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Indonesian oil and gas: Bureaucracy reform?

Publication Date : 19-06-2014


While global oil production has shown an upward trend, Indonesia has experienced a decline from over 1 million barrels per day (bpd) in 2006 to less than 818,000 bpd this year (according to the revised state budget).

Dividing the reserves in Indonesia at the end of 2011 by the production at the end of that year (918,000 bpd), will give us 11.1 years (reserves to production ratio). By definition, that is the length of time that the remaining reserves would last if production continued at that rate.

In line with the growth trend in global oil consumption, Indonesia’s consumption has continued to increase from 1.184 million bpd in 1992 to 1.565 million in 2012. It looks big, but if compared with Singapore (from 739,000 in 1992 to 1.255 million in 2012), the growth is relatively small in terms of population or area.

It is important to observe that among those factors above, while the consumption growth is in line with the global trend, oil production and proven oil reserves are exactly to the contrary.

Hence, the ultimate remedy is to discover more proven oil reserves and to increase then to optimise oil production. The most measurable means of achieving these goals  is to boost exploration and exploitation activities.

This requires investors to come and explore. However, in deciding their business portfolio, they will compare Indonesia with other countries in the world.

 If Indonesia is not attractive in terms of potential findings, oil and gas regime or sanctity of contract, they won’t enter Indonesia. Or if they have been here, then they will pull out. Their ultimate goal is simply to maximise their shareholders’ value, nothing personal.

The first attraction should not be an issue here because there are more than 22 basins currently unexplored, 15 basins have been drilled but no hydrocarbons found yet and seven basins where hydrocarbons have been found but have not yet been brought into production in Indonesia. It means the opportunities are there.

The second attraction is not out of the question for Indonesia either. People must know that the production sharing contract (PSC) system originated in Indonesia and was launched in this very country in 1966. The Indonesian concept of PSC has been adopted around the world by many sovereign countries — oil exporters and some oil producers.

Many people easily dismiss PSC simply because they are nervous of the phrase “cost recovery” without knowing the details of this great concept.

The devil is in the detail — hence many negative comments about cost recovery may be caused due to the ignorance of non-specialists in understanding the details of its meaning and the application of such a concept.

Finally, the third attraction should also be applicable to Indonesia in this new era of democracy, unless Indonesia breaches the interpretation of the United Nations General Assembly Resolution 626 and the United Nations Conference for Trade and Development (UNCTAD) in 1960 and its Resolution 1803 of 1962.

The right of states to nationalize companies or requisition them in the national interest is acknowledged in those UN resolutions as a corollary of their sovereignty over their natural resources.

But these resolutions also require that a public interest is demonstrated and that fair and prior compensation is paid. Nationalization without, or with inadequate, compensation discourages new petroleum exploration and encourages the alienation of a country.

On the other hand, under no circumstances, as a dignified country, should Indonesia beg investors to come at all costs. Indonesia’s ultimate goal is none other than to maximise the utilisation of the nation’s potential for the people’s welfare.

All frameworks to be established by the government and the House of Representatives must be pivoted around that ultimate goal. They should not deviate at all to enrich a group of people, a party, a family or a faction only.

Arithmetically speaking, to increase production up to 1.4 million bpd as in 2003 requires an extra output of 600,000 bpd. If 20,000-35,000 bpd is considered a major discovery, then we need 30 more producing fields. If the probability of finding oil is around 10-30 per cent, and we choose 20 per cent as a denominator, then it requires the announcement of 150 new blocks in a licensing round. If we wish to achieve 1.4 million bpd in seven years from now, then we should have started yesterday.

Is seven years feasible? Well, it took only five years for Unocal from its initial discovery in 1998 to start developing the West Seno block (Makassar Strait) in 2003.

Having said that, there is an infamous block that was discovered 14 years ago and which has not yet commenced production. Is 30 new blocks possible in a round? Well, in 1997-1998 there were no less than 35 new PSCs signed.

One may argue that despite 250 new PSCs signed after 1968, a decline still happens after reaching a peak. There is no proof of correlation between having more blocks and production increases. However, that is the least one can do in the life cycle of oil fields: sign the blocks.

PT Pertamina has announced its plan to increase its current oil and gas output from 465,220 barrels of oil equivalent per day (boepd) to 2.2 million boepd in 11 years, with 30 per cent coming from domestic effort. The government must support Pertamina’s bid because its success may contribute 50 per cent to the national goal of reaching the 1.4 million bpd mark in seven years.

We have attended to all those hypothetical questions related to technical competence. Now it comes to answering the question of human capital behind the underlying assumption that all people of the Republic should share its wealth.

The people who are involved in the decision-making process without doubt must undergo bureaucratic reform.

First, revisiting the idea of a perceived super power executing body for oil and gas, to return to its calling as a monitoring, not challenging, body by empowering more competent oil and gas forensic auditors.

Second, revising the 2001 Oil and Gas Law, including the supply chain regulation, in facing (a) a new challenging environment of US$100+ per barrel oil price, (b) the

scarcity of the resources and (c) the increase in cost of lifting where adopting early new technology is a must.

Third, to have an efficient methodology to allow an apt decision-making process without breaching the law among the energy and mineral resources, environment, manpower and transmigration, law and human rights and administrative reform ministries and regional governments.



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