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.