Wooing Explorers

Indonesia

Economic News

22 Jul 2010
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Last week, the government announced it would increase the share that exploration investors in the Indonesian oil and gas sector will receive from future revenues. The move is the latest in a series of attempts to encourage higher domestic production and thus decrease dependency on the import of oil and gas.



On August 29, Luluk Sumiarso, director general for oil and gas at the ministry for energy and mineral resources, announced that in future gas projects, companies willing to undertake exploration can expect to receive 40% of revenue after tax, compared to the old ratio of 30% for the company and 70% for the state.



In the oil sector, investors will be able receive up to 35% of revenues in future deals. This is a dramatic increase on the present arrangement. For example, the recent Cepu field exploration agreement between ExxonMobil and Pertamina, the government will receive 85%, while the company will receive 15%.



Indonesia is in need of energy to satisfy ever growing domestic demand. In 2004, the country became a net importer of oil, despite the widely acknowledged geological prospects of the archipelago.



A 2005 study, conducted by PricewaterhouseCoopers (PWC) on behalf of the Indonesia Petroleum Association (IPA), observed a declining rate of oil production. The study blames this trend on a "lack of significant new oil and gas discoveries", caused by "inadequate exploration activities by oil and gas investors over the years".



In addition, some analysts argue that the country's refineries are ageing, and need upgrading and extension. This results in a larger need for the import of higher value-added refined oil, while cheaper crude oil is being exported. About a third of Indonesian oil products are imported, given the limited refining capacity of 1.06m barrels per day (bpd).



Enduring high oil prices are causing a global upswing in exploration investment, increasing demand for equipment and resources. However, many in the sector argue that Indonesia currently risks lagging behind competitors for exploration dollars.



President of BP Indonesia, Anne Drinkwater, recently told OBG "The world is enjoying a boom in terms of oil and gas development." She said "The sector is stretched enormously, with massive increases in activity. So the industry has gone up quite sharply in terms of activity, Indonesia's (activity) has increased but it still hasn't managed to capture its proportion of the (global) increase".



According to the PWC study, "Indonesia's average annual (exploration) investment for the last five years represented only approximately 1% of global investments".



The study blames a range of issues for this low figure, from uncertainties of contract sanctity, taxation and the regulatory and legal framework to security of assets, people and ownership rights.



Ms Drinkwater explained that "investors look for certainty, clear terms and consistency. So all of it comes down to how Indonesia actually competes with other areas that also offer oil and gas potential".



While structural measures to increase confidence will take considerable time before bringing results, Indonesia has recently taken several other initiatives to become less dependent on fuel imports.



During last week's Association of South East Asian Nations (ASEAN) meeting of ministers of economy, Marie Elka Pangestu, Indonesia's trade minister, called upon her counterparts to step up energy cooperation to produce alternative fuels such as biofuel. This comes in addition to Indonesia's development of a blueprint for biofuel advancement, announced a few months ago.



In addition, state-owned oil and gas company Pertamina announced plans to increase its refinery capacity by about 5%, or 53,000 bpd.



Also, Elnusa, a subsidiary of Pertamina, revealed plans to build a $4bn new oil refinery in cooperation with Venezuelan state oil firm Petroleos de Venezuela (PDVSA) and Iran's National Iranian Oil Refining and Distribution company (NIORDC). The new refinery is slated to produce 300,000 bpd, with 30% owned by Elnusa, 25% by PDVSA and 20% by NIORDC.



Sceptics argue that a revival of the refinery industry in Indonesia is feasible only after a complete adjustment to the unfavourable price structure of the Indonesian market



Pertamina is also actively pursuing a restructure of its revenue stream. The company announced this week that it is seeking operational cooperation in Indonesia in exchange for obtaining stakes in blocs abroad.



The most significant move until now has been the offering of 41 oil and gas areas to investors in mid August. The areas will be awarded partly by public biddings (20) and partly by direct offering (21). This system entails companies identifying the blocs of interest, and then the government advertises to see if there are bids from other companies for the same area.



Eight of the areas offered through public tendering so far have failed to attract bids in previous rounds. The government has thus decided to increase the attractiveness of those and other fields by increasing the private sector's share of revenue.



Out of the 41 projects, 20 will have the new revenue sharing scheme. Twelve will have a 65-35% division while the rest will be 75% owned by the government and 25% by the investor.

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