New hope in oil industry

New hope in oil industry

Amid the plunge in Indonesia's oil production to 966,500
barrels per day (bpd) this year from as many as 1.2 million bpd
in 2002 -- which degraded the country as a net oil importer --
there have, of late, been several promising developments in the
petroleum industry.

Last Tuesday, the Oil and Gas Implementing Body (BP Migas)
awarded 12 new oil and gas contracts to foreign and national
companies, with combined commitments to spending at least US$163
million for exploration within three years.

Late last month, President Susilo Bambang Yudhoyono
inaugurated a new oil and gas production field and floating
storage facility in the South Natuna Sea, with a potential output
of up to 100,000 bpd. The Belanak production facility will also
produce gas, condensate and liquefied natural gas.

Earlier, in the middle of last month, the government finally
issued two long-awaited regulations to implement the Oil and
Natural Gas Law of 2001, which allows foreign companies to enter
the downstream petroleum industry, which is currently monopolized
by state oil company Pertamina.

These developments will surely provide a positive signal to
energy investors, notably oil mining companies, that Indonesia
remains an area of great potential for oil and natural gas
prospecting, with a reasonably high success ratio.

Much more important than the new investments pledged by the 12
mining contractors is the fact that seven of the new oil blocks
were awarded to national firms. This signifies very significant
progress in the financial and technological capacity of national
companies to operate in the capital- and technology-intensive and
high-risk industry.

Continued investment in oil and gas exploration is the only
way to discover new reserves to sustain production, and typically
an oil project takes between five to eight years to get up and
running, meaning that today's output is the product of
investments made several years ago.

It is no wonder that the steep decline in new exploration over
the past six years of economic crisis and legal uncertainty --
caused by excesses in the start-up of the local autonomy process
and the transition to the new oil and gas law -- have markedly
cut into Indonesia's daily production capacity.

Even last year, contractors' spending for exploration still
fell by more than 50 percent. Consequently, no significant
volumes of new reserves were discovered and added to the national
production capacity, while oil and gas consumption has now risen,
returning to the pre-crisis level as a result of the economic
recovery.

The government, last year, changed the standard formula for
production sharing contracts -- 80:15 for oil and 70: 30 for gas
all in favor of the government -- to a ratio of 75: 25 for oil
and cut down its share of gas production to as low as 55 in
certain areas in a bid to attract more investors to explore new
blocks.

But, while the new production-sharing formula would improve
the attractiveness of oil and gas prospecting in the country,
this advantage seemed to lack the power to woo as many new
investors to the hydrocarbon industry as there had been in the
early 1990s.

Hence, the mid-October issuance of two Government Regulations
-- No.34 regarding the upstream oil industry and No.36 on the
downstream industry -- will hopefully improve regulatory and
legal certainty in the petroleum sector, as these regulations
provide more clear-cut rules of the game between BP Migas and
mining contractors (oil firms).

The 2001 law on oil and natural gas is supposed to have
fundamentally improved the attractiveness of the hydrocarbon
industry because the legislation will abolish the monopoly of
state oil and gas company Pertamina in the downstream industry
later next year. As investors will be allowed to get reasonable
margins from both crude oil mining and refining and final
products, they will be encouraged to make more investments in
exploration. This, in turn, will increase the volume of proven
oil and gas reserves.

However, issues related to bureaucratic and regulatory
procedures for BP Migas approval of contractors' spending plans
and weak fiscal and legal environments remain major obstacles to
new investment in prospecting Indonesia's potential hydrocarbon
resources.

Yet, most discouraging is what oil mining contractors see as
contradictory provisions on taxation for expenditure during the
stage of exploration. Oil contractors have been subject to value
added tax and import duty even during the stage of exploration,
which is quite unreasonable given the long lead time for
investments in the petroleum industry. But the new regulation
does not resolve this taxation problem once and for all.

The petroleum industry will remain unattractive to new
investors as long as the government cannot strike a harmonious
balance between geological prospects and fiscal terms,
bureaucracy and regulatory frameworks.

-------------