Publications

Indonesia’s upstream industry lies at a crossroad. If it continues on its current path it is likely the country’s hydrocarbon production will continue to decline, as will new investment by IOCs discouraged by tough fiscal terms, a lack of appropriate exploration incentives and uncertainty over PSC extensions. But there is an alternative path, where new incentives and legislation are introduced that will encourage IOCs to invest further in the country, provide clarity on contractual extensions and provide for a more productive relationship between international and domestic oil companies. But these are all complex issues and it is not easy for any government to steer a straight course through such politically-charged waters. Of fundamental importance is the role of the regulator in attracting and maximising foreign upstream investment. Countries such as Norway and Malaysia provide interesting and relevant case studies as to how a progressive approach to fiscal terms can achieve huge pay-offs in terms of increased activity, and in turn, newly discovered resources. Changes to Indonesian fiscal terms and structures over the last five years have in general not been welcome by IOCs, who feel growing restrictions on cost recovery have hampered their ability to spend more on upstream exploration and development. Moreover, Indonesia already sits in the top 10% of the toughest oil and gas fiscal regimes across the globe. Going forward, providing meaningful incentives for companies investing in frontier exploration, high-cost deepwater developments and EOR could assist in unlocking the 12 billion barrels of oil equivalent reserves that Wood Mackenzie estimates have been discovered in Indonesia but remain non-commercial under current fiscal conditions. Maximising the potential of Indonesia’s hydrocarbon resources may well require Indonesia to prioritise its long term objectives over short term fiscal gains. But, the economic benefits for the country of unlocking these stranded resources would in turn be enormous. There are also pertinent examples from other countries of beneficial relationships being forged between IOCs and NOC. In contrast, there are also many examples of resource nationalism, and the negative impact this can have on IOC investment. Finding the right balance between supporting domestic and state-run operators and attracting the world’s top oil companies to invest in the country is not easy, but it is a challenge that must be broached. The path the Indonesian government wishes to take will become clear as it explores the various outcomes it can achieve by clarifying legislation and procedure around PSC extensions. Improved visibility here would reduce uncertainty on new investment and subsequently have a dramatic impact of the country’s future hydrocarbon outlook and its ability to hit ambitious national targets. Exploration in Indonesia is another area that needs review, as it has greatly underperformed its regional peers over the last decade, despite far greater levels of overall activity. For example, during the period 2003-2012 Indonesia accounted for 42% of the total number of exploration wells drilled in South East Asia, yet only 20% of the discovered resources, whereas over the same period Malaysia accounted for 21% of the wells but 42% of the resources. However, creaming curves suggest there is still huge exploration prospectivity left across the country. This potential could be realised if the fiscal regime can be tweaked to facilitate smaller or remoter discoveries to be commercialised within competitive time-frames. Falling production, exploration underperformance and an uncertain fiscal regime have reduced Indonesia’s attractiveness for new investment at a time when it is needed most. It therefore must look to learn from other nations that have been successful in attracting and stimulating new investment and activity. If it does so, given its size and the vast scale of resources likely left to be discovered, a brighter future could easily be achieved.