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https://asiatimes.com/2021/01/death-knell-tolls-for-indonesias-oil-and-gas/
Death knell tolls for Indonesia’s oil and gas

Indonesia lacks the foreign investment and domestic expertise needed to
keep its fast-declining oil and gas industry afloat

*By **JOHN MCBETH <https://asiatimes.com/author/john-mcbeth/>*JANUARY 5,
2021

[image:
https://i2.wp.com/asiatimes.com/wp-content/uploads/2020/08/Indonesia-Oil-Spill-2019-e1596616204484.jpg?fit=1200%2C774&ssl=1]A
worker scrapes sand affected by an oil spill as he cleans the beach at a
shoreline in Karawang, West Java province, Indonesia, August 9, 2019.
Image: Facebook/Agencies

JAKARTA – With Chevron and perhaps ExxonMobil heading for the exits, active
exploration at a virtual standstill and production on an increasingly
downward spiral, Indonesia’s government needs to conduct radical regulatory
surgery before its oil and gas industry is doomed by the onrushing era of
renewable energy.

Analysts say the nationalist tide that has swept over the industry in the
past six years has left Indonesia on the bottom rung of prospective foreign
investment and without the financial and technical means to explore for and
develop new fields independently.

“The government needs to consider a major paradigm shift to spur investment
if the country is to realize its geological potential before it becomes too
late and its many remaining resources are left in the ground forever,” says
one American oil expert with long experience in Indonesia.

That’s also because major oil companies, many with a previously long
history in Indonesia, including BP, Royal Dutch Shell and Total, are
signaling a shift to renewables as they start to scale back investment in
traditional oil and gas projects.

“Globally, renewables are moving very fast, technology-wise,
infrastructure-wise and cost-wise,” a former senior Indonesian energy
official told Asia Times. “Renewables are now in head-on confrontation with
oil and gas. As always, we (Indonesia) are behind the eight-ball.”

With most low-risk resources in Indonesia already being exploited, oil and
gas output will continue to decline as state-owned Pertamina struggles to
come up with the increased investment required to fund enhanced recovery
technology in mature fields.

Exploration has fallen by an average of 23% over the past decade. According
to government data, the number of exploratory wells plunged from 64 in 2014
to 26 in 2019 and only 18 last year, partly because of the impact of the
Covid-19 pandemic and partly as a result of sagging global oil and gas
prices.

Chevron is walking away after its failure to renew the contract to
Sumatra’s long-producing Rokan oil block led to it relinquishing its 62%
stake in the US$9 billion Indonesian Deepwater Development (IDD) project in
Kalimantan’s Kutai Basin.

Italian oil company ENI, which operates one of the four fields to be merged
under the IDD venture, is expected to replace Chevron, although officials
said last week they were still in negotiations with ENI over commercial
aspects of the five-year development.

ExxonMobil is also reportedly close to relinquishing its Cepu, East Java,
oil block as it seeks to ditch projects with the lowest profit margins to
focus on Papua New Guinea and the Gorgan liquified natural gas (LNG)
project on Australia’s Northwest Shelf.

[image:
https://i1.wp.com/asiatimes.com/wp-content/uploads/2021/01/Indonesia-ExxonMobil-Cepu-Oil-and-Gas-1.jpg?resize=780%2C388&ssl=1]Workers
at ExxonMobil’s Cepu oil block. Image: Facebook

The oil giant is laying off 14,000 employees, or about 15% of its global
work force, after the impact of the pandemic saw it lose its position as
America’s top energy company to NextEra Energy Inc, which specializes in
solar and wind power.

Cepu, an onshore block that went onstream in East Java in 2008, produced an
average of 215,000 barrels of oil a day last year, edging ahead of Rokan’s
176,000 barrels, Indonesia’s largest producing field for more than five
decades.

State oil company Pertamina estimates that Rokan’s Duri, Minas and Bekasap
fields will need $70 billion in investment over the next 20 years
to maintain production at acceptable levels and save an annual $4 billion
in oil and product imports.

Since the 1980s, Chevron has employed the technologically challenging and
capital intensive technique of steam-driven enhanced oil recovery (EOR),
which has allowed it to achieve a 60% recovery rate to extend the life of
the fast-maturing block.

But given the complexity of the operation, there are fears Rokan
will follow the same pattern as East Kalimantan’s Mahakam gas block, where
production has fallen away since Total was compelled to hand over control
to Pertamina in early 2018.

Upstream regulator SSKMigas revealed last week that output fell by 20% in
2020 — from 605.5 million to 485 million standard cubic feet a day (MMSCFD)
– because the number of wells drilled fell short of the target. It
predicted a similar decline this year.

ExxonMobil’s departure would leave ENI, BP and ConocoPhillips as the only
active petroleum majors in Indonesia. BP is adding a third production train
to its Tanggu LNG complex in western Papua; delayed by Covid infections, it
is now expected to be completed by early 2022.

Sources familiar with the project say promising results from exploratory
drilling at BP’s new offshore Ubadari field, 70 kilometers southeast of
Tanggu, will extend the facility’s life well beyond 2035 when the company’s
current contract expires.

Japan’s Inpex will be hard-pressed to find a partner with the deep pockets
and technical expertise to replace Royal Dutch Shell, which after a year
of speculation has announced it is pulling out of the $19 billion Marsela
gas venture in the remote Arafura Sea.

[image:
https://i0.wp.com/asiatimes.com/wp-content/uploads/2020/06/Indonesia-Masela-Gas-Field-Inpex-Shell.jpg?resize=780%2C468&ssl=1]Japan’s
Inpex will be hard-pressed to replace Royal Dutch Shell in the Masela Gas
project pictured here. Photo: Stock

Inpex turned down an overture from the China National Overseas Oil Corp
(CNOOC) for political, technical and what one source describes as “bad
business chemistry issues,” leaving the company to contemplate at least a
decade-long delay in developing Marsela’s Abadi field.

Last month, Inpex signed an MoU with state-owned Perusahaan Gas Negara
(PGN) for a long-term supply contract in an effort to entice interest from
a new partner. It had previously signed MoUs with power utility Perusahaan
Listrik Negara (PLN) and a state fertilizer company.

Some experts question whether the Abadi field, 2,800 kilometers east of
Jakarta on Indonesia’s maritime border with Australia, will ever be
developed given its position high on the LNG cost curve in a commoditizing
market.

Still, it is one of four so-called National Strategic Projects, including
Tanggu, IDD and Pertamina’s Cepu-associated Jambaran-Tiung gasfield, which
the Mines and Energy Ministry hopes will deliver on its 2030 target of one
million barrels of oil and 12 billion standard cubic feet of gas a day.

Industry sources insist that can only be accomplished with material EOR
capital and extensive exploration – and that means providing a raft of
unprecedented incentives and other measures that will help put Indonesia
back on the map of desirable investment targets.

Indonesia has 128 geological basins, only half of which have been explored.
Oil production has fallen from 1.6 million to 700,000 barrels a day since
1995, the contribution of oil and gas to GDP has plummeted from 9% to 3.3%
and foreign investment is at its lowest-ever point.

Experts say only deep-water exploration in prospective areas like offshore
northern Sumatra, northern Papua and the Makassar Strait, separating
Kalimantan and Sulawesi, have the potential to move the needle to any
significant degree.

As things stand now, Indonesia’s greatest hope lies in the Andaman Sea,
northwest of Aceh, where Abu Dhabi-based Mubadala Petroleum, Spain’s
Repsol, BP and Malaysian state oil company Petronas have stakes in four
adjacent blocks all under active exploration at depths of 1,000-1,500
meters.

Industry sources say high-quality 3D seismic shows the existence of several
natural gas fields in the 3-4 trillion cubic feet range, all located in
close proximity to the mothballed Arun LNG plant and its pipeline
infrastructure.

Elsewhere, Pertamina is exploring around Tarakan, an island off northeast
Kalimantan close to the Malaysian border, and other companies are drilling
wildcat wells in a handful of far-flung blocks, including near Seram, the
main island in southern Maluku.

“The opportunity is huge, but it cannot be met solely by risk-averse
domestic and state-owned companies who also lack the balance sheets and
necessary technology,” says the American expert. “The desire to nationalize
the country’s resources, along with a woeful fiscal policy and bureaucracy,
has dampened foreign investment.”

Ministry of Mines and Energy oil and gas director-general
Tutuka Ariadji said in a year-end assessment that the government was
considering a range of new incentives, among them investment credit,
accelerated depreciation, value-added tax exemption and a streamlining of
the licensing process.

[image:
https://i1.wp.com/asiatimes.com/wp-content/uploads/2021/01/Indonesia-Tutuka-Ariadji-Oil-and-Gas.jpg?resize=780%2C437&ssl=1]Tutuka
Ariadji is trying to lure in foreign investors through a raft of new
incentives. Image: Facebook

“The government is very eager for a better oil and gas investment climate,”
he said, adding that the government was open to “win-win” discussions
with stakeholders on changes to regulations. But as in past years,
officials may not be prepared to bite the bullet.

Foreign oil executives say they want to see an end to SSKMigas’
micro-management of exploration budgets. Oversight, they say, should only
be confined to ensuring  a production sharing contractor’s (PSC) work plan
conforms with contract commitments and other laws.

Critics say apart from the government’s minute scrutiny of budgets, which
often does not match the strict accounting procedures of most large
international companies, it is also time to end the “archaic” tendering of
exploration blocks.

In particular, they want to see significant changes to the cost recovery
scheme, under which the government reimburses companies for
upstream-related costs in exchange for a higher share – up to 85% — for
each company’s earnings from oil and gas blocks.

Over the years, the government’s take, at least in share of revenue, has
shrunk because of the higher costs associated with maintaining aging
fields. That led to the introduction of an alternative gross split scheme,
under which firms bore all the upstream costs, but the state received a
smaller cut of up to 57% of revenue.

Once seen as a panacea to the deteriorating investment climate, the
three-year experiment has now been abandoned by new Mines and Energy
Minister Arifin Tasrif. Investors see the scheme as a victim of the Joko
Widodo administration’s failure to consult with stakeholders.

“The mindset that foreign investors ‘overspend’ to take advantage of the
cost recovery system is illogical,” says one consultant, echoing widespread
complaints about a micro-management policy that also compels firms to buy
overpriced Indonesian goods and services and favors cost over quality.

Apart from removing the limit on expatriate employees during the
exploration phase, companies say SSKMigas oversight of a plan of
development (POD) should be conceptual, instead of focusing on the money a
PSC is spending from its own resources to develop a promising discovery.

“The main problem with POD evaluation is that the people doing the
evaluation are incompetent,” says the consultant. “They may have the skill
set to evaluate an onshore development, for example, but not a deep-water
project.”

Other suggested changes include

·         Remove ring-fencing for producing PSCs and also allow cost
recovery for those engaged in active exploration.

·         Allow failed exploration PSCs to sell any excess inventory to
recover costs, instead of it automatically becoming the property of the
Indonesian government.

·         Sweeping improvements to the budget/authorization for expenditure
(AFE) process, particularly the requirement for time-consuming layers of
bureaucratic approval.

·         Why, the industry asks, does it take years to relinquish a PSC,
or months to get a PSC transfer approved?

Timing is one factor Indonesian regulators have never recognized, despite
its impact on returns and investment attractiveness. It currently takes up
to two years for exploration companies to open an office, secure financial
and technical approvals, tender for goods and services and finally drill a
well.

If the well is dry or the block is relinquished, it still takes another two
and a half years to close out AFE, a puzzling anomaly when cost recovery
only applies to the production phase, not during exploration when all the
risk falls on companies.

Risk is something cash-strapped Pertamina and domestic companies have never
been ready to take, mindful of the fact that only one in nine wildcat, or
exploratory wells, yield results – and then not necessarily in commercial
quantities.

[image: A PT Pertamina worker sits under pipes as he rests near crude oil
tanks at Bunyu island, Indonesia's East Kalimantan province February 8,
2011. Pertamina has said it expects crude and condensate production of
132,000 barrels per day for this year, up just 1 percent from last year,
though the former OPEC member country has often missed production targets
because of declining output at ageing fields, Pertamina's director of
investment and risk management Ferederick Siahaan said last month.
REUTERS/Beawiharta (INDONESIA - Tags: ENERGY BUSINESS) - RTXXLW8]A PT
Pertamina worker sits under pipes as he rests near crude oil tanks at Bunyu
island, Indonesia’s East Kalimantan province. Photo: Agencies

The costliest example of that was the $1 billion spent by ExxonMobil,
Marathon, ConocoPhillips, Norway’s Statoil and three smaller foreign
companies in an unsuccessful search for oil and gas in 2,000-meter deep
waters on the eastern side of the Makassar Strait between 2006 and 2011.

Most of the mature fields Pertamina has inherited as part of the same
nationalist model Saudi Arabia adopted in the 1970s require the sort of
enhanced recovery techniques and technology Indonesia does not possess.

“So the dilemma is does Indonesia wait until matters get worse, or do they
take bold and drastic steps now,” says one foreign executive. “It is akin
to a patient waiting whether to undergo treatment now or wait until a
doctor decides on a prescription.

“In other words, Indonesia can choose to implement incentives and measures
which it believes will make it more attractive (as countries like Egypt and
Columbia have done in recent years), or wait to negotiate with foreign
investors from an increasingly weak bargaining position.”

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