Over the past three years, investment in the upstream oil and gas sector has plunged to almost half of the usual figure of more than US$20 billion, and the industry has seen some 50,000 layoffs as well as a persistent decline in oil production.
While the blame partly lies with low oil prices, some of the factors may stem from inherent problems that have reduced the appetite of foreign oil and gas investors for new projects in Indonesia.
From policy changes that have severely impacted Japan’s $19 billion investment in the gas-rich Masela Block in Maluku to the replacement of decades-long production-sharing contracts (PSC) for a new scheme that is deemed unattractive, the oil and gas industry has faded into the twilight.
The Indonesian Petroleum Association (IPA), which groups major local and foreign oil and gas companies, has called on the government to take the issues in the industry seriously after seeing no progress in the past three years in the attempts to increase global investor confidence in Indonesia.
“With fewer than two years left [for the administration, there’s not much to be done other than try to improve confidence as soon as possible by creating investment-friendly policies,” IPA executive Marjolijn Wajong of Santos Ltd., said recently.
“In almost all discussions with the government, there is no narrative to ensure the policy will make Indonesia more competitive,” she said.
The 2016 Policy Perception Index survey released by Canadian think tank the Fraser Institute positioned Indonesia at 79th out of 96 jurisdictions with a reserve replacement ratio (RRR) of 51 percent, indicating the country’s poor investment climate in the oil and gas sector.
The RRR measures the amount of proven reserves that a company adds to its reserves to replace those produced. The industry has been particularly worried recently by the governments' insistence on oil and gas contractors adopting the so-called gross split scheme to replace the PSC regime, which is widely believed to be less attractive.
The gross-split sliding scale was introduced earlier this year and ended the government’s need to reimburse investors’ exploitation activities and therefore exempt investors from long negotiations on the value of their activities with the Upstream and Oil Gas Regulatory Special Task Force.
However, the gross split is deemed unattractive as companies risk losing a lot of money for exploration in Indonesian areas that are mostly considered as frontier with difficult terrain and where most of the reserves are in deep water.
“It’s not that we oppose the scheme. It’s a matter of how to make it competitive and attractive for investors. If the ‘carrot’ is not attractive, will the ‘rabbit’ want to seek it out?” another IPA executive Sammy Hamzah of
Ephindo Energy Pte Ltd. said.
The success rate of the gross split scheme will be determined in the upcoming announcement of winners for the auction of 14 unconventional and conventional blocks on offer. The announcement itself has been delayed from March.
In 2015, a year after Jokowi took office, there was no winner from the auction of 11 oil and gas blocks. Last year was little different with only one winner determined for 17 conventional and unconventional blocks offered. In comparison, during the 2012-2014 period, there were 89 winners from the auction of a total 50 blocks.
IPA executive Ignatius Tenny Wibowo of Santos Sampang Pty Ltd. said the downward trend might have occurred because there had been no long-term solutions, particularly in terms of regulations.
He quoted Energy and Mineral Resources Minister Ignasius Jonan who once said that Indonesia could rely on imports if the cost of oil lifting the colloquial term for ready-to-sell production was too high.
“That’s easier to say than to face the reality,” Tenny said. “Just imagine, what if suddenly the oil price reaches $200a barrel? What will be the impact for us?” Since taking office in late 2014, President Joko “Jokowi” Widodo has pledged to make the business environment in Indonesia more competitive in order to attract foreign investors.
Red tape has been cut in a deregulation drive, but the oil and gas industry has been largely left: out. However, the President’s main priority for the industry has been to boost efficiency and transparency by launching crackdowns on the so-called “oil and gas mafia", overhauling personnel in the Energy and Mineral Resources Ministry as well as cutting brokerage activities in state oil and gas company PT Pertamina.
Another concern in the industry is a policy to force Pertamina to take over expired concession areas, with analysts indicating that the company will be biting off more than it can chew and the policy being perceived as an attempt at “nationalization”.
As many as 23 cooperation contracts will expire within the next five years, with Pertamina projected to take them all over. The IPA hopes to raise the issue in its upcoming 415' convention and exhibition, one of the biggest energy get-togethers in Southeast Asia, which will take place on May 17 and 19 at the Jakarta Convention Center.
The annual convention, where all stakeholders and policy makers gather to.discuss challenges as well as opportunities, has never been attended by Jokowi, which many industry players regard as a sign of the President’s lack of interest in the sector at a time when domestic oil output is on a steady decline and the country which used to be an oil exporter, heavily reliant on imports for its energy security for the next decade.
“The potential for Indonesian oil and gas is still there, but it has to compete for global capital, which it is unable to do at the moment,” said IPA executive Michael Putra of Shell Upstream Indonesia Services.
“Yes, the oil price decline is a factor in it. But other countries like Mexico manage to get investment. So it’s not just about the oil price. Indonesia has an inherent problem to make it more competitive.”
Jakarta Post, Page-13, Friday, May, 5, 2017
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