Resolving oil, gas supply barriers Montty Girianna  ;   Deputy coordinating energy and mineral resources minister at the Office of the Coordinating Economic Minister

JAKART POST, 08 September 2014

                                                                                                                       

                                                      

Indonesia has become a net oil importer, as domestic production meets less than 50 percent of total consumption. Today, oil imports are a major contributor to the balance of payments deficit.  The discovery of new oil reserves is quite small. Of the almost 2 billion barrels oil equivalent (BOE) found in Southeast Asia over the past 10 years to 2012, only less than one quarter was discoveered in Indonesia. This mismatch between production and consumption has raised the issue of our energy independence and security due to excessive energy imports and subsidies. Insufficient investment in exploration and production, and the inadequate deployment of secondary and tertiary oil recovery are the major reasons for production decline. Production Sharing Contracts (PSCs), which have been an important part of our oil and gas sector over many decades, face an unprecedented risk for their existence. Uncertainty — regulatory risk — surrounding the extension of existing PSCs has affected the confidence of PSC investors and constrained efforts to increase production. As of now, close to half the active PSCs in place for current operations and supply of oil and gas will end within the next 10 years. The expiry of existing PSCs has reduced incentives for exploration of both new deep-sea oil reserves and secondary/tertiary oil recovery. To decrease our excessive reliance on oil, we have begun to increasingly utilize gas as an important alternative source of domestic energy supply. Our National Economic Committee (KEN) has emphasized the use of natural gas to meet long-term domestic demand. However, this has not been without fundamental challenges. As a key liquefied natural gas (LNG)world exporter for a number of decades, we have had to balance our export obligations — long-term LNG contracts — with increased domestic demand. We have also followed a policy to maintain low domestic gas prices to encourage large industrial customers and power generation. But this, together with perceived regulatory risk, has discouraged PSC holders from making further investment. Gas transmission and distribution pipelines — necessary for gas to flow from gas blocks to demand centers — are not well integrated due to a lack of open access arrangement. Shale gas and coal-bed methane have been very limited because of low incentives. As a result, while production of gas has remained steady in recent years, domestic gas supply is insufficient to keep up with our demand for oil substitutes. This, accordingly, requires imported LNG, which is, of course, more expensive. To resolve supply constraints and fulfill demand, the new government has to immediately carry out a comprehensive analysis of regional oil and gas basins to identify new potential reserves to be offered to PSC holders. Early exploration in a number of strategic hydrocarbon basins, such as East Natuna and the deep-sea Kutai basins, should be given high priority. These basins have sizable reserves with a high percentage of recoverable natural gas. Once gas is found, exploitation from these basins will provide significant long-term energy sources for economic development, domestic industries and the local economy. Focus is also needed to increase production in existing oil wells through the application of Enhanced Oil Recovery (EOR) technologies. With more than three-quarters of today’s oil and gas production being extracted from 40-year-old blocks, EOR will be the solution to maintain a high production rate through secondary/tertiary recovery. Issues with respect to the property rights of EOR technologies, as well as the cost of acquiring the technologies, need to be resolved between the new government and PSC holders. Cooperation in conducting research, preparing feasibility studies and the application of EOR pilot projects is necessary. A cost-sharing mechanism to absorb some of the costs of implementing expensive EOR technologies needs to be invented. Moreover, the provision of proper incentives for secondary/tertiary recovery, such as profit sharing and credit-investment mechanisms, will be essential. In addition, reforms to the existing PSC allocation and extension mechanism should be made an urgent priority. Fundamentally, when a contract expires, the concession belongs to the government, which is free to do with it as it wishes, of course, for the benefit our country and people. We can allow the existing PSC holder to carry on for a further period, with or without additional commitments; we can terminate the contract and carry out a tender for the license; or we can award the concession to our state-owned oil company. The prerogative to extend a PSC, or award a new one, is with the government. But it is important to have an investor-friendly PSC-extension mechanism. It is crucial to have the decision–making process for the transfer of expiring PSCs made in a timely fashion, with a decision made long before the PSC expires. This is so PSC holders have certainty to inject the necessary funding for operations, as well as continuous investment, and will not let field production decline when licenses are expiring. Both the implementation of EOR and a clear mechanism for PSC extension/termination will help resolve oil and gas supply constraints. Failure to execute the two will jeopardize not only our energy supply through loss of supply capacity but also our economy. ●