Oil and gas investors need policy consistency: IPA chairman

The 29th Annual Indonesian Petroleum Association (IPA) Convention and Exhibition opened on Tuesday and ended on Thursday this week. IPA's president Brian WG Marcotte talked to the press on various issues related to the oil and gas industry at the end of the forum. The following are excerpts of the conversation on Indonesia's competitiveness, compiled by The Jakarta Post's reporter Fitri Wulandari.

You mention that oil and gas investors need confidence to invest in Indonesia. Can you elaborate on that as well as the current state of investment in Indonesia?

I think in general, the thing that makes people confident in investing in Indonesia and any other place is the consistency of the environment. We know that to develop a certain amount of a resource, we have to make a large investment. There are certain risks with any investment. When we make a decision, everything should stay consistent throughout the term of the contract. If it stays consistent, then we are relatively satisfied and our level of confidence will be high.

The atmosphere is okay. It is not hugely attractive at the moment for new investors. I am not saying it is not attractive for existing investors because existing investors have their infrastructure set up, have their personnel here. For existing investors, it is easier to justify this atmosphere than it is for new investors.

But the issue is now that the areas offered are in remote regions. They are not adjacent to or near existing operations. More and more remoteness is a very different situation.

First of all, you have little infrastructure to work with. So there is a risk with development and a risk with marketability of the product that we produce. As we go to remote areas, there should be a balance on the likelihood between the oil and the gas. And that's probably in the remote areas, where the greatest uncertainty lies.

Adding to that, as we move to remote areas, deepwater areas, the technology required is much more sophisticated. And, of course, more expensive.

Q:What sort of compensation/incentives are needed by investors to encourage them to work in remote areas?

A good production split between the government and the production sharing contractors (PSCs). That is one way.

There are also other ways. Perhaps getting a relief for some period of time on first pump petroleum, which is the early production.

Adding to that, the new production sharing contract says that domestic gas obligations can be between 0 and 25 percent. When will the percentage be set? Will it be set when the block is offered? If the government says at this moment in time that the percentage for domestic gas will be zero percent, then we make a bidding decision based on that percentage. If the government said 25 percent, we would have to incorporate that into our economic decision. Knowing at the earliest possible phase is really the key. Those are the areas where the incentives can be given.

Many oil fields in Indonesia are drying up, aging. Can new exploration compensate for this?

Yes. There is a possibility of compensating for the decline. About 84 percent, roughly, of the current production comes from PSCs set up before 1971. It means the fields have been in production for about 25 to 30 years.

This is a natural decline. So the whole theme, how do we make our resources more sustainable and how do we add to the new production? It rests with the success of exploration.

Government data shows that Indonesia has reserves of 10 billion barrels of oil and 150 trillion cubic feet of gas.

But reserves are just material in the ground. It has no economic value until there is a project to access it, produce and so on to turn it into a marketable product.

Is the current oil split attractive?

The oil split in the most recent round of bidding certainly has been improved. That should be an added incentive for new investors to come.

Oil companies will take a geologic survey of an area into account. We could put together hypothetical scenarios of what we might expect in terms of investment, in terms of oil and gas. Then, we will determine whether there will be adequate terms of return on our investment.

So, it would be an incomplete answer to say yes and it would be an incomplete answer to say no because it is a combination of all of the issues.

We have seen some big companies pulling out of Indonesia. Furthermore, we don't see large firms from Western countries bidding for new concessions in the country. However, new players from Asia, such as Petronas and Petrochina, are coming in. Do you think there is a decline in attractiveness here?

It really is a relative investment decision. Some companies have different investment criteria. Usually it has to do with the general competitive environment of Indonesia versus competing countries. We tend to look very seriously at one particular measurement: What is the government take of the profit? If the government take is high, from an investor's standpoint, you will look at that more poorly than if the government take were low.

You can see a range of government take if you look at all the countries in the world. It ranges from a low 30 percent government take to as high as a 90 percent government take. Over that range, some companies are willing to invest, some companies won't.

The change of resource ownership in Indonesia over time represents relativity in the industry. If I think it is not good in Indonesia, I will ask somebody else to buy me out of that and I will take the money and invest somewhere else, that's just balancing the portfolio.

Many large companies balance their portfolio in terms of reserves, production and economic risks.

It is different from company to company. We say if the existing companies are happy, new investors will come. There is recognition that the government needs to be competitive. I honestly believe there is an issue being discussed right now to improve competitiveness.