--> Investment Uncertainties and Opportunities in Indonesia

AAPG Asia Pacific Technical Symposium

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Investment Uncertainties and Opportunities in Indonesia

Abstract

This paper will mainly discuss about major issues related with oil and gas investment in Indonesia. Since the birth of BPMIGAS in 2002, revenues of oil and gas companies in Indonesia have risen steadily, with the increasing trend of crude oil prices. Gross revenues rose by 218 percent to $54 billion in 2008 from just $17 billion in 2002. This gross revenue reached their peak level at $61 billion in 2012 before dropped in 2014. The distribution of revenues has shown healthy upstream business environment during this period. Furthermore, ratio of cost recovery to gross revenues has dropped impressively from 30% in 2002 to only 17% in 2008, but increase again to 25% in 2012; whereas Government of Indonesia share rose significantly from 58% to 65% in 2008 before fall back to 58% in 2012. However, since June 2014 crude oil prices have plunged sharply to $48 a barrel. These low oil prices have stayed in volatility for almost three years, leading to significant revenue shortfalls in many energy producing countries including Indonesia. In Indonesia, gross revenues have fallen by 51% in 2016 from the 2014’ level of $51 billion. This have a severe impact to the government of Indonesia (GoI) net share where it dropped to $9.7 billion in 2016. On the other hand, cost recovery has only contracted slightly from $16.3 billion in 2014 to $11.6 billion in 2016. Such situation has put the government of Indonesia under strong pressures in both economy and politic. Assessment on PSC Profit Split Vs Oil Prices during 2002-2016 period surprisingly indicates that PSC System has been regressed for more than a decade. Combination of production decline with increasing cost recovery provide an increasing burden for the government of Indonesia. The sole weakness lies in 100 % recoverable cost applied in conventional PSC system. Low oil price pressures have led to the collapse of upstream capex, reaching 30% to 40% global reduction. The rate of contraction in upstream spending varies significantly by region, countries and sector of activities. As for Indonesia, the total expenditures of PSCs which peaked in 2014 at $19.2 billion, dropped by 43% in 2016. By sector, exploration and development in 2016 were aggressively slashed and remained about one third of the 2014’ level for each of activity. Even spending for production was also shrink by 38%. Under the burden of global oil price crisis, Indonesia also face successive termination of PSCs blocks. About thirty-five PSCs blocks will be expired between 2017-2026. Following the termination of ONWJ PSC in 2017, eight other PSCs expired in 2018 have been replaced with the new Gross-Split PSCs with its operatorship awarded to Pertamina. Increasingly burdened by new expiring blocks, Pertamina needs massive investments and new partnerships to optimize recovery from both old and new field developments. To achieve success, Pertamina executives should strengthen their E&P activities by focusing on; financial, operational and portfolio resilience. This situation may result in the future Indonesia upstream domination by Pertamina. However, small to medium sized companies are expected to participate jointly or independently. On positive point of view this situation open opportunities for major oil company to explore and invest in underexplored area such as Eastern Indonesia region. Opportunities from both upside potential in existing blocks and prospects from less explored basins in Indonesia are still promising. A new task force under supervision of both Migas and SKKMigas has been established an open access regional database for giants’ exploration targets. Hopefully this strategy would overcome barriers and uncertainties to achieve our objectives, particularly in establishing a globally-competitive policies and positive investment climate that encourages further significant investment flow. In alignment with this step, some variable and progressive components have been amended to the New Gross-Split PSC Regulation, but continued policy improvement is still required to attract investors with strong technical and financial capability. In the end, everybody needs to work together for better project risk management and create a potential framework for improving risk sharing with future contractors.