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.

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