Uncertainties linger in petroleum sector

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.