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Indonesia treading water

The government wants higher oil production. The prospects are dim

Desperate to boost production for an energy-starved nation of 264m people but faced with a yawning capital expenditure gap, Indonesia is hoping that reluctant foreign investors will buy into 14 unexplored mainly offshore oil and gas blocks under a raft of financial incentives unveiled in April.

In a belated recognition that Southeast Asia's biggest economy cannot fund its future energy needs, Indonesia will offer tax-free imports of drilling equipment and other upstream technology as well as revised "gross split" contracts that, the government argues, should help operators recover costs sooner.

But foreign operators have been slow to show up at the party, citing excessive red tape, politicking and poor prospective returns. The latest numbers tell the story—in the first quarter of 2017 investment in the oil and gas sector fell 4.1% compared with last year, to $2.57bn, exactly the opposite of what Indonesia needs.

Meantime, state-owned Pertamina is bearing the brunt of plugging the energy gap as it moves to take over "terminated fields" next year under a government mandate to wring the last drop of crude from them.

$200bn required

In Indonesia's latest overhaul of its energy policy, President Joko Widodo's government hopes to attract up to $200bn in capex over the next decade in an attempt to turn around the shortfall in crude oil production. As the president has admitted, Indonesia will remain a major importer for at least the next decade. However, he would prefer that in future the imports are in the form of crude rather than refined fuels. Indonesia consumes around 1.63m barrels a day of oil, roughly twice what it produces.

By any measure, the numbers required to turn around this situation are substantial. As Energy and Mineral Resources Minister Ignasius Jonan acknowledged in May, the long-delayed Masela gas project could cost up to $16bn. The East Natuna block, with estimated reserves of 48 trillion cubic feet of gas, could swallow $30bn to $40bn. And another $20bn-30bn will be needed for perhaps 15 oil, gas and methane fields coming up for bids.

And there may be other resources out there. According to the country's upstream oil and gas regulator, SKK Migas, there are 43.7bn barrels of crude lying in unexplored basins.

Dithering

But, as the dithering over the Masela field shows, the government moves slowly. In March, Widodo decided that the liquefied natural gas plant should be constructed onshore, reversing the well-advanced plans of Japan's Inpex and Shell to construct a floating facility. According to several analysts, this decision will cost another $7.5bn because it will require an extra 600km of pipelines. Local newspapers have run stories suggesting that local politics is a factor—Widodo is backed by the PDI-P party, which has a stronghold in the province of Maluku where Masela is located and local politicians have been lobbying for an onshore LNG plant.

In the meantime, consumption continues to outpace supply. As Fitch's BMI Research estimates, even if processing capacity grows by 2% by 2025, as predicted, consumption will rocket by 31% in the same period.

At current rates of production, Indonesia's crude output will fall way short of targets. According to the Ministry of Energy and Mineral Resources, Indonesia is producing about 0.8m b/d of crude oil. And the government has given Pertamina a combined oil and gas target of 0.863m b/d in 2017, rising to 1.039.4m barrels of oil equivalent a day in 2019, and then to 2m boe/d in 2025.

Yet the IMF begs to differ. In its latest report on Indonesia's financial stability, it predicts crude production will decline steadily in the medium term, from an estimated 0.815m b/d in 2017 to 0.77m b/d in 2018 and 0.74m b/d in 2019. Other independent analysts broadly agree with the IMF. It's hard to understand why import-dependent Indonesia is rumoured to have asked to rejoin Opec again (having suspended its membership, just a year after re-joining, last year).

Constrained

Pertamina is doing its best with constrained financial resources. In the past four years the group has boosted oil production by a compounded 4.3% a year. But the heavily indebted state firm lacks anywhere near the funds required to do the job—in the first quarter of 2017 its capital spending totalled just $1.1bn and even that was three times higher than the equivalent period in 2016. Still, the company expects to boost supplies by acquiring foreign oil and gas blocks. "In the upstream sector the low oil price becomes an opportunity to continue to expand," Pertamina said earlier this year.

The burning issue is whether the new gross split contracts, unveiled in January, will attract the foreign investment Indonesia vitally needs. So far, there's little to go on but, as law firm Jones Day points out, Indonesia is taking "a large step toward eradicating the cost-recovery regime for upstream cooperation contracts".

Source: Petroleum Economist
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