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Oil, gas search in Indonesia put on hold

Publication Date : 12-05-2014


Indonesia's dwindling oil and gas production is facing further challenges as a number of exploration projects have been put on hold pending the appointment of a new administration.

Financial issues also appear to be another challenge as most companies cannot afford to carry out exploration in remote areas.

“There are many [exploration] activities that have been postponed. We fully understand this because the current administration cannot take any decisions,” Indonesian Petroleum Association (IPA) vice president Sammy Hamzah said.

Sammy said the current situation would affect the country’s production as the realisation of exploration activities looking for potential new hydrocarbon sources would decline due to pending permits.

Figures from oil and gas regulator SKK Migas showed that 26 oil and gas exploration wells were drilled in the first quarter of 2014, in addition to six coal-bed methane (CBM) wells. The regulator had planned to see 206 wells drilled this year.

The figures also showed that the realization of exploration-well drilling was less than 60 per cent in the last few years, creating worries about the ability of the country to meet its energy demand in the future.

SKK Migas deputy for commercialization control, Widhyawan Prawira Atmaja, said about 60 per cent of exploration projects were facing financial problems — the main challenge in exploration. “Most projects are in mature areas, meaning firms are only finding [gas or oil] in small amounts. We should go to the eastern part of the country to seek bigger reserves; however, the investment needed is huge and only big companies can bear it,” he said.

In the oil and gas business, Indonesia implements production-sharing contracts, in which the government awards oil and gas areas to companies. The production from these areas is shared between the government and the companies.

Moreover, under the contracts, any spending must get approval from the government because money spent by contractors during exploration can be reimbursed.

Exploring oil and gas is known to be a huge challenge. Figures from the SKK Migas show that the amount of investment in exploration that cannot be recovered reached US$1.8 billion during the 2001-2013 period.

The money made no returns because exploration discovered no resources. In other cases, the exploration discovered resources but they were economically unfeasible for further development.

In the first quarter of 2014, the country’s oil production amounted to 795,500 barrels per day, far lower than the output target set in the state budget of 870,000 barrels per day. SKK Migas blamed the shortfall on bad weather that had forced companies to halt production activities.

Meanwhile, gas production was at 8,339 million standard cubic feet per day (mmscfd) in the first three months of the year far higher than the national gas output target of 6,939 mmscfd by the year end.

Along with its economic growth, the country is seeing increased demand for oil. This is a serious challenge as most of the country’s oil wells have been depleted.

The gap in oil supply and demand is expected to widen in the coming years, leading the country to import more and remaining vulnerable to volatility in global oil prices and exchange rates, which in turn hurt its balance of payments.

IPA president Lukman Mahfoedz said the gap would reach 2 million barrels of oil equivalent per day, although new projects were already coming on stream. “We need a stable investment environment, clarity, consistency and certainty in regulations as well as acceleration of approval for oil and gas projects,” he said.

He added that the realization of exploration projects was only US$2 billion to $3 billion per year in the last four years while development projects amounted to only around $3 billion to $4 billion per year. The low realization, he said, had caused the decline in new discoveries of resources and an oil reserve replacement ratio of only 47 per cent in 2013, compared to 82 per cent in 2011.
“If we want to increase production, the amount must be greater. However, funding is actually not a problem although the drilling of exploration wells in Indonesia is two to two-and-a-half times higher than overseas. The government needs to continue supporting exploration by simplifying permits and eliminating obstacles related to social problems,” he said.

Lukman added that the complex involvement of a number of governmental institutions and cross directorates, such as the Energy and Mineral Resources, Finance, Forestry, Domestic Affairs and Environment ministries, as well as poor coordination between central government and local administration remained major challenges to resolving issues in the oil and gas industry.


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