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29 May 2020 (closed)
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For a company it is very difficult to start activities in Indonesia's upstream oil and gas sector. As a result, not unoften, activities related to exploration and production are delayed. This is the major reason why Indonesia's oil production has been declining for the past two decades, while Indonesia's gas production today does not differ much from production one decade ago. Why is it difficult for an oil and gas company to get started in Indonesia?
Despite Indonesian government officials often emphasizing the importance of more investment in exploration and production in the oil and gas sector, many projects are plagued by uncertainty and delays. One key factor that makes it a hazardous undertaking to engage in oil and gas exploration in Indonesia is the lengthy and costly process to obtain all required permits.
Based on data from Indonesia's upstream oil and gas regulator SKK Migas, an investor currently needs a total of 341 permits (from 17 institutions) in order to be allowed to engage in exploration and production in Indonesia's oil and gas sector. Knowing that each permit takes time and brings along costs, it makes the investment climate unappealing. Even though the Indonesian government is trying to move (as much as possible) the process to obtain permits to the electronic domain (online services), and therefore there are fewer government officials that can request some additional money for their services, it remains a lengthy and costly affair.
It is also interesting to note that corruption is widespread in the oil and gas sector. Although, generally, Indonesia is plagued by a high degree of corruption, there are certain sectors in the Indonesian economy where the degree of corruption is especially high. A rule of thumb is that when businesses involve natural resources (and this often involves a high degree of government involvement) the degree of corruption rises. As such, a foreign investor who sets up a food trading company in Indonesia will experience far less corruption compared to an investor who wants to start producing oil.
Apart from corruption (and its price tag), it also requires time to obtain all permits. For example, arranging all permits needed to conduct seismic surveys - to examine what kind of rock types are located beneath the earth's surface - can take more than one year (the actual survey itself only requires several months).
SKK Migas data from 2015 show that 40 seismic surveys in Indonesia were blocked by troubles related to the difficulty to obtain permits. Meanwhile, 41 drilling activities were blocked by the difficulty to obtain the necessary permits or land. Moreover, there were 80 examples of companies that were in the production phase but experienced troubles and therefore had to cease production.
SKK Migas spokesman Taslim Z. Yunus said it should be made less difficult for investors to obtain all required permits, particularly for oil and gas exploration. The oil and gas business already is a long-term investment (it can take more than ten years before production starts) and therefore authorities should not add more time to this process. Furthermore, weak exploration will result in further weakening production in the future.
According to estimates from SKK Migas, Indonesia has 43.7 billion barrels of crude oil in unexplored basins, mostly offshore (which makes it more expensive to engage in exploration and production).