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Bad news from the oil sector

Publication Date : 21-01-2013


The oil industry, still reeling from the abrupt disbanding of the upstream oil regulatory body BPMigas last November, has been hit by another piece of bad news that threatens not only Indonesia’s energy security but also its balance of payments and fiscal consolidation, with an adverse impact on inflation and the rupiah exchange rate.

The upstream oil regulatory taskforce that replaced BPMigas revealed last week that several big oil production-sharing contractors (PSCs), including giants such as ExxonMobil and Norway’s Statoil, had relinquished and returned their offshore oil concessions in the eastern region to the government.

These contractors were among the dozen PSCs that had spent more than US$1.60 billion on deepwater explorations off Papua, Sulawesi and Maluku between 2009 and 2012 but struck only dry holes.

That news is very worrisome because most undiscovered, prospective oil basins in the country are located in the frontier eastern region. This region is believed to hold big reserves that are not yet proven, but their prospecting requires sophisticated technology and huge investment, estimated to be 10 times as large as those in Java and Sumatra.

But now, after even such oil giants as ExxonMobil and Statoil, well-known for their high technology and rich experience in deep-sea hydrocarbon exploration, have failed to find oil or gas, the prospects of hydrocarbon basins in the eastern region may not be as promising as many first thought.

This could further dampen foreign investors’ interests in exploring oil in Indonesia at a time when the country badly needs to increase exploration to replenish its proven reserves in order to sustain its production, which has fallen steadily from as much as 1.6 million barrels a day in 2000 to 830,000 at present.

The news of the $1.6 billion oil exploration that struck only dry holes once again shows how greatly risky investment in hydrocarbon prospecting is as well as how big the capital and sophistication of technology is required by the petroleum industry.

We hope this blunt fact is fully understood by politicians at the House of Representatives who are currently deliberating amendments to the 2001 Oil and Gas Law to make it much more favourable to national oil companies.

Many oil executives and energy analysts are concerned that the new oil and gas legislation emerging from current political debates would be extremely biased toward national companies at the expense of foreign oil investment, in view of the forthcoming legislative and presidential elections next year.

If the new Oil and Gas Law is so inimical to foreign companies or much less attractive than those offered by other countries in the region, our petroleum industry will most likely be in big trouble because only a few of our national oil firms already own the expertise, technology and financial capital required by the oil industry.

Even fewer national companies will be willing to risk such big sums of money in the petroleum industry where the success ratio is only about 30 per cent because under our law it is the contractors that bear all the costs of exploration.

Only after contractors discover reserves with commercial volumes for production development will they be able to negotiate with the government the cost of recovery to recoup their investment.

The government and politicians at the House should realise the sorry state of our oil industry now and should strengthen the legal certainty of investment in the industry.


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