Streams of opportunityJanuary 19, 2018
Cindy Sukiman, energy and resources leader at Deloitte Indonesia, talks to TOGY about the impact of recent amendments to Indonesia’s hydrocarbons regime, potential further improvements and opportunities for investors. Deloitte Indonesia offers audit, financial advisory, tax, risk advisory and consulting services for the oil and gas industry.
• On the legal framework: “The government is very focused on developing a better future for the oil and gas industry in Indonesia.”
• On efficiency: “In this environment where the price has been challenging, efficiency is one of the important issues. When the company can do a project in the most cost-efficient method, there will be more profit to be shared between the contractor and the state.”
• On the gross-split regime: “The introduction of the gross-split model is a wonderful breakthrough by the government. This regime does not rely on cost recovery. The split is on the top line, so cost recovery will not be a potential dispute between the government and the contractor anymore.”
• On natural gas: “In order to be aligned with the government goal of producing an extra 35,000 MW of electricity supply for the domestic market, many power generators will require lots of gas. That will be Indonesia’s future.”
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What changes are being made to oil and gas taxation in Indonesia?
The government is very focused on developing a better future for the oil and gas industry in Indonesia. Recent amendments are an answer to what is generally perceived as a challenge in doing oil and gas business in Indonesia. The two classic challenges mentioned by the industry are the fiscal regimes, which may not be as competitive as expected, and the regulatory.
One of the most important things is Ministry of Energy and Resources regulation No. 8 2017 regarding the gross-split PSC concept, as opposed to the cost-recovery PSC concept. Within the past month [June 2017] Government Regulation No. 27 also amended GR 79 [introducing some incentives for PSC cost recovery model].
Is the government not satisfied with what they are getting?
There has been some indication that is the case, even though it is not really definitive. They see that, in this environment where the price has been challenging, efficiency is one of the important issues. When the company can do a project in the most cost-efficient method, there will be more profit to be shared between the contractor and the state. That is where there may be some issues – whether the player or the company has been as efficient as they can. There may be different views between the players and the government. The introduction of the gross-split model is a wonderful breakthrough by the government. This regime does not rely on cost recovery. The split is on the top line, so cost recovery will not be a potential dispute between the government and the contractor anymore.
They are also offering new blocks to investors based on this gross-split PSC regime as well. Investors’ perspectives and responses will need to be further monitored. If they are responding well, it will be reflected in the new PSC for the new blocks. We will see. This is very new for Indonesia.
How can the oil and gas legal framework be improved?
The government could provide more guidance and certainty for the implementation of the gross split. Obviously there will be impacts to the new blocks. There will also be impacts from the accession side. I think it will be better if this new regulation follows further guidance on the implementation of the gross-split PSC regime concept.I expect another government regulation to be issued, not amending GR27, but regarding the implementation of the gross split. GR27 amended GR79, which is basically the implementation guidance for the cost-recovery PSC model. I would expect another guidance to follow, maybe in the context of a government regulation. This is going to be very important, especially if the government is offering new blocks, and would provide more certainty.
Do you see LNG as a big opportunity for the future?
Certainly. In order to be aligned with the government goal of producing an extra 35,000 MW of electricity supply for the domestic market, many power generators will require lots of gas. That will be Indonesia’s future. The downstream sector is creating demand for gas resources. Of course, then the upstream itself will be important.
How is the new law on the energy mix impacting the market?
Infrastructure development is a must. Otherwise, it will be a barrier to growth. The government’s programme of infrastructure projects does not just focus on Java island, it covers the islands and isolated areas. That is expected to bring this economy up to date. Not just Java island, but the whole country. Alternative energies are good, but it remains to be seen whether they will be developed, particularly with renewables. The issues are the fiscal and regulatory regimes, compared with those of conventionals, which have been a part of life in Indonesia for many years. How responsive the government is to implementing the new regimes and offering guidance on these new initiatives will be important to the future. My observation is that there may be further incentives to make it more appealing.
In which sector do you see the best investment opportunities in Indonesia?
Refineries are very important. But this is still in process. I have seen several incentives with regard to the new PSC blocks offered and many initiatives with regard to IPP projects. If I were an investor I would look at refineries, IPP and upstream blocks. Blocks still need to be explored, and we still need the energy. This is actually still part of my concentration. We have seen new regulations with fiscal incentives. There are signals that the government understands this is very important for the state, especially for exploration. I would still put upstream as one.
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