Building blocks in Indonesia

How are upstream market conditions affecting service providers?
Due to the low oil price, oil companies have reduced their investments worldwide, including in Indonesia. We face a big challenge in order to adapt to this changed scenario. We hope that oil companies will begin to invest once again, supported by governments and oil and gas associations. We are in a competitive position thanks also to our Karimun yard – an extremely valuable asset for Saipem, but also for Indonesia due to the yard’s high technological capabilities and potential. We have developed major investment projects in the country in recent years.

Which upcoming projects would you like to participate in?
We are hoping for a return to investment in the upstream sector. The largest prospect in this regard is the Masela development project. Saipem and Technip are the only main contractors capable of undertaking the following full scope of work: FPSO, deep pipelines, subsea development and onshore development. We can also develop offshore facilities. Then there is IDD [Indonesia deepwater development] Gendalo-Gehem.
We are also interested in participating in the downstream development in the country and in building gas infrastructures, where we could apply our LNG or refinery technologies.

What are the challenges for a services provider here in Indonesia?
In the upstream sector there is a lack of work continuity. This affects the sustainable development of human capital, which is one of the pillars of our business model. We contribute to training qualified engineers and the construction workforce, but experience, competence and an attitude to leadership need time to be developed. The lack of investments makes it difficult to create the conditions to grow these skills.

How do you see the Indonesian market in the coming years?
It is difficult to predict the oil and gas market. Energy demand is expected to grow in Indonesia and, as a consequence, that should produce a return to investment in the upstream sector. If this occurs, the overall context will become positive and stable once again, and this should benefit all companies.

How would you like to see taxation change to help the upstream sector?
As Saipem is a construction contractor with important recent investments in the country for which we still have to bear the depreciation costs every year, the taxation scheme based on revenues is penalising us. We have made huge investments in the country; we are a very important employer and in many projects we export our products to other countries (Angola, Iraq, Saudi and Australia) following fabrication in Indonesia.
These contracts are taken at market conditions with price pressure and taxation based on revenues regardless of the level of profit, [which] means the company cannot recover the costs of depreciation associated with the execution of these contracts. This can lead the company into the abnormal situation of being subject to tax for an amount that is higher than pre-tax profit, ending up with a loss due to taxation, or, even more absurdly, being subject to tax with a loss before tax. Clearly, this system does not promote investment in our industry in Indonesia, as it gives a competitive advantage to companies with depreciated and obsolete facilities.

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