Publications

PwC Indonesia has released its sixth biennial survey of the Indonesian oil and gas sector, “Crude Awakenings – Investor survey of the Indonesian oil and gas industry”. The survey responses come from companies representing approximately 80% of Indonesia’s current petroleum production. The objective of the survey is to highlight contributions of the oil and gas industry to the Indonesian economy and the issues preventing full realization of benefits for all stakeholders. Overall, survey participants indicated that Indonesia is still regarded as attractive, however the “shine” seems to be wearing off. We already reported this downward trend in our 2008 and 2010 surveys. However, we have noted a general shift in survey participants’ sentiment, as their perception of the industry seems to be less optimistic, which is not good for investment. There are a number of fiscal, legal and bureaucratic challenges which have hindered the achievement of Indonesia’s full investment potential in the upstream oil and gas industry. With geological resources having been extensively exploited for more than four decades it is understandable that the current prospects are not as compelling as they were in the past (due to declining find sizes or the need to move into more difficult environments such as offshore deepwater or more remote areas). It is therefore of the utmost importance for the Government of Indonesia (“GoI”) to seriously address these challenges (which are not geological in nature) to attract higher investment in the upstream oil and gas industry. From this survey, the five most critical challenges facing the industry are as follows: 1. Interference from other government agencies, such as the tax authorities 2. Contract sanctity 3. Confusion as the roles of the central, provincial and regional governments 4. New regulations 5. Uncertainty over cost recovery and SKK Migas/BP Migas / BPKP audit findings We noted that survey participants were slightly more optimistic on the anticipated developments on a number of challenges over the longer term as they expect some improvements within the coming five years. However, despite this ray of hope, the survey participants also indicated that they don’t expect any significant improvement for the most critical challenges (issuance of new regulations, interference from other government agencies, such as the tax authorities, uncertainty over cost recovery and SKK Migas/BP Migas / BPKP audit findings and contract sanctity). The main reason behind this somewhat gloomy view may be that many of the challenges confronting Indonesia, such as Korupsi, Kolusi, Nepotisme (“KKN”) and judicial reform, require structural changes and it will take a long time to implement such changes. The participants’ general view seems to be that capital spending will decline or at best stay the same over the coming five years. This is a significant change in sentiment compared to the 2008 survey results where over 90% of the survey participants thought capital expenditures would increase or even significantly increase. This pessimistic view is a worrying development, as the GoI is keen to see an increase in investment in the Indonesian oil and gas industry. In line with the continued increase in global demand for oil, the demand for employees working in the oil and gas industry in Indonesia is likely to increase over the coming years, although compared to previous survey results, there has been a shift towards “remaining the same”, especially for expatriate workers. A large percentage of survey participants indicated that they expect to increase their hiring of local staff, together with a decrease in expatriate employees. Similar to the 2012 survey results, a large portion of the survey participants expect difficulties in attracting sufficient (skilled) human resources. One of the reasons behind this is the fact that a significant proportion of skilled local employees seek employment abroad (mostly in the Middle East) in search of higher compensation. As in the 2012 survey, industry participants indicated that geological prospectivity remains one of Indonesia’s most attractive features, followed by political stability. It is interesting to note that political stability is now regarded as Indonesia’s most attractive feature and may be the result of increased government focus on stability throughout the archipelago. This is a positive sign and should enhance levels of foreign investment, however this needs to be tempered with the survey participants’ negative views on GoI coordination. Access to a trained workforce has remained in the top five most competitive features. The oil and gas industry has a long history in Indonesia which has resulted in a large, well educated workforce, especially for the technical professions such as engineers and geologists. Overall, one can conclude from our survey that in order to remain competitive, it is critical that the overall investment climate in Indonesia continues to improve.