Energy Crisis Threatens Indonesia
TEMPO.CO, Jakarta -
Energy crisis is bound to threaten Indonesia in the next few years following
the significant gap between high energy demand and domestic oil supplies.
Indonesian
Petroleum Association (IPA) executive director Dipnala Tamzil said energy
demand in 2010 was 3.3 millionb barrels of oil equivalent per day (BOEPD). The
demanded energy comprised fuel, gas and coal. In 2025, energy demand will
increase to 7.7 million BOEPD. From that amount, the proportion of fuel and gas
is around 47 percent.
"If
Indonesia does nothing to the increasing energy demand while supply keeps
decreasing, Indonesia will become a net importer," said Dipnala on
Tuesday.
Energy
crisis in Indonesia has begun to show its symptoms. In 2015, Indonesia will
experience shortage of oil supply and gas by 2.4-2.5 million BOEPD. "If
there's no new reserve found, oil and gas in Indonesia will run out in 11 years
and Indonesia will become a net importer," said Dipnala.
The estimates
are based on the reserve requirement ratio of oil and gas. According to
Dipnala, the ideal ratio is 100 percent, meaning 100 percent production output
and 100 percent new reserve input. "However, with production of 47
percent, it has gnawed on reserve and supplies will eventually run out,"
said Dipnala.
Discovering
new oil reserves also takes a relatively long time, which is 10 years starting
from exploration to production. This energy crisis in Indonesia will be the
main theme of the 39th IPA Convention and Exhibition at JCC on May 20-22.
IPA
president Craig Stewart said it was pivotal for all stakeholders to work
together to find a solution to future energy deficit.
According to
Craig, various challenges faced by industry players included red tape, legal
uncertainty, difficult access to land utilization and lack of incentives for
massive projects with high costs.
"These
have caused a significant decrease in exploration activities," said Craig.
Energy
crisis: Needs urgent action now
Unless the
government incentivizes exploration, Indonesia will suffer from a lack of new
reserves.
Nearly half
of the 7.7 million barrels oil equivalent per day (boepd) of primary energy
that Indonesia needs in 2025 will have to come from petroleum products. To be
precise, the National Energy Policy allocates 25 percent to oil and 22 percent
to gas. Present day oil and gas production levels, which are around 2.2 million
boepd, and declining, should alert the government that urgent action is needed
to secure Indonesia’s future energy supply if the country is to avoid getting
deeper into the energy crisis being driven by the ever-widening gap between
demand and supply.
The oil and
gas sector has been the major contributor to state revenue since the early
1970s. Attention is given to the output side, i.e. production. Efforts have
been mainly concentrated on increasing oil production, at the expense of
exploration. Indonesia has out-produced its ability to add new reserves. In
2013, Indonesia’s reserve replacement ratio for oil was a dismal 47 percent,
while gas has started to dip to 90 percent — we cannot fully replace the oil
and gas consumed. On the production side, the reality is not encouraging
either. Output of oil continues to decline to the current level of 788,000
barrels of oil per day (bopd) as of July 2014, half of the peak production of
1.65 million bopd in 1977.
We cannot
stress more the strategic value that the upstream oil and gas sector holds for
the future growth of Indonesia, as it has to provide 47 percent of total
primary energy needs in 2025, or 3.7 million boepd.
Current
estimates put a 2.5 million boepd gap between demand and supply in 2025, which
would severely stress energy resilience as shown on the chart overleap.
The upstream petroleum industry needs urgent measures from the government to perform its strategic duty, i.e. securing future energy needs while reducing dependency on imports and ensuring more efficient domestic energy consumption.
The upstream petroleum industry needs urgent measures from the government to perform its strategic duty, i.e. securing future energy needs while reducing dependency on imports and ensuring more efficient domestic energy consumption.
The
Indonesian Petroleum Association (IPA) believes the following actions would
energize the performance of the upstream oil and gas industry.
Indonesia
needs to look at and learn from other countries’ experiences in boosting the
performance of their upstream oil and gas sectors by successfully attracting
significant capital and technology investments in exploration and production
activities.
The United Kingdom is a mature oil province with declining production after reaching two production peaks. Three key factors have always been critical to the success of the North Sea: oil prices, an attractive fiscal regime and technology. The second oil peak was achieved when oil prices were lowest, due to the country’s fiscal regime, which is arguably the most attractive in the world. In fact, its attractiveness has been maintained until now through thriving enhanced oil recovery (EOR) investment to optimize the recovery.
Norway successfully ramped up its production and new reserve booking after declining in 2010. A key contributor was positive change in its fiscal regime — not only a clear and stable regulatory platform, including fiscal arrangements, but also further de-risking exploration by refunding up to 78 percent of exploration expenditure, encouraging further investment.
The United Kingdom is a mature oil province with declining production after reaching two production peaks. Three key factors have always been critical to the success of the North Sea: oil prices, an attractive fiscal regime and technology. The second oil peak was achieved when oil prices were lowest, due to the country’s fiscal regime, which is arguably the most attractive in the world. In fact, its attractiveness has been maintained until now through thriving enhanced oil recovery (EOR) investment to optimize the recovery.
Norway successfully ramped up its production and new reserve booking after declining in 2010. A key contributor was positive change in its fiscal regime — not only a clear and stable regulatory platform, including fiscal arrangements, but also further de-risking exploration by refunding up to 78 percent of exploration expenditure, encouraging further investment.
In Malaysia,
the combination of tax and fiscal incentives as well as government
participation in initial exploration risk has led to significant new reserve
discovery, the largest in Southeast Asia (in 2012, Malaysia discovered 1.4
billion barrels of oil equivalent (BOE) or 72 percent of total discovery in
Southeast Asia, while Indonesia only discovered 0.2 billion BOE, or 14
percent).
The
aforementioned examples clearly show that stable, clear and certain
regulations, combined with attractive fiscal arrangements, boost investments
and technology uptake to deliver top industry performance.
Removing barriers.
Kuntoro
Mangkusubroto, the chief of the Presidential Working Unit for the Supervision
and Management of Development (UKP4), lists 69 different types of permits
needed in the upstream oil and gas sector involving 284 processes in 17
government agencies.
The IPA supports the UKP4 proposal on the establishment of service-level agreements (SLA) between the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) and other related agencies to facilitate quality and efficiency, and at the same time improve governance and transparency of the permitting processes.
The IPA supports the UKP4 proposal on the establishment of service-level agreements (SLA) between the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) and other related agencies to facilitate quality and efficiency, and at the same time improve governance and transparency of the permitting processes.
The IPA
believes that policy and regulation, including permits and licenses, should
never be an impediment to investment and business. Therefore, the IPA expects
that the government will deregulate and streamline business processes for a
more efficient upstream petroleum industry.
Presidential
Instruction No. 2/2012 must be used as starting point, in which the roles and
accountability of each ministry and government agency are set in order to
achieve the common objective of national oil production increase. This is an
example of good affirmative policy.
The IPA
supports the implementation of this presidential instruction in its entirety,
as momentum to review all related administrative procedures with the full
intention of making them simpler, more open and transparent, as well as to add
value. The directive also instructs the Energy and Mineral Resources Ministry
to conduct an inventory and assessment of the laws and regulations that hinder efforts
to increase national oil production and propose changes to the regulations.
This is urgent homework for the new government and its Cabinet.
Clarity, consistency and certainty
In a
regulatory landscape, investors expect nothing less than clarity, consistency
and certainty of laws and regulations — even more so in the oil and gas sector,
a long-term industry with high risks, massive capital, technology and people
investments.
First and foremost is the revision of Law No. 22/2001 on oil and natural gas, in compliance with the Constitutional Court’s decision. It is fundamental to establishing a certain legal framework for the governance of the upstream oil and gas sector. The IPA expects the government to show a sense of urgency in finalizing the revision, which, apart from providing certainty on the governance structure, would also provide for the sanctity of all previously signed production sharing contracts (PSCs).
Further challenges to the industry include a multitude of regulations that are detrimental to investment. The property tax (PBB) on exploration contracts is one example. For the 2012-2013 fiscal year, the bill for exploration PSCs signed post-2011 was Rp 3.2 trillion (US$277 million) in terms of whole area, surface and subsurface.
This huge PBB assessment against the new PSCs has effectively discouraged exploration in Indonesia, which is contrary to the government’s vision of ultimately increasing exploration activities and production. As intended in Presidential Instruction No. 2/2012, it is necessary for the government to introduce tax incentives to boost exploration investment.
First and foremost is the revision of Law No. 22/2001 on oil and natural gas, in compliance with the Constitutional Court’s decision. It is fundamental to establishing a certain legal framework for the governance of the upstream oil and gas sector. The IPA expects the government to show a sense of urgency in finalizing the revision, which, apart from providing certainty on the governance structure, would also provide for the sanctity of all previously signed production sharing contracts (PSCs).
Further challenges to the industry include a multitude of regulations that are detrimental to investment. The property tax (PBB) on exploration contracts is one example. For the 2012-2013 fiscal year, the bill for exploration PSCs signed post-2011 was Rp 3.2 trillion (US$277 million) in terms of whole area, surface and subsurface.
This huge PBB assessment against the new PSCs has effectively discouraged exploration in Indonesia, which is contrary to the government’s vision of ultimately increasing exploration activities and production. As intended in Presidential Instruction No. 2/2012, it is necessary for the government to introduce tax incentives to boost exploration investment.
Government
Regulation No. 79/2010 on cost recovery and income tax treatment for upstream
oil and gas, to some extent, is in conflict with other regulations and is prone
to multi-interpretation. It opens the opportunity for imposing additional costs
and taxes, which in the end will discourage investment.
The recent
Presidential Regulation No. 39/2014 on the negative investment list will also
affect upstream oil and gas operations in a similar way to the unintended
effect of the cabotage regulation. Restricting participation of foreign
investment in the many technical support services needed in drilling,
operating, producing and maintaining oil and gas wells will impede efforts to
increase reserves and production.
The above examples are not consistent with Presidential Instruction No. 2/2012, which mandates collaboration between all relevant government agencies to increase oil and gas production.
The above examples are not consistent with Presidential Instruction No. 2/2012, which mandates collaboration between all relevant government agencies to increase oil and gas production.
The
inclusion of cost recovery in the state budget, and State Budget Law, has
caused many misconceptions. In this case it is a “state loss”. Cost recovery is
an investment of contractors in carrying out petroleum operations under PSCs
and work programs and budgets. It should not be regarded or otherwise treated
as part of the state budget. Should there be any unsettled disputes pertaining
to the execution of PSCs, such disputes should be handled and settled as per
the provisions of the contract, i.e. under civil law, as opposed to criminal
law such as in the recent Chevron bioremediation case.
The uncertainty on PSC extension may impact directly on the continuation of investment and national production. At least 20 PSCs, accounting for 20 percent of national oil production, will expire within the next five years. In the next 10 years, the figure will increase to 60 percent of national production. These are significant numbers that mandate swift action from the government, i.e. to issue a regulation providing transparency and clarity for the PSC extension process.
The uncertainty on PSC extension may impact directly on the continuation of investment and national production. At least 20 PSCs, accounting for 20 percent of national oil production, will expire within the next five years. In the next 10 years, the figure will increase to 60 percent of national production. These are significant numbers that mandate swift action from the government, i.e. to issue a regulation providing transparency and clarity for the PSC extension process.
Boost discoveries of new reserves
Indonesia’s
reserve replacement ratio sits at a low 47 percent for oil and 90 percent for
gas. We consume faster than we can replace the resources. However, Indonesia
does not only suffer from low activity, but also from inefficient exploration
results.
In the period of 2004-2013, Indonesia discovered 3 billion BOE of new reserves, compared to two to three billion BOE in Malaysia, Vietnam with 7 billion BOE, and 6 billion BOE for Brunei. Without significant new additions, Indonesia is practically just depleting its existing reserves — the result of exploration investment in the last 30 to 50 years.
In the period of 2004-2013, Indonesia discovered 3 billion BOE of new reserves, compared to two to three billion BOE in Malaysia, Vietnam with 7 billion BOE, and 6 billion BOE for Brunei. Without significant new additions, Indonesia is practically just depleting its existing reserves — the result of exploration investment in the last 30 to 50 years.
Exploration
is the highest risk phase in the quest for sourcing hydrocarbon, with intensive
capital and technology investment. Throughout 2009-2012, investors burned $1.9
billion of losses due to sub-commercial discovery in the eastern part of
Indonesia. Unless the government incentivizes exploration, Indonesia will
suffer from a lack of new reserve reserves, hence jeopardizing future supply
capability.
Era of easy oil and gas is over
According to
a WoodMac study, 75 percent of the potential resources are located offshore
(shallow and deep water) in the eastern Indonesian region, the likes of which
will need technical expertise and huge funding. Furthermore, around 85 percent
of the existing reserves of hydrocarbons are of gas while only 15 percent are
of oil, which means the country needs the necessary infrastructure to develop
them. In addition, the hydrocarbon sources identified in several blocks contain
significant amounts of CO2, requiring expensive treating infrastructure.
Looking into
success stories in other parts of the world, the IPA estimates that exploration
activities must increase threefold from current levels, at the minimum, to meet
half of the 2025 oil and gas supply and demand gap.
The
realization of exploration activities until the first half of 2014 was also not
encouraging — with only 40 exploration wells able to be drilled of the planned
130 wells — and it will be very difficult to achieve the 2014 target of 206
exploration wells in the remaining six months. Meanwhile, as the exploration
expenditure realization until June 2014 is only about $1 billion, more efforts
are needed to pursue the 2014 exploration budget of $3.8 billion.
The SKKMigas
deputy chairman for planning control said the cause of the lack of new
exploration drilling is that many officials do not dare to make decisions and
fear being criminalized. The second is that many permit requirements must be
met to execute drilling activities in Indonesia, as a result of increased
requirements due to local autonomy in the last two to three years. This leads
to a less attractive investment environment for investors.
The IPA
suggests that the government increase incentives for investing in exploration
activities. Considering the risk, the equity split of PSCs in frontier areas
can be revisited with higher takes for investors. Tax and other fiscal
incentives are also needed. Investment in initial data acquisition, national
data repository, support services and infrastructure will further enable robust
exploration activities.
Existing
production comes from many mature fields already past their heyday of primary
and secondary recovery stages. The estimated average recovery factor is less
than 40 percent, but there is still the potential of left-behind hydrocarbon.
Enter the tertiary recovery stage, to maximize the recovery of hydrocarbon.
Tertiary
recovery, or EOR as it known, utilizes chemicals or other substances to ease
remaining hydrocarbon into production. No single recipe fits all. EOR is a
massive undertaking of technical and capital deployment. This is where
certainty and clarity in PSC extensions come to play. EOR comes toward the end
of PSCs. Without guarantee of extension, investment will not be made.
To fully
realize production increase from EOR, the government must seriously look into
providing transparent processes for PSC extensions. At the same time, the
government should allow innovative partnerships between PSCs and other
reputable parties, such as technical service providers, to address the
technical and financial challenge of implementing an EOR project.
Go gas!
Indonesia
should reduce its dependency on oil. With 85 percent of the remaining resources
to be explored and developed being in gas, it makes business sense to focus on
increasing domestic gas utilization. In fact, domestic demand for gas has been
increasing significantly, mostly coming from power generation and industry, not
discounting the potential of household and automotive markets.
Pricing and
gas infrastructure such as pipelines are two key factors in increasing gas
uptake, including liquefied natural gas (LNG), in domestic markets. Pricing
policies must take into account upstream project economics. The process for
pricing approval by the government, if required, must be done in a transparent
and timely manner. The government must also ensure the availability of reliable
(open-access) and efficient infrastructure.
Given
Indonesia’s geographical conditions, the development of integrated
infrastructure with open-access pipelines and inter-island infrastructure is
key. This needs to be backed up by an enabling regulatory environment, which
touches upon gas/LNG domestic allocations, permits and import licenses.
It is
imperative for the government to streamline the regulations and provide better
business assurance for infrastructure development. This would boost investor
interest, as the infrastructure business is a high-risk business that requires
substantial, long-term investment and is critical for the timely
commercialization of discovered reserves. The commercialization policy and
process must also be streamlined to align with infrastructure development or
availability.
There is an
increasing number of gas projects that require higher prices to support their
economics, including coal bed methane (CBM) and shale gas. Ideally, there would
be a gas-pricing policy that did not distort the economics of the upstream
projects, and gave clear signals to the end users of the possibility of higher
gas prices borne by consumers. This transition will have to be managed properly
— and the government’s role will be crucial.
In addition, the government needs to make breakthroughs for accelerating the approval of oil and gas projects currently still in planning, such as Indonesia Deepwater Development (IDD), Abadi Masela, Tangguh Train III and East Natuna. These oil and gas megaprojects are needed immediately to minimize the future oil and gas demand and supply gap.
In addition, the government needs to make breakthroughs for accelerating the approval of oil and gas projects currently still in planning, such as Indonesia Deepwater Development (IDD), Abadi Masela, Tangguh Train III and East Natuna. These oil and gas megaprojects are needed immediately to minimize the future oil and gas demand and supply gap.
The
government needs to make an inventory of marginal oil and gas reserves (small
or uneconomic to develop reserves) due to the lack of gas infrastructure as
well as market unavailability. SKKMigas data shows there are more than 80
marginal field oil and gas reserves totaling more than 2 trillion cubic feet
(TCF) that are still undeveloped and are scattered from western Indonesia to
eastern Indonesia.
Providing
incentives for marginal field development and building more infrastructure
surrounding oil and gas reserve areas are the main prerequisites for marginal
reserves’ monetization and contributing energy supplies to surrounding areas.
Expectations for the new government
Energy
investors, both foreign and domestic, expect solid business foundations to be
built from a stable and transparent implementation of rules for all. Clarity,
consistency and certainty are of utmost importance to provide a predictable
business climate.
Investors
look forward to a bold and innovative vision from the new government to build
Indonesia’s energy resiliency, one part of which is by renewing the commitment
to enhancing the upstream oil and gas sector in line with its long-term
strategic value for the growth of the nation.
Increasing
production, simplifying bureaucracy, enhancing exploration, as well as legal
and regulatory reform are four focus areas to impact and elevate our upstream
oil and gas industry’s competitiveness on the global stage.
Urgency is
needed to immediately ensure the implementation of Presidential Instruction No.
2/2012 on a national oil production increase, to conclude the revision of the
Oil and Gas Law, to incentivize exploration, marginal fields and EOR, to issue
regulations on PSC extension processes, to amend the property tax regulation,
to accelerate approvals on major projects, to amend Government Regulation No.
79/2010 and to remove cost recovery from the State Budget Law. SLAs between
related ministries and government agencies are to be implemented.
The
government needs to have a new paradigm in the control of the downstream
sector. The downstream sector must be controlled by the government in order to
improve national energy security, especially in terms of improving the security
of the fuel supply and crude oil for domestic consumption.
The
government should maintain strategic reserves at a safe level to ensure the
availability of domestic supply, as well as improve the control and supervision
of oil and gas distribution in the downstream, especially maintaining the level
of subsidized fuel utilization.
The IPA is committed to being the contributing partner to the new government in advancing the upstream oil and gas industry, for the greater benefit of the people of Indonesia.
The IPA is committed to being the contributing partner to the new government in advancing the upstream oil and gas industry, for the greater benefit of the people of Indonesia.
