national classification society DNV-GL, economies of scale and cost reductions can nevertheless be achieved by developing and utilizing intermediate storage hubs for the delivery of large LNG cargos and then aggregating the demand of urban locations with smaller, more remote islands through small-scale value chains (SSLNG) called “milk runs” (Choy 2011). Milk-Runs are defined as routes where small LNG carriers offload partial cargos to multiple supply points. The small-scale LNG value chain is visualized in Figure 3 below.

Figure 3:

Diagram of small-scale LNG (SSLNG) value chain: own illustration.

Milk-runs make it economical to supply low-demand centers, by sharing infrastructure with high-demand centers. Another key resource-making intervention that makes supplying smaller demand centers more feasible was the development of floating storage and regasification (FSRU) facilities. According to interviews with technology suppliers, floating terminals removes the complications (such as permitting issues) related to onshore terminal construction, reduces costs, and allows for more flexibility as these terminals can be repurposed for use in other locations. In the LNG supply tender launched by PLN, the locations of the power plants included both high-demand centers, such as Makassar in Sulawesi (1.3 million people), and low-demand centers, such as Palau Rote in Nusa Tenggara (119,000 people). Whereas traditional large-scale LNG production networks have entailed that natural gas markets have largely been limited to large, urban demand centers, milk-runs and small-scale FSRUs open for developing markets for LNG in smaller, more peripheral demand centers that have historically been excluded from LNG production networks.

5.3 Ownership, commodification, and risk allocation in LNG market development

While small demand centers in Indonesia have been traditionally excluded from LNG markets due to the organization of LNG production networks around economies of scale and take-or-pay contracts, emerging market imperatives and resource-making interventions are reconfiguring such arrangements. As we will discuss in this section, the Indonesian government has sought to draw on state-led PPPs for LNG supply to small demand centers in Indonesia. As we will discuss, issuing a tender to private parties does not entail a full privatization of LNG markets in Indonesia. On the contrary, state ownership remains a key part of pursuing state strategies. Based on the critical dimensions outlined in the theoretical section, we will now explore the particular configurations of ownership, commodification and risk allocation that constitute market governance in the Indonesian case.

5.4 Market governance failure and development outcomes

While the low-boiling point of natural gas makes distributing LNG across the Indonesian archipelago difficult, natural gas can nevertheless be made exploitable in domestic markets through resource-making interventions by aggregating the demand of the 21 locations in the LNG tender through “milk runs”. Despite these strategies, the LNG project was unsuccessful. Figure 4 below outlines the strategies and interventions of the Indonesian resource-making state and the associated outcomes in relation through the conceptual framework developed in the theoretical section (Figure 4).

Figure 4:

The resource-making state in Indonesia: own illustration.

As discussed in the theoretical section, the extent through which governance for market development is successful is dependent upon the balance and alignment of public and private objectives. According to interviews with companies involved in the LNG tender, negotiations around the supply of LNG had largely stalled. Interviews with companies involved in the LNG tender revealed that the failure of extra-firm bargaining between PLN and the companies involved in the LNG tender revolved around two key issues related to market governance. The first point of disagreement was PLN’s requirement that LNG companies supply all 21 locations in the tender. The second point of disagreement was PLN’s refusal to “derisk” LNG projects by committing to take-or-pay clauses in the LNG supply agreement. A consultant from an energy advisory firm described the situation as a “tug of war”, in which LNG producers seek to create markets for excess supply on LNG markets, but require that the state “derisks” small-scale LNG projects by committing to take-or-pay contracts, while PLN bargains for contracts that are more flexible, where risk is allocated to private partners.

The failure of market governance is related to how resource-making through milk-runs limits the possibility for commodification, which in turn shapes the willingness for private actors to offtake risk in LNG projects. According to the sales manager at the LNG technology firm, although milk runs may reduce the costs of supplying remote demand centers, the logistics of supplying multiple locations increase the need for developers to systematically coordinate LNG supply with investments in ships, storage, and regasification facilities across multiple locations. As mentioned previously, LNG tends to boil-off when exposed to heat and compression under storage and transport which increases capital and operational costs for shippers. According to an interview with an LNG shipping consultant, the challenge of milk runs is that establishing intermediate hubs and terminals at all 21 locations in the tender increases the total amount of LNG stored in the system, thereby expanding storage costs due to the management of boil-off gas. In addition, offloading a single carrier at multiple ports increases the daily shipping costs. Shipping and storage costs can nevertheless be optimized by tightly coordinating storage with LNG shipping routes to reduce how much LNG is stored in the system.

Here resource-making through milk-runs limits the vertical disintegration necessary for private actors to mitigate risk through spatial flexibility and market arbitrage (Ledesma 2016). Resource-making through milk-runs is dependent upon the coordination of simultaneous investments in facilities at intermediate hubs, procurement of LNG carriers and development of FSRUs and the necessary supporting infrastructure at each of the locations specified in the tender. The organization of these investments in infrastructure would entail the organization of projects through point-to-point flows governed under vertically integrated value chains. Through vertical integration, LNG carriers and import terminals become “dedicated” to LNG supply agreements (despite the flexibility that FSRU’s offer), thus limiting the possibility of flexible short-term arrangements between partners involved in the LNG tender. A technical advisor at a classification society noted the following:

Doing milk runs could be economical, but then you have 5 to 6 points of contact that need to line up, and they all need investment, and then you need a person to build the carriers, so you need to have very good contractual arrangements between them, and therefore, you will need long-term contracts. However, the people taking the gas, they want to avoid buying LNG on long-term agreements.

A consequence of systematically coordinating milk runs in Indonesia is that such agencies would contradict the processes by which LNG production networks are becoming increasingly spatially and organizationally fragmented. A sales manager at an LNG technology company explains:

Because it is small scale, you have a logistics chain involved, and the risks multiply. This power plant, with so much capacity factor, will offtake so much, but what happens if it doesn’t offtake? Because you have stored a certain volume, with a basis that it will be regasified and consumed, and if it doesn’t get consumed, the vessel is wasted. One time, fine, you can adjust it. But you have 90 deliveries a month, and then your offtake has come down by 15–20 percent, and you still need to pay your supplier.

This quote reflects a situation in which milk runs limit the capacities of suppliers to mitigate risks by arbitraging trading opportunities between markets. Such limitations are displayed in the skepticism of LNG-related firms to engage in speculative markets and financing for LNG infrastructure.

Overall, the capacity of the Indonesian government to realize state strategies through state-led PPPs is limited as the resource-making interventions used to supply all locations in the tender contradict the vertical disintegration and commodification processes that would enable private partners to mitigate the risk of market volatility in LNG projects. Consequently, the disagreement between the government and private partners on how risk should be allocated and which locations should be included in the tender resulted in the failure of the government to realize domestic market development for LNG through PPPs. Consequentially, the Indonesian government shifted tactics. In 2020, the Indonesian government issued a ministerial decree ordering Pertamina to supply LNG to 52 power plants with a combined capacity of 1,870 MW operated by PLN (Kristoff 2021). An investment of 1.5bn to 2.5bn was estimated for the project. Whereas the 2016 LNG supply tender relied on the blending of public and private institutions, market governance has shifted to public-public partnerships to realize state strategies of developing develop “every inch” of Indonesia as quoted by President Jokowi in Section 5.1.

The status of this project is unclear, but as Kristoff (2021) notes there continues to be considerable risks for PLN, Pertamina, and the government. Because electricity tariffs in Indonesia are capped at specific rates, PLN would have needed to bear the costs of price increases in global LNG markets (Seah 2014). In addition, the electricity demand in the peripheral regions of the country is unstable and uncertain, and PLN would have needed to bear the risk of demand shortfalls. Although the objective of LNG projects in Indonesia was to reduce subsidies, the government would most likely need to step in with subsidies and guarantees in periods of price increases and sudden demand reduction. Overall, the capacity of the Indonesian government to develop LNG markets in peripheral regions in the country seems to be limited. The case of Indonesia also reflects wider challenges related to small-scale LNG infrastructure, and the limited market potential due to the need for states to “derisk” the development of small-scale LNG value chains.