The state of oil and gas
Ririn Radiawati | May 07, 2011

Indonesia, a former member of OPEC, is now a net importer of oil. The country is rich in natural resources, but the oil and gas sector is shrinking. Globe Asia examines what’s holding back the sector. 

Indonesia is a unique archipelagic country that is rich in natural resources. It’s more than a little ironic that it cannot rely on its assets to boost economic growth. While Indonesia’s abundant oil and gas reserves have propelled economic growth for decades, the former OPEC member is now a net importer of oil.

Revenue from oil and gas has decreased progressively each year. According to the Central Statistics Agency (BPS), the oil and gas sector even hampered national growth in 2010. “National growth in 2010 was 6.1%. Without oil and gas, growth was 6.6%,” says BPS head Rusman Heriawan.

The oil and gas business accounts for approximately 7% of total growth in Indonesia. “It’s small, but when it hits negative figures it will create lower growth overall,” Supriyanto, director of production balance at BPS, tells GlobeAsia. Last year, the oil and gas sector shrank by 3.61%, he notes, adding the sector now registers negative growth rates each year.

The oil and gas sector includes both upstream and downstream activities. Upstream activities include exploration and exploitation to extract oil and gas in the field, while downstream activities include gas sales and refineries, which in Indonesia are operated by state-owned oil and gas company Pertamina.

For the past two years Indonesia has failed to meet its oil production targets and analysts expect this trend will continue if the government does not invest in upstream and downstream business activities. On average, Indonesia’s oil production is declining by 12% each year.

Last year the government targeted the production of 965,000 barrels of oil per day (bpd), but only 954,000 bpd was produced. This year the government has set a target of 970,000 bpd, but in April production had only reached 907,000 bpd. Ahmad Erani Yustika, an analyst from the Institute for Development of Economics and Finance Indonesia (Indef), says oil production will remain steady this year and next but says the government needs to provide more incentives to encourage investment over the next decade.

No new peaks

While it seems clear that oil is on the decline worldwide, there are significant reserves of natural gas and methane gas in Indonesia. Only one-third of natural gas basins have been explored in the archipelago and these alone give Indonesia the biggest reserves in the Asia Pacific – at least on paper. Despite its ubiquity, however, the problem with gas is that extracting it is a costly and infrastructure-intensive process. 

“The lack of new investment in the sector is a major problem as new oil and gas blocks are only replacing declining volume rather than reaching new peaks,” says Indef’s Erani. Priagung Rakhmanto, an analyst from Reforminer Institute, says the bottom line is regulation, a statement that is echoed unanimously by the corporate sector.

“The government is planning to revise the oil and gas law and there are several articles that must be changed,” he says, noting the government should urge companies to explore new oil and gas blocks by offering tax incentives. The government issued a new regulation on cost recovery early this year.

The regulation is aimed at clearing up questions on cost recovery in the industry in the hope of boosting investment in the sector. Not everyone agrees that this is the right approach. Sammy Hamzah, vice president of the Indonesian Petroleum Association, says the regulation will discourage investors rather than provide investment incentives. “I see this as a disincentive for oil and gas investors,” he says.

As a new regulation will over-ride business contracts between oil and gas companies and the government, represented by upstream oil and gas regulator BP Migas, it will effectively curb the latter’s authority to provide incentives.

Sammy also criticizes an article in the new regulation issued in December which imposes a 5% tax on the value of each contract for companies transferring contracts to other firms during the exploration stage. “Indonesia suffers from weak exploration which is also the most risky activity in the business. So why does the government impose a tax when companies try and share that risk?”

The cabotage law was the latest regulation to cause a stir in the industry. The law requires all maritime vessels operating in Indonesian waters to be registered as Indonesian-flagged vessels, but Indonesian shipping companies have not invested in the expensive rigs and tenders the industry needs.

The policy was seen as a dramatic setback for the industry and in the end the House of Representatives was forced to agree to exempt the sector from the law rather than see exploration and exploitation shrink dramatically. For Abdul Hamid Batubara, president director of Chevron Pacific Indonesia, acquiring land to drill new wells is becoming increasingly problematic as land prices rise.

“Land prices are growing higher and higher every year,” he complains. Chevron’s main operation in Duri, Riau, produces approximately 370,000 bpd or 40% of Indonesia's oil. Hamid suggests that to acquire land, the company must seek support from local government.  “We have our own standards, but they offer higher prices. There are no local government rules to support us,” he explains.

Hamid admits that uncertain rules are an obstacle to investing in Indonesia and may force investors to look elsewhere. “The rules need to be consistent, otherwise oil and gas investment in Indonesia will not be very attractive,” he says, adding however that the company will significantly boost oil production during 2011.

The second-largest oil producer, state-owned oil and gas company Pertamina, will be more aggressive about reaching its oil and gas production target of 1 million barrels per day by 2015. Pertamina currently produces 192,000 barrels per day of crude oil but this year it expects the figure to move upward to 208,000 bpd, an increase of 5.26%.

Pertamina expanded in 2010, acquiring Inpex's stake in October, and that and other blocks are expected to boost its oil production this year. The company has also reactivated 5,244 wells that will be operational by mid-January next year. Pertamina estimates this plan will add an extra 22,888 bpd to its output. GA

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