Is Indonesia heading toward an oil and gas emergency?

Is Indonesia heading toward an oil and gas emergency? Eddy Purwanto ;   An Oil and Gas Practitioner and Former Deputy Head of BPMigas, the Now Defunct Upstream oil and Gas Upstream Regulator

JAKARTA POST, 12 Desember 2012

The oil and gas upstream industry has the same characteristics everywhere — it has connections to investment, technology and is very high risk — including in Indonesia. As a result the industry is highly sensitive to the “3Cs” — clarity, consistency and certainty. This was indicated by the new president of the Indonesian Petroleum Association (IPA), Lukman Mahfoedz, recently. Sadly, the last “C”, encompassing (legal) certainty and (business) certainty, becomes increasingly vague in Indonesia after the Constitutional Court (MK) dissolved the oil and gas upstream regulating agency (BPMigas). Although not apparent, what actually happened is that the oil and gas contractors in Indonesia are beginning to reevaluate their decisions regarding investment in exploration and giant gas projects, while investment in the extraction of the remaining reserves is expected to proceed. In order to prevent an “oil and gas emergency”, the only effective answer is to boost oil and gas explorations by domestic and foreign investors. For the consideration of policymakers following the MK decision, below are some analyses of facts, geography and region, that will affect the strategic environment of Indonesia’s oil and gas upstream industry in the future. The impact of the declining certainty was evident in the early 2000s, especially in the wake of the change of the Oil and Gas Law, after the economic crisis of 1998 and following the change of the Oil and Gas Law No.8/1971 into the Oil and Gas Law No.22/2001.  In addition, the oil and gas cost and investment ratio in Indonesia indicated a drastic pattern of change. Previously the portfolio for explorations in production blocks was around 25-31 percent, but after the Oil and Gas Law amendment it dropped to only 5 percent of the total oil and gas expenditure in Indonesia, far from the investment portfolio for development and production.  Since the slump in the exploration portfolio Indonesia’s oil production and reserves have tended to further decrease, the impact of which continues to be felt right up to the present day.  The Oil and Gas Law amendment and the disbanding of BPMigas occurred amid uncertain global economic conditions, most notably in the US and Europe, which have not yet recovered are feared to bear the same impact. The explorations already registering a fair increase lately will again be plummeting, with investors or International Oil Companies (IOC) concentrating only on production to extract the remaining oil and gas reserves and shifting their exploration portfolio to other countries. If this really happens (hopefully not), national oil production in 2020 is predicted to be only 400,000-500,000 barrels daily. The other impact is the delay in major gas projects. For whatever institution is going to replace BPMigas the emergency plunge in production and reserves seems difficult to avoid  Following the change in the Oil and Gas Law, the government’s effort to stimulate investors in order to increase the exploration investment ratio from 5 percent back to the previous level of 25-30 percent will become even tougher.  The exploration investment slump will cause the “reserve replacement rate” to drop further below one, meaning that the production of one barrel of oil is only compensated for by the exploration discovery of far less than one barrel, thus resulting in a continued deficit that will reduce production and reserves and finally lead to an “oil and gas emergency” marked by swelling oil and fuel imports. To catch bigger “fish”, in the post-1971 Oil and Gas Law period the exploration territory shifted to the frontier region, particularly in East Indonesia and inner maritime zones, but sadly, the results of exploration drillings since 2009 have shown less encouraging facts.  Of the 21 exploration wells drilled, only two yielded non-commercial oil or gas and the rest were dry holes, with total losses borne by investors nearing US$2 billion. The failures have become public knowledge and have dampened the spirit of investors to operate in the frontier region, prompting them to return to “safer” areas close to the already productive oil and gas blocks. With the dissolution of BPMigas, investors’ enthusiasm to expend funds for explorations will further diminish and they will focus soley on development and production activities.  The other concern is the fact that many contractors have encountered problems of the first two “Cs”, clarity and consistency, making many of them unable to keep their exploration drilling commitments, so that in the period of 2002-2008 of the 107 blocks already assigned for drillings, only 28 percent (30 blocks) were carried out, leaving 72 percent (77 blocks) unfulfilled for various reasons. The main reasons were overlapping land use, licensing matters, the impact of regional autonomy and complications with local communities.  Coupled with the third “C”, the decline due to the lack of legal certainty and business certainty following the MK decision, the conditions for Indonesia to arrive at an “oil and gas emergency” are thus complete. Apart from the “3Cs”, a regional factor will appear in the future to affect the oil/gas strategic environment in Indonesia, with the US and Australia being dominant. Before long, the US will be ready to become a natural gas production and export center.  The success of the US through its shale gas technological revolution enables it to develop the fifth largest gas reserves in the world, totaling 273 trillion cubic feet, and to compete with Russia. US gas exports are needed to restore its economy and industry, which demands the lowest possible price of gas. The US government is waiting for the right time to emerge as a gas exporting country and be ready to flood East Asia as the traditional market of Indonesian LNG after 2020. On the other side Australia, a US ally, will also become a major world gas production and export country. Australia today has the world’s 12th largest gas reserves, amounting to 110 trillion cubic feet, which will keep growing with the discovery of new oil and gas basins.  Now Australia has become the fourth biggest gas exporter in the world and is ready to shift the position of Qatar. Australia is preparing the development of seven new LNG refineries with a budget of $200 billion.  When all the refineries are set for production, Australia will be able to export 95.7 million tons annually, almost five times the present volume of Indonesian LNG exports. After 2020, the presence of gas from the US and Australia plus the “3Cs” at home is predicted to make it even more difficult for investors to make business decisions on investment in Indonesia, especially in the gas sector, because with the influx of gas from the US and Australia, the price of gas in post-2020 contracts is expected to tumble notably in East Asia and Southeast Asia, including Indonesia. We are not expecting an “oil and gas emergency” that drags the nation into an energy crisis with its far-reaching and profound consequences, but the MK decision creates a greater chance to lead to a situation such as this unless the government and the House of Representatives are capable of reversing the investment climate through the “3Cs”, including a revision of the Oil and Gas Law and the prompt establishment of the right substitute for BPMigas. ●