Uncertainties linger in petroleum sector
Fitri Wulandari, The Jakarta Post, Jakarta
The oil and gas sector started to pick up slowly this year after experiencing a slump last year, but uncertainties in the country's business environment will remain the main constraint for some time into the future.
Iin Arifin Takhyan, the director general of oil and gas at the Ministry of Energy and Mineral Resources said that this year, the oil and gas sector had improving compared to the previous year and still had a promising outlook for the years ahead.
"The oil and gas sector is the only sector that never experiences a crisis. It will be improving in the future," he remarked.
As of the end of this year, the government has awarded 16 oil and gas concessions and bagged a total of US$343.82 million in investment commitments. This is a huge leap from last year when the government could only get two contracts -- a new contract and an extension contract -- but is still much lower than in 1997, when the government awarded a total of 28 contracts.
The government expects to award another 10 new oil and gas acreages next year.
The number of contracts reflects investor sentiment toward the country's business environment, and also bring hopes for the discovery of new hydrocarbon reserves in the future to compensate for declining reserves in the existing fields.
Oil and gas has been a major revenue resource for Indonesia, making up 29 percent of the country's foreign exchange earnings.
According to Iin, crude oil production now stands at 1.16 million barrels per day (bpd), which is much lower than the 2003 state budget target of 1.27 bpd. It is also lower than the 1.317 million bpd quota set by the Organization of Petroleum Exporting Countries (OPEC).
Meanwhile, natural gas output has stabilized at an average 3 trillion cubic feet this year with 65 percent of the output being used for exports and the rest for domestic consumption.
Iin said the signs of revival were evident from the development outlays of oil and gas companies, which surged from $5 billion last year to $6.9 billion this year.
As far as liquefied natural gas (LNG) is concerned, this year Indonesia struggled to keep its position as the world's largest LNG exporter within an increasingly competitive market with the emergence of new competitors, such as Australia and Malaysia.
But, Indonesia managed to win a tender and ink several initial agreements with buyers this year.
In July, the country's third LNG plant, Tangguh in Papua province, was named the winner of the tender to supply 1.5 million tons of LNG annually to South Korean power firm SK and steel firm POSCO for a period of 20 years. The contracts are currently being finalized.
The new contract will bring total demand to 4.1 million tons for gas from Tangguh, which is owned by a consortium led by Anglo-American energy giant BP Plc. Last year, Tangguh clinched a deal to supply the Chinese province of Fujian with 2.6 million tons of natural gas per annum.
Indonesia at present has a production capacity of 31.6 million tons from the Bontang LNG plant in East Kalimantan and Arun LNG plant in Aceh province.
This year, the Oil and Gas Implementing Body (BP Migas) signed an initial agreement with Sempra Energy and Marathon Oil Corp. to supply 6 million tons of LNG per annum to the U.S., the world's largest energy consumer.
Widjajono Partowidagdo, an energy expert from the Bandung Institute of Technology (ITB), said that although the sector showed an improvement this year, uncertainties still lingered and would likely persist in the future.
He cited uncertainties related to fiscal aspects such as taxation and uncertainties related to security, which were preventing an influx of investment into the sector.
This was evident from the fact that local and regional firms dominated the oil and gas block tenders this year, Widjajono said.
"The seven sisters would like to see how these small companies are doing first. If they see the level of uncertainty being reduced, they will come back to make major investments in Indonesia," Widjajono told The Jakarta Post.
The "Seven sisters" is the nickname for the seven major world oil and gas companies that have dominated the world energy market since World War II. Among them are Royal Dutch Shell, ChevronTexaco and ExxonMobil.
The likelihood of Iraq resuming oil production next year will further add to the uncertainty.
"Major energy companies will prefer to invest in Iraq when situation there improves rather than investing in Indonesia. So while everything is uncertain right now, they are in a wait-and- see situation," Widjajono said.
The fact that the government offers better split revenues, Widjajono said, would not do much unless the government could guarantee consistent policies.
Brian WG Marcotte, chairman of the Indonesian Petroleum Association (IPA), which groups together all oil, gas and geothermal companies operating in Indonesia, said that one of the main demands of oil and gas investors was government policy consistency in relation to contractual and fiscal terms.
Inconsistency in policy would cause uncertainty and hurt investor confidence.
The facts showed that inconsistency in policy could cost the government dearly. For instance, following the economic crisis, the government postponed a geothermal project owned by American power firm Karaha Bodas in 1998. The move prompted the firm to file arbitration proceedings against the government and state oil and gas company Pertamina. The case has hurt Indonesia's reputation in the international community and Pertamina has spent a lot of money to hire top lawyers in the legal battle.
"There are certain risks with any investment. When we make a decision, everything should stay consistent throughout the period of the contract. If it stays consistent, then we are relatively satisfied and our level of confidence will be high," he said in an interview published by the Post.
Some investors also said that the unclear definitions of the roles played BP Migas as the new regulatory body and Pertamina, the former regulator of the industry, added to the uncertainties in the industry.
Pertamina itself was officially turned into a limited liability company in August. This means the company will be treated like other oil and gas contractor and no longer receive privileges as it did in the past. But, the firm has demanded it be freed of its social mission, such as providing cheap fuel to the public, to ease its financial burdens.
Widjajono, however, said some uncertainties were natural as the country was in transition from one system to another.
Whether or not Indonesia would succeed in liberalizing the market, Widjajono said, would depend on the government's efforts to boost healthy competition.
"With less collusion and corruption, and by implementing good governance, healthy competition can be created as in many developed countries," he said.
Widjajono suggested the government should sell natural gas for domestic use as a source of clean and cheap energy for industry while only selling oil for export to obtain greater revenues.