Tapping New Sources

Indonesia

Economic News

22 Jul 2010
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For nearly a century, Indonesia has been Asia Pacific’s leading producer and exporter of oil and gas. In recent years, however, a combination of ageing fields, growing domestic demand and a lack of new investment has resulted in the country becoming a net importer, prompting Indonesia to withdraw its membership from the Organisation of Petroleum Exporting Countries (OPEC) in 2008.

In order to regain self-sufficiency in energy, the country realises that in times of depleting reserves and increased risks for operators, it must create the right investment environment to encourage further high-cost exploration and production activity. At the same time the country is also looking to decrease its long-term dependency on fossil energy by encouraging the development of alternative sources, such as geothermal coalbed methane (CBM) and biodiesel – all of which the country has in abundance, but which have yet to be fully explored.

According to BP Migas, the country’s upstream oil and gas regulator, it is estimated that with most of the country’s fields in production maturing, output is declining at a rate of 8-10% a year. The company has warned that without new reserves and at the current rate of decline, the country’s supply could be depleted by 2018.

Many believe that due to a complicated and uncertain investment climate in the sector, the country been slow in discovering new oil fields fast enough to replace old ones in decline. With many of the world’s major energy companies currently delaying their investment plans worldwide due to volatile oil prices, many operators are calling for Indonesia to review the terms and conditions of its production-sharing contracts in order to make them more attractive to investors.

Nico Kanter, the executive vice-president of BP Indonesia, told OBG, “In July 2008 oil was at $150 a barrel. In a period of four months, it fell to $50 a barrel. All the while, prices of equipment and services have soared. In turn, investors are now reviewing and revisiting their capital spending. Investor confidence is eroding, and the government needs to take a proactive position and implement policies that regain investor optimism.”

While the declining price in oil has made the country’s newfound position as a net importer less of a national burden in recent months, the country remains steady in its desire to decrease its dependence on oil in the long term. With tremendous capacity in identified alternatives such as geothermal energy and CBM, major multinationals like Chevron, BP and Exxon are expressing genuine interest in developing these emerging sources. However, both geothermal and CBM are technology intensive and require tremendous up-front capital, so before committing more fully, investors want to be assured of the right mix of incentives and commercial viability. Even prior to the decline in oil prices, analysts had cited bureaucracy and the lack of a clear policy environment, rather than slumping prices, as the main stumbling block to geothermal and CBM activity.

With more than 500 volcanoes, of which 130 are active, Indonesia has the largest geothermal reserves in the world, estimated at 27,000 MW in total. At present, geothermal supply is at 850 MW, accounting for only 3% of the country’s total power output. In comparison, geothermal accounts for 18% of the Philippines’ energy needs. The government has said it is targeting geothermal output to reach 9500 MW by 2025.

Energy giant Chevron has made it clear that the firm is interested in playing a leading role in the country’s development – currently managing two geothermal projects and pursuing more – alongside leading local firms such as Medco Energi and Star Energy.

Steve Green, the managing director of Chevron Indonesia, told OBG, “Geothermal has huge potential, and we are very supportive of the government’s policies towards its expansion. But it is a long-term investment, requiring a stable and predictable pricing regime. Everyone could benefit from a clearer definition around its governance.”

CBM, which consists of natural gas trapped in seams of coal, is similar to geothermal in that it is available throughout Indonesia, yet is not fully exploited. The technology to tap the resource is still in its infancy and the time to recoup investment can take years from exploration until the time gas can actually be extracted.

To date, despite CBM exploration being closely related to that of oil and gas and geothermal, the government has not labelled its exploration in the same category, treating CBM as a mineral rather than an energy resource. As such, developers have not been privy to the tax and duties incentives to which oil and gas operators are entitled. However, the government has recently announced that it will review and revise the incentives on offer in an attempt to attract more investment into CBM exploration.

CBM is considered vital to decreasing the country’s dependence on declining gas output arising from ageing fields, as overall the country is estimated to have 453trn cu ft (tcf) in reserves compared with 350 tcf of natural gas, according to Reuters. With government estimates for domestic demand for gas expected to rise 3% a year, producing CBM could help the country meet domestic requirements while keeping its long-term contractual agreements for gas supply to markets such as Japan and Korea. Under its blueprint for CBM, the country is targeting production of 1tcf per day by 2025.

Similar to geothermal, industry players are calling on the government to clearly commit to its development.

Wahyudin Yudiana Ardiwinata, the chairman of Ephindo, a local energy company holding CBM concessions, told OBG, “The government has expressed a commitment to CBM, as they realise that the country’s oil and gas output is in decline. Our wish is that they continue to consult the players involved and interested in CBM development, so that we can work together to help ensure we reach the country’s potential.”

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