A wave of energy exploration and extraction projects is expected to be rolled out in Indonesia over the coming months, with an increased focus on developing new offshore reserves.
A recent report on the regional energy sector by international bank JP Morgan said prospects for the industry in Indonesia had improved following the recent presidential election. The bank said it expected the approval process for new oil and gas developments to be accelerated now that the vote had taken place, with a brighter outlook forecast for 2015, especially in the increasingly important offshore segment.
Heightened offshore activity spells good news for the country, coming at a time when existing fields are struggling to meet production targets and paving the way for Indonesia to develop its downstream operations. However, competition from other Southeast Asian countries for rigs and services might drive up costs and delay projects.
Shift in tempo
Increased activity within the sector was evident in late August, when Malaysian oil field services provider Bumi Armada Bhd said a consortium in which a wholly-owned unit is involved had been awarded a contract to provide a floating production, storage and offloading vessel for Indonesia’s Madura BD Field. Under the terms of the contract, valued at $1.18bn, Bumi Armada will supply services for the offshore project for a ten-year term with options for extension.
Indonesia is not the only Southeast Asian country looking to forge ahead with new offshore projects. The Asian market is forecast to see a 54% rise in expenditure for offshore oil and gas infrastructure over the next five years, according to a report by London-based analysis firm Infield Systems. South East Asia will continue to drive demand in the region, particularly Malaysia. Vietnam is also considering boosting extraction operations in its waters next year and beyond, which could see competition for rigs and services increase yet further.
Indonesia, however, will be hoping that rising demand will also drive up foreign investment in downstream operations. In August, the JX Nippon Oil & Energy Corporation indicated it was considering developing a refinery in Indonesia. The group’s president, Tsutomu Sugimori, said the expanding Indonesian market combined with its limited refining capacity presented significant investment opportunities.
“Indonesia has many requirements such as a need to upgrade refineries, increase refining capacity and improve ageing facilities, and we are looking for an opportunity to enter,” Sugimori said, quoted by Reuters.
New investment in the industry could also help ensure the long-term viability of the energy sector, according to Roberto Lorato, president of Premier Oil Indonesia. “Indonesia has all that is needed not only to meet a growing local demand, but also to become a regional energy hub,” he told OBG. “What the country needs at the moment are larger investments in exploration and infrastructure development, and more attractive and stable commercial and fiscal terms in order to attract such large investments.”
Such projects would help Indonesia cut its burgeoning import bill, reducing its reliance on expensive refined oil and products processed in overseas plants after its shift from oil exporter to net importer in the past decade.
Output from the country’s existing fields is falling, with production unlikely to reach targets set by the government for this year. Output for the first six months averaged 797,000 barrels per day (bpd), significantly below the 825,000 bpd produced last year and even the 818,000 forecast in the revised 2014 budget. With oil consumption rising 1%-2% annually, Indonesia will need to bring through more reserves if it is to make progress in bridging the supply gap.
In addition, Indonesia subsidises domestic fuel supplies at a cost of $21bn for 2014, with outlays forecast to rise to $25bn in 2015. Import costs were also affected by the devaluation of the rupiah, which lost around 10% against the dollar over the past year, putting further strain on state finances.
Output is, however, expected to see a turnaround in 2015 when ExxonMobil’s Cepu block will provide up to 165,000 bdp of additional capacity. Bukit Tua oil field, which is now expected to start pumping in March, will have the capacity to produce a further 200,000 bpd. When combined, the two initiatives will more than offset falling output from some of Indonesia’s ageing fields.
Follow Oxford Business Group on Facebook, Google+ and Twitter for all the latest Economic News Updates. Or register to receive updates via email.