ExxonMobil exit warning of waning oil, gas industry

The sudden exit of United States-based oil and gas giant ExxonMobil from the East Natuna energy block has become a major blow to Indonesia’s already struggling upstream oil and gas industry.

Investors’ appetite in the sector has long been waning even before ExxonMobil’s withdrawal. announcement on Tuesday, due to concerns on regulatory uncertainties and lengthy red tape, in addition to the persistently low global oil prices.

While the government has visibly made some effort to freshen up the industry with new policies, BMI Research oil and gas analyst Peter Lee said that Indonesia’s attractiveness as an investment destination was still below par in comparison to other markets in Asia, Africa, Europe and the Gulf of Mexico.

“Investors have yet to be impressed by the government’s gradual attempts at upstream reform, which includes the decision to eliminate exploration-related taxes in September 2016 and the introduction of a new PSC [production sharing contract] in January 2017 that significantly increases the companies’ take of profits from oil and gas sales, although it does not offer any cost-recovery mechanism,”

he said.

Block East Natuna

ExxonMobil Indonesia announced that it no longer wished to continue any discussions or activity in the East Natuna block. for which it had joined a feasibility study consortium otherwise consisting ofstate-owned energy firm Pertamina and Thailand’s PTT EP.

Its exit follows in the footsteps of two other former consortium members Malaysia’s Petronas and France’s Total. The Energy and Mineral Resources Ministry has confirmed ExxonMobil’s wish to halt its participation in the negotiations, saying thatthe latter had deemed the project economically unfeasible under the current terms offered.

The East Natuna block, located in Riau Islands, has total proven reserves of 46 trillion cubic feet (tcf) of gas and is deemed to be one of Asia’s largest reserves. However, the gas field has a high carbon dioxide (CO2) level of 72 percent, which requires an estimated US$20 billion to $40 billion for development and the advanced technology needed to maximize extraction.

Moreover, a previous government-commissioned study showed that East Natuna would only be economically feasible if future contractors obtained 100 percent of the profit share, leaving the government only to reap revenues from taxes.

Wood Mackenzie research analyst forthe Asian upstream sector, Johan Utama, said the latest company’s move to leave the East Natuna block has made the list of international companies exiting or reducing their presence in Indonesia even longer.

East Natuna Seismic Survey

“Marathon, Anadarko, Murphy, Hess and Lundin have disposed of their Indonesian portfolios, as they focus their capital on more attractive projects in their portfolios,” he told the Post.

Utama also cited the decision of ConocoPhillips and Inpex to sell their stakes in the South Natuna Sea Block B and Chevron’s move not to extend the operation of its shallow-water blocks in East Kalimantan as signs of a poor investment atmosphere in the Southeast Asian country.

While ExxonMobil’s decision to pull out may not directly affect this year’s total upstream investment, the governments failure to attract sufficient foreign investment is expected to burden Pertamina. The government has assigned eight expiring fields to the state-owned firm to be operated under the recently introduced -gross-split scheme.

“While its state-owned nature will see investment into domestic fields sustained, pumping capital into domestic mature assets, all the while advancing its overseas and downstream expansion agenda, will prove increasingly taxing,” BMI Research’s Lee said.

The Upstream Oil and Gas Regulatory Special Task Force (SKK Migas) recently announced that investment in the sector in the first half of the year only reached $3.99 billion, 28.84 percent of the full-year target of $13.8 billion. Most analysts agree that a shortfall in investment will likely happen by the end of the year.

Jakarta Post, Page-13, Friday, July 21, 2017