Monday 11/5/2015, 19.36 WIB
Although Indonesia still has signficant potential for new oil and gas discoveries but it faces many constraints that have reduced oil and gas companies interest to invest

KATADATA ?  The oil and gas industry in Indonesia is facing heavy challenges. Falling oil production, declining oil reserves to below 4 billion barrels and aging wells. Ironically, against this backdrop, oil and gas contractors have lost their interest in oil exploration investment, which is crucial to discovering new oil and gas reserves.

According to the President of Indonesia Petroleum Association (IPA) Craig Stewart, Indonesia still has signficant potential for new oil and gas discoveries. Unfortunately, Indonesia faces many constraints that have reduced oil and gas companies? interest to invest in Indonesia.

In order to unravel the potential and obstacles faced by the oil and gas industry in Indonesia and to seek a governmental solution, Katadata Team interviewed Mr. Craig Stewart in Jakarta in April 2015. Followings are the excerpts of our interview.

Is Indonesia still an attractive place for oil and gas investment?

Indonesia still has huge potential. Simplistically, the larger a country is, the more hydrocarbon potential you are likely to have. For example, if you look at the largest countries in the world: USA, China, Canada, and Russia, each have a very large oil and gas industry. Indonesia, including its maritime territories, covers a very large area and much of it is underexplored particularly Eastern Indonesia. Commercial oil and gas has been found in every corner of Indonesia and as a result it has the largest oil and gas industry in Southeast Asia.

Recent tenders offered on oil and gas working areas in Indonesia failed to attract a significant number of bidders. How could that happen?

There are many factors.

Given the relative lack of exploration success over the last decade, the prospectivity of available acreage is viewed as higher risk and higher cost due to being in more remote areas in Eastern Indonesia or in deepwater. To be attractive the PSC contract terms need to be commensurate with the risk. The current terms in Indonesian PSCs are too severe, as they are among the most onerous in the world, for the prospectivity of available acreage. This is especially true in the current low oil price environment.

The low oil price also affects industry interest in exploration, because with revenue declining and cash available for investment drastically reduced, exploration expenditures are one of the first budget items cut. In this situation, oil companies will prioritize investment spending on development projects to boost near term revenue.

Regulatory uncertainty has also impacted the attractiveness of the Indonesian oil and gas industry. A prime example was the issuance of Government Regulation 79/2010, known affectionately as ?GR 79?.  This regulation eliminated the ?assume and discharge? provision for all non-oil and gas taxes in PSCs post-2010. Therefore new PSCs were potentially open to unknown, new or changing taxes that they were not previously. The first impact of this was the application of Land and Building Tax (LBT) on post-2010  PSCs for 2012 and 2013. LBT tax assessments were issued for $220 million for 17 exploration PSCs for these two years. These assessments were so excessive that they destroyed the potential for commerciality of any PSCs post-2010. Although these assessments were later recognized as an error by the Department of Tax and LBT is no longer being applied to PSCs during the exploration phase, these tax assessments were not revoked and are now being appealed in tax court, requiring the parties to pay 50% for the right to appeal. Needless to say, this caused an immediate pullback in the signing of new PSCs, and the Bid Round for oil and gas blocks in 2013 was largely a failure as companies pulled out from even bidding on their own Joint Study areas. Interest in exploration in Indonesia has still not recovered from that event as it created huge uncertainty in the industry.

It should be noted that LBT will still be applied in the exploitation phase as a revenue tax, effectively decreasing the profit share for the PSC contractors and making the terms of the PSC even more onerous at a point in time where they need to become more favourable.  

There have been a handful of PSCs that were awarded from the 2014 bid rounds but the work program commitments are very small given the issues raised above

Are there any other issues?

Project timelines have become a major problem. If exploration proves successful, the time to develop discoveries has become much longer and is typically 10 to 15 years as compared to 2 to 5 years in the past. This has impacted most of the large discoveries in Indonesia that are being developed or waiting to be developed such as the Chevron IDD project (Indonesia Deepwater Development) which was discovered in the early 2000s, Inpex?s Abadi field discovered in 2000 and Exxon?s Banyu Urip field discovered in 2001.

Because of this long timeline for oil and gas projects in Indonesia, the contract period of 30 years for the PSC is no longer long enough. In the case of the IDD and Abadi fields, the projects will require and are waiting upon PSCs extensions to proceed.

So how long should the contract period for a PSC be?

Under this business environment, the industry needs 50 year contract periods or at least an automatic renewal of 20 years. Without this change in the terms of the PSCs, exploration will continue to be unattractive in Indonesia.

Why does it take so long?

Part of this is due to the slow bureacratic processes and decision making that govern the industry. Part of it is due to the new complexity of working in the country due to regional autonomy and the different levels of government to deal with. Also we are often hampered by difficulties in acquiring or accessing land due to weakness in laws or law enforcement.

Does the  government need to prepare incentive for oil and gas industry? Does it need to change the type of contract?

The Indonesian government and Ministry of Energy and Mineral Resources are well aware of the issues facing the industry today and their negative impact. One of the major focuses of the government needs to revitalize exploration. The upstream oil and gas industry is a depletion business. If we do not find new oil and gas reserves, the industry will shrink and the country will need to import its oil and gas which has many negative aspects. Exploration is the key to the future of oil and gas industry. To help address this, the Ministry has just established an Exploration Task force which will include government and industry.

The Production Sharing Contract has worked well for Indonesia since its introduction in the 1960s. One advantage of the PSC in the complex environment of local goverments and many stakeholders that is today?s Indonesia, is the fact that all oil and gas projects are viewed as government projects for the benefit of the people and oil and gas companies are contractors to the government.

This gives the industry government support, through agencies like SKK Migas, to work in partnership with us to a deal with all stakeholders and to help solve any issues so that the contractors can focus more on their work for the benefit of the country.

What do you think about the amendment to Oil and Gas Law?

The ruling of the Constitutional Court that dissolved BP Migas has become a driver for the government to create a new oil and gas law. They do not want that situation to reoccur because it can create legal uncertainty and negatively impact the industry. The Ministry and DPR (Commission 7) want an oil and gas law that is robust from a constitution law perspective so that it is sustainable and cannot be challenged again in the Contstitutional Court. Therefore a major focus in the law is the framework for the management of the industry (i.e. role of SKK Migas).  

What does the industry expect from the new Oil and Gas Bill?

The industry wants certainty and consistency so we support this initiative.

In terms of the role or structure of the management body for the industry (currently SKK Migas), our main request is to streamline the bureaucracy such that the industry can be more efficient, decisions are made quicker and we can do a better job exploring and developing discoveries.

I mentioned earlier that the contract term for PSCs is now too short given the long project timelines. It is difficult to get a discovery developed and produced within the time frame without a PSC extension. And there are PSCs today, and we have talked about a few of them, that have had discoveries and they are unable to commercialize it and are now held up by PSC extension discussions. What I would like to see in the new oil and gas law is an automatic right to extend the PSC for at least one period.

This is the case in Thailand. There's an automatic right to extend an expiring concession for one period. The second extension requires the government's approval but the first one is automatic.

One of the critical issues in oil and gas sector in Indonesia is about the relationship between NOC (National Oil Company) and IOC (Intenational Oil Company). Because we think that's a very sensitive issue. What do you think about the ideal relationship between IOC and NOC in Indonesia?

One of the goals of the new Oil and Gas Law No. 22/2001 was to separate the PSC management role from Pertamina and have Pertamina focus on becoming a true business entity and a better performing oil and gas company. I think Pertamina has achieved this and we now look at them more like other oil and gas companies which are both competitors and potential partners. You can be a partner in a PSC joint venture or you can be a competitor by bid against them in exploration blocks or in acquisition.

However we also recognize that Pertamina is a state owned enterprise, has special roles in the country and the government may give preferential treatment to them in certain circumstances. This can be the case by taking over operatorship of expiring PSCs.  

This is a big question for the government. There are a lot of PSCs that are expiring in Indonesia in the next few years. Some of these have very mature fields and may not have significant reserves left. Does the government want all of these to go to Pertamina? How much can Pertamina can efficiently operate and fund? We often have joint venture partners in our PSCs. This is to share risk, supply ideas and technical expertise and to provide discipline to the joint venture. So these are things to think about by the government regarding this.

The oil and gas industry is a high risk business. Deepwater exploration wells may cost as much as 200 million dollars (IDR2.6 trillion) and they can be dry holes. The government needs to think about whether Pertamina should risk this kind of money on their own. I think it is better to have partners from private industry. There is too much money needed to fund medicine, education, and infrastructure. It is better not to spend too much government money on high risk oil and gas projects.