The upstream oil and gas industry of Indonesia is plagued by companies' lack of interest in exploration amid low crude oil prices, their eagerness to focus on efficiency strategies, and Indonesia's difficult investment climate. At the 41st Indonesian Petroleum Association Convention and Exhibition in the Jakarta Convention Center on Wednesday (17/05) Christina Verchere, President Director of the Indonesia Petroleum Association (IPA), said low oil prices have been the main reason for reduced investment in oil and gas exploration since 2014.
Verchere adds that not only in Indonesia companies are unwilling to invest in exploration and emphasizes it is a global phenomenon due to low crude oil prices. Amid structurally low oil prices oil and gas companies have revised their operations and strategies. Some have in fact sold (part of) their assets, fired employees and rolled back plans for high-risk exploration investment plans. To improve Indonesia's competitiveness in the oil and gas industry she wants business players and the government to face these challenges together. Currently, the profit-sharing mechanism between private investors and the Indonesian government remains a big issue, while fiscal incentives are considered necessary to boost appetite of foreign oil and gas companies to invest in exploration in Indonesia.
Budi Agustyono, Secretary at Indonesia's upstream oil and gas regulator SKK Migas, said the lack of exploration is the primary reason why Indonesia's oil and gas reserves continue to recede. And therefore it is no surprise to see declining oil and gas production in Southeast Asia's largest economy. Currently, Indonesia can only produce 829,000 barrels of oil per day, while the Indonesian population consumes 1.63 million barrels of oil per day, implying about half of domestic demand needs to be imported from abroad.
In the first quarter of 2017 investment in Indonesia's oil and gas sector fell 4.1 percent year-on-year (y/y) to USD $2.57 billion.
Oil and gas exploration is a very costly affair. Between 2002 and 2016 nearly USD $4 billion was spent - in vain - by oil and gas companies in the exploration stage in Indonesia without finding reserves suitable for commercial exploitation. Under the cost-recovery scheme the Indonesian government only reimbursed contractors' exploration costs in case the contractor indeed found enough reserves that can be exploited. However, under the newly introduced gross split scheme (that replaces the cost recovery scheme) risks and costs related to exploration are fully born by the contractor.
Low crude oil prices indeed make investment in exploration unattractive. However, in the case of Indonesia there are additional risks related to the investment and business climate. Therefore, it can be assumed that suddenly sharply rising oil prices would not automatically boost oil and gas exploration in Indonesia. Legal uncertainty, bureaucracy, red tape, the lack of reliable government data regarding the oil resources, corruption, lack of infrastructure, and high taxation are all matters that undermine the attractiveness of Indonesia's oil and gas sector.
Read more: Analysis of Indonesia's Oil Sector