Publications

Indonesia remains a key producing country in Asia-Pacific, and indeed the around the world. Oil and gas output from Indonesia reached more than 2 million barrels of oil equivalent in 2014, making it the largest producer in Asia-Pacific after China, higher than Malaysia, Australia and India. In terms of remaining resources, Indonesia holds around 27 billion barrels of oil equivalent that have been discovered but have still to be extracted. This makes it the 20th largest oil and gas resource holder in the world, based on discovered resources to date. Just under 60% of Indonesia discovered resources have already been produced, placing Indonesia alongside key oil and gas countries such as Norway, Libya and Algeria in terms of remaining potential. However, based on our forecasts, Indonesia will fall from second largest producer in Asia-Pacific, to 4th largest by 2020 as new LNG capacity is brought online, firstly in Australia and then in Malaysia. Furthermore, much of Indonesia remaining resources are currently considered uneconomic with no development plans in place. As a result, Indonesia's supply profile is expected to decline, with production forecast to fall below 2 million boe/d by 2017. To reverse this decline, Indonesia must encourage new activity in its upstream sector but faces several challenges in attracting new oil and gas investment. Many of these challenges have been exacerbated by the pressure placed on corporate budgets in light of falling oil prices. The largest issue impacting Indonesia's oil and gas investment environment in recent years has been regulatory and political uncertainty. Over a third of Indonesia oil and gas production in 2020 is forecast to come from projects which have not yet been sanctioned. Project economics are key to making a final investment decision, but delays and uncertainty in securing the necessary permits and regulatory approvals can also impact whether a project can proceed. With the regulatory environment impacted by corruption investigations and political indecision, FID on several major projects have been delayed, including, Chevron's IDD, BP's expansion of Tangguh, and INPEX's Abadi FLNG project. As a result the supply outlook for Indonesia looks increasingly uncertain. Further uncertainty has been caused by a lack of clarity over expiring PSCs. Around 30% of Indonesia's current production comes from contracts which are due to expire in the next 5 years, of which Offshore Mahakam is a key PSC. With a lack of visibility on the future of these expiring PSCs, companies will be unwilling to sanction new development, placing billions of dollars of new investment and future output at risk. Exploration underperformance has also been a key factor impacting the attractiveness of Indonesia's upstream sector. Our data suggests around 2 billion boe of new volumes have been discovered in Indonesia in the last 5 years, less than half the volumes discovered in Malaysia, despite around twice as many wells having been drilled in Indonesia's waters. Average discovery sizes in Indonesia have also fallen below those in other South-Eastern Asia countries. In recent years several high profile drilling campaigns in Eastern Indonesia have failed, leading to acreage relinquishments. As a result, explorers have found it harder to justify spending on exploration in Indonesia, particularly in frontier areas where fiscal terms are challenging and barriers to commercialisation are high. If Indonesia is to improve the attractiveness of its upstream sector, it could look to other countries that have tried to stimulate investment in their respective countries. Indonesia's close neighbour Malaysia has taken a pragmatic approach to its fiscal terms, tailoring its upstream offerings to match the opportunity set it has wished to promote, while in Norway, stimulation of exploration, particularly in mature areas, has led to a re-invigoration of the country's core producing areas and generated new multi-billion barrel discoveries. More recently, Mexico has taken a consultative approach to the re-launch of its upstream sector, attracting high interest by seeking feedback from the industry on the types of opportunity and terms that would encourage it to invest. In Indonesia, a new government and president has signalled a willingness to improve the upstream environment, and an initial focus on reducing bureaucracy, eliminating corruption and providing swifter-decision making has been met with cautious optimism. Recent changes to fiscal terms applicable to future exploration licences also suggest recognition of the need to make Indonesia more attractive to investors. However, in a world of lower oil prices, and increased capital discipline, more drastic measures may be required, if Indonesia is to attract the investment required to maximise Indonesia's remaining oil and gas potential.