Investment in Indonesia's oil and gas sector remained bleak in the first quarter of 2017. The key reason why oil and gas companies are still reluctant to invest in any exploration and expansion projects is the low crude oil price that remains below the USD $50 per barrel level. In Q1-2017 investment in Indonesia's oil and gas sector fell 4.1 percent year-on-year (y/y) to USD $2.57 billion. Indonesia's upstream oil and gas regulator SKK Migas targets to attract a total of USD $12.87 billion worth of investment in the oil and gas sector in 2017.
Parulian Sihotang, Deputy Chairman for Finance and Monetization at SKK Migas, says the direction of the oil price will determine whether SKK Migas' investment target for 2017 can be achieved. However, considering activities in the upstream oil and gas sector (such as 2D and 3D seismic surveys and drilling) are still on the decline so far this year, SKK Migas may need to revise this target but, for the moment, SKK Migas will still wait and see for further developments, specifically the crude oil price. One key factor that will impact on the direction of the oil price is whether the Organization of the Petroleum Exporting Countries (OPEC) can agree to curb production further.
Marjolijn Wajong, Director of the Indonesian Petroleum Association (IPA), said Indonesian oil and gas fields are currently experiencing a natural decline in output. This actually requires additional investment in advanced technology. However, with the oil prices unattractively low few oil and gas companies are currently eager to invest. This is not only the case in Indonesia but also in all other parts of the world. The key question is: what can the Indonesian government do to attract investment in this sector, Wajong says. For example, is it willing to offer fiscal incentives to entice investors?
In the next five years contracts of 20 Indonesian oil and gas blocks will expire. Although surely they will continue to have operators (either by extending existing contracts or by appointing new operators), such transition periods diminish operators' willingness to invest, Wajong adds.
Besides the unattractive oil price, other problems too limit investment into Indonesia's oil and gas sector. Foreign investors continue to complain about the difficulty to obtain all necessary permits, while there remains unclarity about all details of Indonesia's new gross split scheme. Late last year, the Indonesian government announced the gross split scheme (which replaced the cost recovery scheme at the start of 2017) as it is regarded a fairer system for both the oil and gas contractor and the government, and will lead to more efficient operations in oil and gas exploration and production as contractors will be more careful when spending funds. In the new gross profit sharing system the Indonesian government will generate earnings from (part of) gross profit as well as tax revenue from contractors' activities in the upstream oil and gas sector, without needing to reimburse exploration and production costs to contractors (as was the case in the preceding scheme).
Investment Realization in Indonesia's Oil & Gas Sector:
(in bln USD)
This is not the main reason, everyone says it is. What happened when the price of oil was high? There was no investment in exploration then. The main reason is the lack of reliable data of the so called resources that Indonesia claims they have.
The regulations do not help either.
Indonesia, which includes the GOI, banks, local business people need to invest in their own country to obtain knowledge of the resources that they believe is available but until now undiscovered.
International investment is unlikely to come to Indonesia in this area for all the reasons that we all know of, including the constant changing of regulations that are not exactly conducive to investment.
@George Barber, good point! Tough bureaucracy, changing regulations, high degree of legal uncertainty, corruption, etc. When it involves natural resources then it involves the government.. when it involves the government, then it involves corruption.