Oil & Gas Industry

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Although Indonesia is one of Southeast Asia’s oldest oil producers, the industry today is not as robust as it should be. In 1977, oil production was almost 1.6 million barrels per day (bpd), a dramatic rise from the 500,000 bpd only 10 years before. The oil boom years from 1967 through until the early '80s were fuelled by many fresh finds of valuable reservoirs, which were exploited quickly, although perhaps a little haphazardly.

The focus was on production for cash, the wells were wide open and there was little thought given to reservoir management or the creation of a downstream industry to make use of this level of production. In truth, at that point in time, Indonesia did not need much in the way of refined petroleum products as the country's infrastructure was emerging slowly from an agrarian economy.

As the primary production depleted, modern technology was employed to enter a phase of secondary recovery using pumps, steam flood and horizontal drilling to create production levels of over 1.6 million bpd, a peak reached in 1995, but has continually declined since then.

At that time, the country's oil and gas industry was challenged to become more efficient and government financial enhancement packages were put in place to entice investors and multinationals to explore again and increase production to greater levels.

The PSC (Production-Sharing Contract) system was created, ostensibly to make it easier to encourage the creation of production companies to enhance the production figures and the system allowed for “Cost Recovery” whereby the government would underwrite a percentage of the costs involved in production and the resultant oil or gas produced would be “split” between the government and the contractors.

At present, the PSC system allows the government to take 85 percent of the oil output and 70 percent of the gas output from each field while the contractors retain the balance. The costs incurred in any development are split proportionally, thus, the government pays for the lion's share in the initial stages but reaps the benefits of their “cut” during the life of the field.

Recently, as the cost incurred in production has increased, the government's revenue is diminishing slowly and measures are being considered to address this imbalance.

Over the past few years, this drop in revenue has increased for a number of additional reasons. Increased drilling costs, few “new” finds, increasingly difficult drilling conditions and the fact that most of the reserves are in “mature fields,” all have contributed to these falling figures.

In 2006, oil output was just over 1 million bpd, but during 2007 this figure dropped to approximately 964,000 bpd with a slight uptick during the first half of this year - but still not enough to get back to the 1 million bpd mark.

These figures seem to be reasonable considering the country's need for fuels. It is estimated that Indonesia needs a production figure of 1.46 million bpd to keep the country running, which creates a shortfall of almost 500,000 bpd.

Even if production figures could be increased to reach this level, Indonesia’s current refining capability is only about 72 percent (1.05 million bpd) of the daily usage, accordingly, 28 percent of Indonesia’s daily fuel is imported. Despite being a member of the Organization of Petroleum Exporting Countries (OPEC), Indonesia has been an oil importer for years. Earlier this year the government announced they were quitting the organization.

The Indonesian oil and gas upstream sector regulator BP Migas recently announced that they were optimistic that Indonesia could restore national oil output to 1 million bpd by the end of 2008. To achieve this, the government has promised to "make it easier for contractors to carry out exploration activities and speed up the production process."

With the exception of ExxonMobil/Pertamina Cepu field in the middle of Java, there have been no major oil discoveries in Indonesia for the last 20 years. The political problems in developing Cepu are numerous and, to date, there is still some wrangling going on between the two companies and the two provincial governments that the field straddles.

Chevron Pacific Indonesia has committed to the North Duri Development, which will entail the drilling of over 2,500 Steam Injection and Production wells over the next five years in an attempt to redress the current shortfalls.

Doom & Gloom for Oil, but Gas may yet be Indonesia's energy star

Since the late 1970s, LNG (Liquefied Natural Gas) has been shipped by the megatons from Indonesia and despite competition from others, predominately Qatar, the country still makes a major contribution to the energy market.

In recent years, early gas discoveries, as with oil, have declined and in the short term Indonesia has had to purchase LNG from others to meet its own export commitments. But all that has changed with the discovery of “super fields” in Papua, Sulawesi, the Timor Sea and the daddy of them all - the Natuna D Field located in the South China Sea.

Despite these finds, there is still a reluctance to invest in Indonesia's gas, the fetidness of corruption still puts people off. The current government's focus on uncovering, punishing and eradicating corruption has come a long way, but still has a long way to go in order to alleviate foreign investors' misgivings.

Within the energy sector, corruption has greatly diminished and with the entry into the market of multinational “energy” companies, greater use of technology, increased HSE (Health Safety & Environmental) initiatives, core business values - includes Corporate Social Responsibility (CSR) - and an adherence to the U.K./U.S. Foreign Corrupt Practices Act, the future looks much better for the long term.

Contributor: Ross Scholes

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