The “shine” is wearing off of Indonesia as an investment destination for international energy companies, despite the global energy rush and the country’s massive reserves of oil and natural gas, according to a survey released by PricewaterhouseCoopers on Thursday.
According to PWC, executives from oil and gas companies cited rising concerns about uncertainty over cost-recovery legislation, corruption, interference by government agencies, the sanctity of contracts and the general regulatory structure of the upstream and downstream oil and gas industry. The executives said they were increasingly skeptical about the chances for positive change in these five areas in the near term, according to PWC.
“Indonesia still regarded as attractive. However, the shine seems to be wearing off,” said William Deertz, lead technical adviser for energy, utilities and mining practices at PWC Indonesia. “There is a shift of sentiment, survey participants seems less optimistic in near term improvement, which is not good for investment.”
PWC surveyed 317 executives from 76 foreign and domestic oil and gas companies. The findings come at a time when the government is struggling to find ways to reverse the gradual decline in national oil production.
Once a member of the Organization of Petroleum Exporting Countries, Indonesia is now a net importer of crude, and is struggling to reverse steadily declining output, targeted this year at 965,000 barrels a day.
The government provided some measure of relief and certainty to investors this week when it announced it would not proceed with a plan to limit the amount of expenses oil and gas companies could claim under the cost-recovery process.
The unsettled regulation and the issue of limits has been a major concern for investors.
“Cost-recovery that changed midway is unacceptable,” Deertz said.
Ron Aston, president of the Indonesian Petroleum Association, which represents almost all oil and gas producers in the country, said Indonesia was still attractive as long as the investment climate remained positive. Indonesia still has basins that contain large reserves, he said.
“The fundamental thing for the oil and gas industry across the world is geological prospectivity, so it’s certainly attractive,” Aston said.
However, the government needed to take steps to make the sector more attractive to international investors, he said.
Over the next few years energy companies are set to invest around $1 billion to explore the blocks around the Makassar Strait, even though it was uncertain whether oil was in the area, Aston said, adding that this highlighted the high level of risk involved.
“It’s a staggering fact that they invest billions of dollars just to see if something is there.”
The government should complete the cost-recovery regulation very soon, because it will enhance production activities in oil and gas, he said.
“There is a misconception. Cost recovery is not a reimbursement, it’s government investment so that production can increase,” Aston added.
Edy Hermantoro, director of upstream oil and gas at the Energy Ministry, said Indonesia still has enormous oil and gas potential. According to ministry data, in January 2009 the country had potential oil reserves of 3,695.39 million barrels of oil and proven reserves of 4.303.1 million barrels of oil.
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