Thu, 13 Aug 2015

The country is on the verge of an Indonesia oil and gas crisis, according to industry players and observers.

The Indonesian Petroleum Association (IPA) revealed that Indonesia oil and gas production has been continuously declining, which, coupled with the ever-increasing oil demand, could lead to the country becoming a net importer of energy within five years.

Indonesia’s oil production reached its peak in the early 1990s and managed to keep some consistency throughout the decade. However, after 1999 oil production has been drastically falling up until today and is set to continue to decline.

Domestic demand for oil and other energies, meanwhile, is constantly increasing. According to data from the government, energy demand in 2010 3.3 million barrels of oil equivalent per day (boepd) and estimated to increase to 7.7 million boepd in 2025, of which oil and gas will constitute 46 per cent.

If the current situation regarding oil and gas in the country is not addressed with any urgency, the Indonesian Petroleum Association (IPA) predicts that Indonesia will become a net energy importer by 2019, as it will not have enough oil, gas and coal to supply the rising energy needs.

IPA executive director Mr Dipnala Tamzil believes that resorting to imports will be detrimental, not only to the industry but also to Indonesia’s overall economy as the oil and gas sector has for a number of years been the second biggest contributor of revenue to the state after taxes.

“Importing will be the easy solution. But imports will have negative impact on our state budget and fiscal. Imports have unfavourable impact: energy dependence on other countries, weakening energy security, disruption of forex rate stability, eroding forex reserves, trade balance deficit and potential high fuel subsidies without oil and gas revenue to finance. This will certainly disrupt the economic growth of the country,” Mr Tamzil told foreign journalists in Jakarta.

Gas the Way to Go

Oil is a serious concern for Indonesia, as the reserves replacement ratio for oil is dangerously low. The IPA notes that most of the remaining oil reserves located in east Indonesia, where it is known to be more costly to conduct explorations.

“When you talk about exploration in east Indonesia, to be able to afford this you need to be a company with deep pockets. An exploration well in east Indonesia can cost between US$ 100 to US$ 200 million per well. Not many companies can afford that, because once you build an exploration well and you don’t find anything, you have a hole of 100-200 dollars in your pocket,” Mr Tamzil said.

He also added that 75 per cent of the remaining resources are located offshore, which implies higher risk, higher technology and ultimately higher costs.

Given the massive challenges in the way of oil exploration, gas inevitably will be the future for Indonesia. According to the IPA, although also showing a declining trend, gas production is more promising than oil as it accounts for up to 85 per cent of the remaining energy to be found in Indonesia, as well as having a better reserves replacement ratio than oil.

The slow shift to gas has been evident, as figures show that Indonesia is now supplying more of its gas for domestic consumption rather than for export as it used to in the past. In fact, Indonesia has tripled its domestic gas supply since 2005. However, further increasing domestic supply of gas will require supporting infrastructure, something the government have been slow to realise.

Better Regulations Needed

The new government has come up with some new initiatives in its efforts to support the oil and gas sector such as by establishing the One Stop Service for licensing at the BKPM (Indonesia Investment Coordinating Body) and setting up a national exploration committee to accelerate exploration activities in Indonesia.

While the industry acknowledges the success of the new initiatives, it would prefer the government focusing its efforts in trying to fix troubles within government bodies and improving existing policies.

A recent survey on Indonesia’s oil and gas industry by services organisation PwC Indonesia reveals that most industry players see government uncertainty and inconsistencies as the main challenge for the industry.

A lack of coordination between government bodies in terms of policies, vision, as well as problem solving is the main complaint by those in the industry.

Another major issue for oil and gas companies is the confusion over the Oil and Gas Law No. 22/2001. Among the things mandated by the law is the implementation of a production sharing contract (PSC) for the oil and gas sector.

Under the system, oil and gas companies are contractors hired by the government to manage oil and gas blocks. Companies bear all the investment burden for the oil and gas blocks and receive reimbursement from the government for the expenses only if the oil and gas blocks produce.


Companies say the law should provide better legal framework for petroleum sharing contracts in order to minimise the risk of future challenges for oil and gas exploration. They also call for the government to provide a provision contract sanctity for all existing production sharing contracts for the Indonesia oil and gas industry.

Such improvements to the regulation is the key to attracting more investment, which is essential in order to carry out more explorations and produce more energy.