The 12 new oil and natural gas mining contracts awarded by the Indonesian government on Tuesday should be confidence-building deals for the country’s hydrocarbon industry at a time when the global credit crunch and sharp economic downturn have forced many oil firms to defer investment.
The new oil investment commitment is also further evidence that the investment atmosphere in the country has significantly improved, thanks to the concerted efforts of the Upstream Oil and Gas Regulatory Agency (BP Migas) to expedite the approval of budgets and working plans of oil contractors, and to provide more clear-cut directives for cost recovery.
Despite stepped up efforts to diversify sources of Indonesia’s commercial energy away from fossil fuels (into geothermal, biodiesel and coal-bed methane), oil and gas still account for more than 60 percent of energy consumption in this country.
The problem, though, is that most of Indonesia’s oil and natural gas fields are already quite mature and have reached their peak production capacity. Without any new proven reserves, Indonesia will see the last drop of its oil extracted within eleven years, as oil output has steadily decreased from 1.5 million barrels a day (mbd) in 1999, to 960,000 barrels per day at present.
BP Migas acknowledges that in most mature oil fields, on stream production usually decreases by about 8 percent a year, while consumption continues to grow steadily along with economic expansion.
But proven oil reserves can increase only through exploration, and no oil firms will invest in such high-risk business without the right investment conditions – highly unlikely at present since oil prices collapsed from their peak at US$145/barrel last July to as low as $50 today amid deep recessions in developed economies.
However, in view of the global economic downturn and steep fall in oil prices that have forced many giant oil companies to postpone investment plans, and given the tough competition to attract oil investment, Indonesia’s moves to improve conditions for oil investment should be taken one step at a time.
True, as BP Migas claims, the average success rate of oil prospecting in Indonesia still ranges between 20 and 40 percent (far higher than in most other areas in Africa, the North Sea and China). But in times of depleting reserves and increased risks for oil mining contractors as most potential hydrocarbon resources are located offshore, Indonesia must offer increasingly attractive conditions.
Legal and regulatory uncertainty and an inefficient bureaucracy are especially inimical to investors in the upstream segment of the hydrocarbon industry – exploration and mining – as this business involves a high degree of risks, requires large amounts of capital and needs high tech equipment.
It is encouraging to learn that President Susilo Bambang Yudhoyono is fully aware of the necessary ingredients to attract investment in the petroleum sector.
Opening the 33rd Indonesian Petroleum Association convention and exhibition in Jakarta on Tuesday, Yudhoyono pledged to resolve, once and for all, tax issues related to investments in oil and natural gas and continue improving the regulatory and legal environment for oil companies.
With a better investment atmosphere and rich hydrocarbon resources, the government’s target of harnessing $16.6 billion investment deals in oil and gas exploration and production development this year, up from $13 billion last year, would not be too ambitious.
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