Turning around the decline in crude oil production

Turning around the decline in crude oil production

Hendarsyah Tarmizi, The Jakarta Post, Jakarta

The recent increase in global oil prices has resulted in
windfall profits for most oil producers in the world, but not
Indonesia.

Despite being a member of the powerful Organization of
Petroleum Exporting Countries (OPEC), Indonesia was unfortunately
unable to take advantage of the surge in oil prices.

Although Indonesia still exports part of its oil production,
the revenue from its oil exports is no longer enough to pay for
its oil imports, which have increased rapidly during the past few
years.

Indonesia, which was once a major oil exporter, has to import
more and more crude oil to meet the surge in its fuel demand. In
other words, the country's oil production is no longer sufficient
to meet its own needs.

Since March this year, crude oil imports have exceeded
exports, making Indonesia a net oil importer.

Indonesia's production has continued to decline in recent
years due to a lack of new investment in exploration and the
natural decline in production at existing oil fields.

Oil production, which reached between 1.4 million barrels per
day (bpd) and 1.6 million bpd during between 1974 and 1999, has
been dropping steadily over the past five years. In the first
quarter of this year, the country's oil production was only 0.98
million bpd or about 70 percent of the production level in 1999.

Kurtubi, the director of the Center for Petroleum and Energy
Economics Studies (CPEES), describes the rapid drop in the
country's oil production as unbelievable.

"The fall in the country's oil production by about 30 percent
in less than five years is something extraordinary in the world's
oil history. No country had experienced such a drastic fall in
oil production," he says.

Indonesia currently holds proven oil reserves of 4.7 billion
barrels, down 13 percent since 1994. The majority of Indonesia's
producing oil fields are located in the western and central
sections of the country.

Riau is the biggest oil producing province in the country. The
province's Duri and Minas fields operated by Caltex Pacific
Indonesia are among the largest oil fields ever found in the
country. Other significant oil fields are located offshore in
northwestern Java, East Kalimantan and the Natuna Sea.

Therefore, the focus of new exploration has been on frontier
regions, particularly in eastern Indonesia. Sizable but as yet
unproven reserves may lie in the numerous, geologically complex,
pre-tertiary basins located in eastern Indonesia. These regions
are much more remote and the terrain more difficult to explore
than areas of western and central Indonesia.

With the current level of global oil prices, investing in the
oil sector is more than economically viable, but legal
uncertainty and bureaucratic problems have discouraged investors
from engaging in exploration activities.

In his article in Kompas daily, Kurtubi points to the new oil
and gas law as the main hurdle in attracting new investment for
oil exploration activities. Instead of providing a more conducive
investment climate, the law, which was enacted in November 2001,
has posed a major problem.

Unlike before, under the new law investors are required to pay
taxes both in the form of value added tax (VAT) and import duties
on the procurement of equipment for exploration activities.

"It is quite unrealistic to put so much of a burden on
investors who are involved in such high risk investment
activities," he says.

Besides causing tax problems, the new law has also created a
longer line of bureaucratic procedures for investors in obtaining
a contract or in processing related permits.

"If in the past, investors had only to deal with Pertamina in
processing such activities, now they have to pass through three
different offices," says Kurtubi. "It makes things more
complicated."

An investor intending to enter exploration activities, for
example, first has to deal with the Directorate General of Oil
and Gas at the Ministry of Energy and Mineral Resources to join a
tender. If they have won the tender, they have to go to BP Migas,
the government's regulatory body on oil and gas exploration and
production, to sign a contract and to propose their expenditure
plan.

Then, if all go as expected, the investors have to go to the
Directorate General of Customs and Excise to report equipment or
capital goods they intend to import to support their exploration
activities.

"It is quite ironic that the new law that was issued to
support the liberalization program in the oil sector has created
so many problem," he adds.

In fact, prospects for the country's oil production are not so
bad. A number of potential oil projects that are now under
development could turn around the country's decline in
production, if the government has a strong commitment to support
them.
Unocal's West Seno field, under development offshore of East
Kalimantan, is producing 40,000 bpd and is expected to be able to
produce up to 60,000 bpd when the second phase of development is
completed in 2005. ExxonMobil's Banyurip field in Java, which is
expected to come onstream in 2006, could produce up to 100,000
bpd.

The most promising project is the Cepu field in Central Java
which holds reserves of at least 600 million barrels. The field,
which is operated by ExxonMobil in partnership with Pertamina, is
now inactive due to a dispute between the two oil giants over the
future operation of the field, which could produce up to 180,000
bpd.

Indonesia still has plenty of oil reserves but unfortunately
has not been smart enough about taking advantage of this
potential.