This week Indonesia's upstream regulator has announced its expectation of a rise in exploration investment next year, in the context of a concerted attempt to increase productive capacity.
After a disappointing performance in 2007, with spending on exploration at $1.8bn falling short of the planned $2.3bn, the upstream oil and gas executive agency, BPMigas, announced its plan to attract $2.2bn in 2008. The importance of the hydrocarbons sector is not lost on the regulator, given that the industry contributed some 30% ($22.2bn) to the state treasury in 2006, the single largest contribution from an individual sector.
Meanwhile, the regulator is lobbying the government to reduce its import duties on imports of drilling equipment, seen as one of the main reason for the shortfall this year.
"There are many obstacles including difficulty in finding rigs, and that has caused some of the exploration activities to be delayed," Achmad Luthfi, deputy chief of BPMigas, said.
The 2006 legislation on Customs and excise duties has imposed heavy burdens on importers of exploration equipment. Such equipment used to be exempt from import duties.
BPMigas has emphasised these duties must be reduced or eliminated in order to meet the government's target of increasing hydrocarbons production by 30% by 2009. Indeed the global demand for rigs is expected to stay at present record highs until at least 2010.
"The Bukat block consortium in East Kalimantan have said that import duties cost them about half as much again as the equipment price," said Eddy Purwanto, deputy chairman of BPMigas. "They had to pay $211m in duties to import drilling rigs worth about $420m."
In addition, Indonesia has offered new exploration rights to help reverse the decline in oil production. BPMigas launched a tender for 26 hydrocarbon blocks on October 30, 21 of which were entirely new blocks. These included the East Bawean I, Bawean II, Situbondo and the North East Madura blocks.
The OPEC (Organisation of Petroleum Exporting Countries) member has witnessed a consistent reduction in its production, which lately fell from 825,300 barrels per day (bpd) in October to 823,000 bpd in November. In a broader context, statistics from the ministry of energy reveal that total oil production has fallen from 1.3m bpd in 2001 to 950,000 bpd in 2007.
Indonesia's proven reserves of oil and gas stand at around 9bn barrels, of which half is oil. Therefore, exploration is key, lest Indonesia's oil reserves dry up in 12 years time.
"We need to boost our production and that's still possible, especially in the eastern parts of Indonesia," said Soebroto, a former minister of energy and secretary-general of OPEC from 1988 to 1994. "To make it happen, we need to create an environment that is attractive enough to lure investors."
This sentiment is echoed by private hydrocarbon contractors as well.
"I believe a more creative approach to some elements of the fiscal terms on the part of the government would be beneficial in attracting new and existing players to become PSC operators," Peter Mills, president director of Premier Oil Indonesia, told OBG. "This would certainly positively impact the government's drive to address production decline and redress the balance of being a net oil importer."
A number of initiatives have been levelled to increase oil production.
First of all, the ministry of energy announced its plans to offer more favourable terms to companies exploiting reserves in frontier areas or in deep sea conditions. Under the current regulations investors earn 15% from oil production and 30% from gas production. Luluk Sumiarso, the ministry's director-general of oil and gas, announced in November that companies drilling in frontier areas would receive 49% of the split.
State-owned oil company Pertamina EP has planned for Rp7trn ($756m) in expenditure for 2008 in order to increase exploration activities and production. This will increase production from 110,000 bpd this year to 129,000 bpd in 2008. Meanwhile Pertamina will use its net profit this year, which reached Rp19.8trn ($2.13bn) in the first 10 months of 2007, to invest in its operations and increase its working capital.
BPMigas is attempting to reduce the obligatory hydrocarbon exploration period to three years, from 10 at present, in order to accelerate exploration by independent hydrocarbon companies. If hydrocarbon reserves are not found during this concession period the areas would then be returned to the government.
"We plan to exclude drilling activities from the list of commitments stated in the exploration stage," Kardaya Warnika, chairman of BPMigas, told the press on December 3. "We are aware that drilling can be done only if the feasibility study proves that reserves are available."
Both Japan and Qatar have recently announced plans to significantly increase investment in Indonesia's hydrocarbons sector. Japan Petroleum Exploration Corporation has decided to increase investment in the Kangean oil and gas field in East Java by 2012, raising spending from $400m presently to $900m in five years. The field is set to start production by 2010.
Similarly the Qatar Investment Authority (QIA), the emirate's sovereign wealth fund, announced on December 6 the creation of a $1bn company to invest in the oil, mining and electricity sectors in Indonesia. Although the QIA declared it would invest $850m in the company, details of the investment plans are as of yet unclear.
What is clear however is that the actions undertaken by the upstream regulator are warranted if Indonesia is to reverse the decline in its hydrocarbons sector. Investors will likely cheer the recent announcements as well as new investments, hoping that this is the start of an upward trend.