The Jakarta Post, Jakarta | Wed, 05/16/2012 7:49 AM
It is quite a paradox.
Most oil executives and hydrocarbon analysts agree that large reserves still exist in Indonesia, and that the exploration of new reserves is a promising venture.
In reality though, the nation has been a net oil importer for the past few years as outputs have fallen steadily from 1.5 million barrels per day (bpd) in 1999 to 1.25 million bpd in 2002, to less than 930,000 bpd today, while national consumption has increased to more than 1.4 million bpd.
Most of the country’s oil and natural gas fields have already reached their production peaks; without any newfound reserves, Indonesia will soon see the last drop of its own oil.
These figures indicate one thing: The volume of reserves is not increasing as fast as consumption growth due to an acute lack of investment in exploration.
By increasing oil and gas reserves Indonesia will be able to meet rising consumer consumption and expand its economy.
But the only way to increase the nation’s hydrocarbon reserves is to increase investment in exploration.
The other problem is that there seems to be mounting resource nationalism among politicians and many energy analysts, suggesting a reduction in the dominance of foreign oil companies in the hydrocarbon industry.
But every time the government puts new oil blocks on open tender, only one or two national companies are interested in bidding due to the financial risks and sophisticated technology needed for investment in the upstream oil industry.
On top of this, there is a persistent demand of politicians at the House of Representatives to amend oil and natural gas laws in favor of national interests.
The prerequisite for wooing new investment, be it national or foreign, is that the hydrocarbon exploration terms should be made more competitive and attractive, given the increasingly challenging and competitive global environment.
Indonesia is not the only country that offers prospective hydrocarbon resources.
Due to the declining interest in exploration by oil companies, competition from other oil producing countries to attract investment is increasing. Indonesia has to compete with many countries offering more attractive incentives and investment climate.
The hydrocarbon industry requires a better investment climate because most of the undiscovered, prospective reserves are located in the frontiers of eastern Indonesia
The eastern region has potentially large reserves which are yet to be discovered, but prospecting at these reserves requires sophisticated technology and huge investment, which are estimated to be 10 times larger than investment in Java and Sumatra, thereby involving bigger risks.
The Indonesian Petroleum Association (IPA) and surveys by PricewaterhouseCoopers often cite rising concerns about the uncertainty of cost-recovery legislation, corruption, interference by government agencies, the sanctity of contracts and the general regulatory structure of the upstream and downstream oil and gas industry.
Legal and regulatory uncertainty and inefficient bureaucracy are especially negative for investors in the upstream segment of the hydrocarbon industry - exploration and mining - as this business requires large amounts of capital and involves high risk.
On top of this, overlapping concession areas, arduous licensing procedures within regional administrations and land acquisition problems have often made things murkier for oil companies.
Sluggish investment due to a lack of appealing fiscal policies and regulatory certainty has painted a bleak picture for Indonesia’s upstream oil and gas sector.
Cost recovery - the mechanism in Production Sharing Contract (PSC) that allows contractors to recover their investment on exploration, development and production - has always been a highly contentious issue.
Since unsuccessful exploration in undeveloped areas is entirely borne by the PSC contractor, there should be a fundamental recognition that cost recovery does not represent the government providing an incentive, but rather providing its share of the necessary investment as agreed in the production sharing contract.
The second biggest headache for oil companies is fiscal uncertainty. There should be confirmation on the principles of assumption and discharge of responsibility in the PSC, except for corporate tax and dividend tax.
Oil executives have suggested that there should be no tax on the transfer of interest, particularly in the exploration phase where farm-in and farm-out mechanisms are a key component in maintaining exploration activity.
The provision of an annual exemption from import duty for particular categories of equipment used in exploration activity must be removed and replaced by permanent exemptions. The annual approval cycle causes uncertainty and delays in production.
The 36th IPA convention and exhibition, scheduled from May 23 to 25, is a great opportunity for the government and oil executives to thrash out the most pressing issues that stand between investors and the prospective exploration of geological resources.
http://www.thejakartapost.com/news/2012/05/16/indonesian-hydrocarbon-industry-opportunities-and-challenges.html
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