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Still hope for Indonesia's upstream, but incentives needed

Just under half of Indonesia's potential resources have not yet been produced

Indonesia's upstream sector, despite being mature, still holds huge potential with 45% of its discovered resources yet to be produced. But the nation needs to provide greater fiscal incentives to help it achieve its long-term production potential, says energy research firm Wood Mackenzie.

Southeast Asia's largest producer, which produces 2.1 million barrels of oil equivalent per day (boe/d), still has the region's highest remaining reserves, estimated at 28 billion boe. Of that figure, 10bn boe is under development, while a further 2bn boe shows development potential. 

The nation also has access to the bulk of region's deep-water exploration acreage. 

Yet its production outlook is weak, particularly for oil, and its recent exploration record is poor by regional and global standards, says Craig McMahon, head of Asia upstream research at WoodMackenzie.

Indonesia still has large tracts of unexplored deep-water acreage and over 130 trillion cubic feet of undeveloped gas reserves. But far more investment is needed to produce these reserves, as the easiest and lower-cost opportunities have already been developed, adds McMahon.

The trick to unlocking its resource is to encourage operators to invest in the remaining, more technically challenging projects.  But two main challenges need to be addressed to reinvigorate Indonesia's upstream sector: the lack of fiscal incentives; and uncertainty surrounding the future of some major production sharing contracts (PSCs).

Indonesia's fiscal terms rank amongst the most severe across the world. The average 86% government take is significantly higher than the global norm of 59%. But with only capital-intensive opportunities left, Jakarta needs to sweeten its terms.

If Indonesia could offer new incentives, there may be a near-term reduction in tax revenues from oil and gas, but this would be offset by increased investment and a likely boost to the country's longer term production outlook, says McMahon.

In neighbouring Malaysia, which is currently experiencing strong levels of industry interest due to its progressive fiscal terms and its efforts to encourage development of marginal and late-life fields, this strategy is starting to pay off.

However, there are some positive indicators that change could be on the way. Indonesia's new upstream regulator SKKMigas understands the challenges the sector faces, McMahon told Petroleum Economist. While a new oil and gas law could be a watershed for the industry, even though the timing and context are unclear, but it offers a direct opportunity to make changes, he added.               

Meanwhile, the lack of clarity on PSC expiry and potential extensions is also hampering investment decisions. Several important PSCs are set to expire within the next decade, including North West Java Sea, Sanga Sanga, Jambi Merang and Offshore Mahakam.

Production is intrinsically linked to the level of upstream spend and any reduction in investment will lead to higher levels of field decline, McMahon said.

He added that only by creating conditions that encourage companies to invest will Indonesia breathe new life into exploration and unlock the full value of its remaining oil and gas resources.       

Being a mature producer has some benefits too. Indonesia has a well established national oil company, strong historical partnerships with the industry, as well as existing infrastructure, such as the 22.6m tonne per year Bontang liquefied natural gas liquefaction plant, providing a great opportunity to monetise gas in the Kalimantan area.

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