KATADATA - Oil and Gas industry, especially in the upstream sector, has a characteristic of being high-risk and requires having a large capital. And even if the company has spent a lot of money, there is no guarantee for the firm to break-even and be profitable in a quick and short time. The firm can even suffer a loss and acquire nothing in return.
Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) has recorded that in the last four months, there were more than US$ 7 billion or around IDR 96 trillion of oil and gas investment that was just gone into thin air without actually producing anything. This fund was being spent by firms to conduct exploration of wells within the country. But these firms failed to find any oil and gas reserves, or the fields turn out to be economically inefficient to be developed.
The contractors lost such large amount of money, without any compensation from the government. This is the rule in Indonesia. The contractors need to explore the oil and gas fields on their own with their money. And when there are oil and gas reserves or the fields are economically efficient enough to be developed, the government will pay back the contractors via cost recovery fund. But if the contractors failed, there will be no cost recovery to cover the loss.
SKK Migas’ deputy for business support control Rudianto Rimbono said that the money lost in oil and gas industry is not really a loss. Exploration activities need large amount of money. And this is very needed in order to get the data of potential oil and gas source. “This is part of the game, not a loss,” Rudianto said. And so, the investors also need to have a long breath if they want to invest in oil and gas industry.
Usually when an oil and gas company has conducted a drilling process in one well and the result is zero, also known as dry hole, then the spirit plunges; even though the time limit that the government has given for the exploration is still long, and that there is still other oil and gas potential that can be developed. And so, the government allows any oil and gas companies to share the risk by offering other investors to also share the burden through the farming out activity (farm out).
Farm out is a transfer of interest or stake from one operator of the block to other company for the same block, or to build a consortium. This has been regulated in the Government Regulation No. 35 Year 2004 about the upstream oil and gas business activities. Ever since 2012, there has been a Farm Out Forum Indonesia (FFI) as a media to share or trade information of any oil and gas company that wish to partner with other investors to also join in the operational activity of a block. This forum can also as a media for the company to let go of its share ownership in an oil and gas block and offer it to other contractors.
This event is always crowded with oil and gas firms. When this forum established the first time, there were 56 oil and gas companies that offer their stakes in their oil and gas blocks to other companies. And the investors that were interested reached 85 companies. And at that moment, there were 20 business agreements that have reached a deal.
Last year, there were 61 blocks offered by the forum, and five of them have been included in business agreements. For 2015, there were 50 blocks offered by the forum for a farm out, and only five that have reached a deal. From here, it can be seen that the enthusiasm of the oil and gas companies to farm out their stakes are still big, but the investors that are attracted to them are very small in number.
And right now, other than to farm out the stakes in oil and gas blocks, many oil and gas contractors now are also decreasing their exploration activities. One of the reasons is because of the low global oil price. Averagely, the global oil price this year is below US$ 40 per barrel, less than half of the average price last year. Furthermore, the assumption of the Indonesia Crude Price (ICP) that has been included in the state budget 2016 would only reach US$ 50 per barrel. And due to the weakening trend of oil price, it is most likely that the exploration activities next year will continue to decrease.
From the data that Katadata has successfully gathered, in this year alone there are three companies that will let go their stakes in their oil and gas blocks. The three firms are ConocoPhillips, Chevron Pacific, and the subsidiary of PT Perusahaan Gas Negara (Persero) Tbk., PT Saka Energi Indonesia.
But, a member of Energy and Mineral Resources Ministry’s expert team for Indonesia crude price Maizar Rahman is optimist that the oil price next year will increase. According to him, there are three factors that can affect the increase of global oil price for the period of 2015 to 2020. First, it must be seen from the demand level that would most likely increase due to the growing global economy that is predicted to be better. Second, it must be seen from the production cost of shale oil, which averagely stands at US$ 65 per barrel. Third, it is about the geopolitics, where the tension of Middle East and the Nigerian Conflict are still hot.
Even if the oil price will increase a little bit next year, it will not guarantee the investors’ enthusiasm to peak and invest their capital in the country’s oil and gas sector. Rudianto admitted that there are several problems that hinder the investors to be enthusiastic in investing in oil and gas sector. One of the problems is the regulation in Indonesia. According to him, there are many rules, especially at the regional level, that are not syncing properly with the rules at the central government. “The rules should be simplified, considering that the government also needs oil and gas. And it’s even more crucial since oil and gas reserves are thinning,” Rudianto said.