Indonesia needs to raise the ante to sustain its oil and gas production in the next decade amid unfavorable circumstances in the
sector.
BMI Research, a unit of Fitch Group, has sent a strong warning to Indonesia that the countrys crude oil and natural gas output is expected to slide by 1.7 percent and 4 percent. respectively, each year until 2021 because of weak oil prices and slow development of new projects.
"Indonesia’s crude oil and natural gas production is set to see firm declines over the next five years amid slowing investment into new projects to counter natural declines at mature assets,” BMI Research says in a recently published report.
“Moreover, although we believe oil prices will improve over the coming years, the gradual pace of the rebound, particularly over the next two years, will continue to drag on firms’ appetite for costly output maintenance works at aging fields.”
The report predicts that national oil production will start to decrease by 1.5 percent year-on-year (yoy) to 800,000 barrels of oil per day (bopd) in 2018 from 812,000 bopd this year, which is in line with the projection in the government’s proposed 2018 state budget.
Similarly natural gas production is expected to drop by 10 percent next year, caused by large output losses from Indonesia’s biggest gas source, the Mahakam block in East Kalimantan.
Global oil prices have not rebounded swiftly since their dramatic fall more than two years ago. Benchmark West Texas Intermediate (WTI) reached US$ 48.21 per barrel on Thursday afternoon, up only slightly from $ 47.33 last year. Fellow benchmark Brent traded at $52.39.
However, weak crude prices only play a minor role in the rapidly declining production rate, as the domestic regulatory environ-
ment primarily supports low-cost and low-risk projects, instead of new exploration and exploitation projects that could maintain the production rate.
Giant gas projects, such as the Masela block and the East Natuna block, have been stalled because of disputes between contractors and the government over the project concept and the domestic market obligation (DMO), respectively
Moreover, investment in the sector reached S399 billion in the first half of this year, which is only 28.84 percent of this year’s target of $13.8 billion, according to data from the Upstream Oil and Gas Regulatory Special Task Force (SKK Migas).
The dwindling production may force the country to rely heavily on imports. Despite the grim outlook the government still maintains that Indonesia is unlikely to start importing gas by 2025.
The government is not blind to the fact that investors are shying away from the upstream sector. In January, the government introduced a new scheme in production-sharing contracts (PSC), namely the gross split scheme, to guarantee fiscal iiexibility in new or high-risk projects, but the new scheme has received an undesirable response from investors and experts.
Energy and Mineral Resources Minister Arcandra Tahar said that while the scheme was initially composed based on case studies of existing fields, a revised one would consider the overall process.
“We previously carried out the analysis based only on existing fields. However, we have to look at a full circle from exploration until commissioning, since there have been many suggestions that the NPV [net present value] be the same as the cost recovery PSC,” he said, referring to the former PSC scheme.
The government is also drafting a new regulation on tax treatment under the gross-split scheme, slated to supplement Government Regulation (PP) No. 27/2017 on the same issue for the cost recovery scheme.
Separately, Wood Mackenzie Asia upstream research director Andrew Harwood said investors might still be cautious, despite any impending positive policy changes, as the 2001 Oil and Gas Law was still under revision.
“The gross split regime, by removing the cost recovery system, presents a new upstream frame-work. Investors will be keen to see if the new regime can be accommodated into a new oil and gas law," he told
Jakarta Post, Page-17, Friday, August 25, 2017
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