High potential in Indonesia

What is the current level of oil and gas investment in Indonesia?
Since 2011, we have seen a decline, especially in oil exploration activities and results. For example, exploration spending dropped after 2011 as did the number of wells drilled. The country’s reserves replacement ratio was around 217% for both oil and gas in 2011. This number dropped to 64% in 2016.
Whether all exploration activity dropped or the results were not good, there has been a drop in activity. You can see that in the number of wells drilled and in the number of active drilling rigs. That is the situation in Indonesia’s oil and gas industry.
Many people might say the decline in oil investment and in the number of rigs is because of the drop in oil prices that occurred in 2014. However, what I am talking about began in 2011. There is an indication that this happened after the implementation of Government Regulation 79/2010.
We also have issues with the permits. There are many individuals and government institutions involved in obtaining permits, but there is no one who handles everything as a leader, no one who can unify everything. Nobody checks to see whether the permitting process is good or bad overall and assesses the impact of the process in terms of adding to the bureaucracy and hampering investment.

In order to improve Indonesia’s hydrocarbons industry and attract additional investors, what should be changed and what regulations should be put in place?
Indonesia needs to admit that with all these issues, we are not competitive enough to attract investment globally. We also have to handle investment holistically by aligning institutions such as the Ministry of Energy and Mineral Resources [ESDM] and the Ministry of Finance. When we talk about fiscal issues, these entities need to work together to verify that, from a fiscal point of view, we will be in a better position when compared to other countries.

What non-fiscal barriers is the upstream sector facing that prevent this sector from being more competitive?
There are terms that must be worked out between the ESDM and the Ministry of Finance but also with other ministries and local governments for permits and other things such as importing equipment.
In my opinion, it is important to have strong leadership to handle these issues as an integrated effort in order to improve competitiveness. Right now, the attempt to make it better is only sectoral and segmented. I still have not seen an integrated attempt to improve. There are many regulations that came out in 2017. That is good because the government is trying to do something better. However, when issuing the new regulations, I do hope that the government will check the impact on Indonesia’s competitiveness, whether it will make the industry’s competitiveness better or worse. This is about attracting more investment.

What kind of investment is needed in the country?
Presidential Regulation [PR] No. 22/2017 mentioned that in 2050, we will need around 4.5 million barrels of oil per day and 20 bcf [566 mcm] per day of natural gas. Not all can be fulfilled with oil and gas, but at least in PR 22/2017 it says that the investment needed for the oil and gas industry should be earmarked for exploration and EOR. This will help to bring production back to around 1 million barrels of oil [per day]. Current production levels stand at approximately 850,000 barrels per day.
The challenge is that many exploration opportunities are further to the east now in deepwater and in frontier regions such as Papua. The government should think about how to make exploration in those areas attractive.
Overall, whether it is a deeper reservoir in the west or the deepwater plays in the east, we are now going into the more difficult areas. This type of exploration requires a great deal of money from investors, and not all players can do that. We need to understand what is important for the big players with special technology to be attracted here and invest in Indonesia.

Can you comment on the recent modifications in the tax scheme with regards to exploration?
Moving forward, all new contracts will be subject to the gross-split scheme, even though the IPA asked for a more flexible tax regulation. If a certain area is difficult and the investor asked for a cost-recovery contract, we do not want to close the door on the possibility of choosing between the gross-split system and the cost-recovery system. Currently the answer is still no regarding choosing between one system or the other. The tax regime should support the improvement of competitiveness of Indonesia. In that sense, it should be at least the same as the tax regime as we had before in the cost-recovery contract.

How can investors feel more confident in investing in Indonesia?
Upstream oil and gas contracts are long-term contracts. Contract sanctity is very important to investors. New regulations issued in the future should not change the contract without agreement by both parties. Good balance between the political will and business should be maintained as well as good alignment between the central government and regional/local governments for upstream oil and gas management. Trust in the investors will prevent the issuance of unnecessary regulations.

Would you like to comment on the national energy plan?
The 2020 National Energy Plan is not an easy one to implement. If you look at the numbers, we are already behind. Exploration and EOR are the two important activities to improve production, but it is difficult to start seeing the production improvement from the new exploration activities as they have dropped significantly in the last four years.
Furthermore, to support EOR, special regulations are required. With the fiscal term regulations for the gross-split scheme as well as the regulation for the cost-recovery scheme, the mechanism for incentives is available.

In your opinion, what other regulations need to be changed apart from the gross-split scheme and the tax issues?
Simplification of the permitting process is a must, including clarity on the land status at the time of the working area contract award and collaboration between the different government institutions from the time of the preparation of the working area bid process until the issuance of the required permits.

What are the opportunities in Indonesia?
Geological prospects in Indonesia vary from the near-field exploration in the western part of the country and big wildcat exploration prospects in the eastern part. Most of the producing fields are from the tertiary post-rift interval in western Indonesia, which still has exploration potential in the area close to the producing fields. New wildcat exploration, however, is also present in the deeper syn-rift and pre-rift intervals close to the infrastructure, but it is usually high risk with HP/HT [high-pressure/high-temperature] conditions.
In the eastern part of the country, despite the unsuccessful deepwater drilling campaign of the past five years, attractive geology is still present. Detailed geological analysis of the Mesozoic section in the area is critical to unlock the potential of the region.

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