View Point: Misguided decisions in the oil and gas industry

The Jakarta Post, May 14, 2016, Vincent Lingga

First, the blunt facts: None of the eight oil and gas blocks offered last year by the regulatory body SKKMigas were taken up by contractors. The number of drilled exploratory wells fell to 52 last year from 83 in 2014 and an average 104 between 2011 and 2013.

National oil production has fallen from as high as 1.25 million barrels per day ( bpd) in 2001 to below 820,000 bpd now. The success ratio of oil explorations has fallen to as low as 15 percent from 20 percent in 2014 and almost 70 percent in 2011-2013. International oil prices continue to hover below US$40/ barrel, as against $95 in 2014.

These harsh realities should have rudely jolted the government to act quickly and firmly to improve the investment climate in the petroleum industry in order to woo new investment.

But the government instead continues to behave and act as if it is only Indonesia that has sedimentary basins with large reserves and geological prospects. Take it or leave it: That is the way the government has treated oil companies that have taken big risks.

The latest grave mistake was President Joko “Jokowi” Widodo’s “verbal” decision last month that Inpex- Shell should change their plan of development in the huge Masela/Abadi gas field in Maluku from an offshore to an onshore liquefaction plant.

This misguided decision could delay the development of the huge gas reserves (10.7 trillion cubic feet) by more than five years to 2030. This was the first oil or gas project for which the approval had to go directly to the President, instead of being appraised and approved only by the SKKMigas and the energy and mineral resources minister.

After several years of uncertainty, the government finally decided last year not to renew the production-sharing contract between Total Indonesie of France and Japan’s Inpex for the Mahakam gas block in East Kalimantan, the country’s largest producer, which will end in 2017.

The concession was instead awarded to state-owned oil and gas company Pertamina under a decision that smacks of nationalist sentiment. The uncertainty surrounding the mechanism and procedures for the extension of production sharing contracts will haunt 19 other contracts set to expire between 2015 and 2018.

These concessions account for 30 percent of the national oil output. Over the next 10 years, PSCs accounting for 80 percent of oil production will expire. The government’s management of contract extensions will be a benchmark for attracting future investment in both exploration and development. The uncertainty over contract extensions could put further pressure on output and investment plans made by companies operating in Indonesia.

Hence, the government should enact a firm regulation on clearcut rules and procedures for contract extension or renewal. If the government does not act quickly and firmly to woo new investments in hydrocarbon prospecting, according to the Indonesian Petroleum Association (IPA), Indonesia will become a net energy importer by 2019. IPA estimates Indonesian energy demand at 6.1 million barrels of oil equivalent per day (B0EPD) in 2019, while domestic production (oil, gas and coal) will only be 6.04 million BOEPD. The energy deficit may reach 2.4 million BOEPD in 2022. Most oil executives and hydrocarbon analysts agree that Indonesia still has many basins with large reserves. But most of the country’s oil and natural gas fields are already quite mature and have reached their production peaks, and without new proven reserves Indonesia could see the last drop of its own oil. This indicates only one thing: The volume of proven reserves has not increased as fast as consumption growth as a result of an acute lack of investment in exploration. Only by increasing proven oil and gas reserves will Indonesia be able to make its production sustainable and sufficient to meet its steadily rising consumption along with the constant expansion of its economy. But the only way to increase proven hydrocarbon reserves is to increase investment in exploration. The other paradox is that there seems to be a mounting resource nationalism among politicians and even many energy analysts, suggesting the reduction of foreign oil companies’ dominance in the hydrocarbon industry.

But every time the government puts new oil blocks on open tenders, very few national companies are interested in bidding, given the high risks and the high-capital and high-technology nature of investment in the upstream oil industry.

The hydrocarbon industry requires an ever better investment climate, as most of the undiscovered, prospective basins are located in frontier, eastern areas.

The eastern region of the country has potentially big reserves that are not proven yet, but their prospecting requires sophisticated technology and huge investment, estimated at 10 times as large as those in Java and Sumatra, thereby involving bigger risks.

IPA has often cited rising concerns of uncertainty surrounding cost-recovery legislation, corruption, interference by government agencies and the general regulatory structure of the upstream and downstream oil and gas industry.

Legal and regulatory uncertainty and inefficient bureaucracy are especially inimical to investors in the upstream segment of the hydrocarbon industry — exploration and mining — as this business involves high risks and requires big capital.

Cost recovery — the mechanism in the PSC (production sharing contract) that allows contractors to recover their investment in exploration, development and production — has always been a highly contentious issue.

Given the slim chance that a dollar spent on exploration will turn into a commercial venture, most banks shun lending to explorations. Hence we need foreign oil firms willing to risk their own money.

However, as veteran oil executive Tengku Nathan Machmud observed recently, these companies now feel frustrated that they are no longer welcome as their contracts are not being extended and that their complaints about heavy-handed micro management are not being heeded and they are increasingly concerned about the negative attitudes and overtones in the media against the oil and gas investor community.