The state of oil and gas

By webadmin on 02:23 pm May 07, 2011
Category Archive

Ririn Radiawati

a former member of OPEC, is now a net importer of oil. The country is rich in
natural resources, but the oil and gas sector is shrinking.
Globe Asia examines what’s holding
back the sector.

is a unique archipelagic country that is rich in natural resources. It’s more
than a little ironic that it cannot rely on its assets to boost economic

While Indonesia’s
abundant oil and gas reserves have propelled economic growth for decades, the
former OPEC member is now a net importer of oil.

Revenue from oil and gas has
decreased progressively each year.

to the Central Statistics Agency (BPS), the oil and gas sector even hampered
national growth in 2010. “National growth in 2010 was 6.1%. Without oil and gas,
growth was 6.6%,” says BPS head Rusman Heriawan.

The oil
and gas business accounts for approximately 7% of total growth in Indonesia. “It’s
small, but when it hits negative figures it will create lower growth overall,” Supriyanto,
director of production balance at BPS, tells GlobeAsia

Last year,
the oil and gas sector shrank by 3.61%, he notes, adding the sector now registers
negative growth rates each year.

The oil
and gas sector includes both upstream and downstream activities. Upstream activities
include exploration and exploitation to extract oil and gas in the field, while
downstream activities include gas sales and refineries, which in Indonesia are
operated by state-owned oil and gas company Pertamina.

For the
past two years Indonesia has failed to meet its oil production targets and
analysts expect this trend will continue if the government does not invest in
upstream and downstream business activities. On average, Indonesia’s oil
production is declining by 12% each year.

Last year
the government targeted the production of 965,000 barrels of oil per day (bpd),
but only 954,000 bpd was produced. This year the government has set a target of
970,000 bpd, but in April production had only reached 907,000 bpd.

Erani Yustika, an analyst from the Institute for Development of Economics and
Finance Indonesia (Indef), says oil production will remain steady this year and
next but says the government needs to provide more incentives to encourage
investment over the next decade.

No new

While it
seems clear that oil is on the decline worldwide, there are significant
reserves of natural gas and methane gas in Indonesia.

one-third of natural gas basins have been explored in the archipelago and these
alone give Indonesia the biggest reserves in the Asia Pacific – at least on
paper. Despite its ubiquity, however, the problem with gas is that extracting
it is a costly and infrastructure-intensive process. 

“The lack
of new investment in the sector is a major problem as new oil and gas blocks
are only replacing declining volume rather than reaching new peaks,” says Indef’s

Rakhmanto, an analyst from Reforminer Institute, says the bottom line is regulation,
a statement that is echoed unanimously by the corporate sector.

“The government is planning to revise
the oil and gas law and there are several articles that must be changed,” he
says, noting the government should urge companies to explore new oil and gas
blocks by offering tax incentives.

government issued a new regulation on cost recovery early this year.

regulation is aimed at clearing up questions on cost recovery in the industry
in the hope of boosting investment in the sector.

everyone agrees that this is the right approach. Sammy Hamzah, vice president
of the Indonesian Petroleum Association, says the regulation will discourage
investors rather than provide investment incentives. “I see this as a
disincentive for oil and gas investors,” he says.

As a new
regulation will over-ride business contracts between oil and gas companies and
the government, represented by upstream oil and gas regulator BP Migas, it will
effectively curb the latter’s authority to provide incentives.

Sammy also
criticizes an article in the new regulation issued in December which imposes a
5% tax on the value of each contract for companies transferring contracts to
other firms during the exploration stage. “Indonesia suffers from weak
exploration which is also the most risky activity in the business. So why does
the government impose a tax when companies try and share that risk?”

cabotage law was the latest regulation to cause a stir in the industry. The law
requires all maritime vessels operating in Indonesian waters to be registered
as Indonesian-flagged vessels, but Indonesian shipping companies have not
invested in the expensive rigs and tenders the industry needs.

The policy
was seen as a dramatic setback for the industry and in the end the House of
Representatives was forced to agree to exempt the sector from the law rather
than see exploration and exploitation shrink dramatically.

For Abdul
Hamid Batubara, president director of Chevron Pacific Indonesia, acquiring land
to drill new wells is becoming increasingly problematic as land prices rise.

“Land prices are growing higher and higher every year,” he complains.

main operation in Duri, Riau, produces approximately 370,000 bpd or 40% of
Indonesia’s oil. Hamid suggests that to acquire land, the company must seek support
from local government.  “We have
our own standards, but they offer higher prices. There are no local government
rules to support us,” he explains.

Hamid admits
that uncertain rules are an obstacle to investing in Indonesia and may force
investors to look elsewhere. “The rules need to be consistent, otherwise oil
and gas investment in Indonesia will not be very attractive,” he says, adding
however that the company will significantly boost oil production during 2011.

The second-largest
oil producer, state-owned oil and gas company Pertamina, will be more
aggressive about reaching its oil and gas production target of 1 million
barrels per day by 2015.

Pertamina currently
produces 192,000 barrels per day of crude oil but this year it expects the
figure to move upward to 208,000 bpd, an increase of 5.26%.

Pertamina expanded
in 2010, acquiring Inpex’s stake in October, and that and other blocks are
expected to boost its oil production this year. The company has also reactivated
5,244 wells that will be operational by mid-January next year. Pertamina
estimates this plan will add an extra 22,888 bpd to its output. GA