Page 4 - AsiaElec Week 50

AsiaElec COMMENTARY AsiaElec
Indonesia’s upstream revamp may fall short
The government is hoping that giving foreign players the option of two contracting models will attract a fresh wave of upstream investment
INDONESIA
WHAT:
Upstream regulator
SKK Migas has revealed that, in addition to new contract options, the approval process will be streamlined
WHY:
Oil production has steadily declined in recent years on the back of a slide in foreign investment
WHAT NEXT:
A return to a system that had already lost investor interest will do little to stem he decline in output
INDONESIA has begun courting foreign upstream investors following the government’s announcement last week that it was considering the creation of a two-contract licensing model.
On December 2, Energy Minister Arifin Tas- rif said the government was reviewing whether to allow contractors to opt between cost recov- ery or gross-split production-sharing contracts (PSC), depending on which suited their devel- opment needs the most. The energy ministry’s acting director general for oil and gas, Djoko Siswanto, said companies would be given this choice as long as their proposed costs were “fair” and showed a commitment to increasing production.
Just days later the vice-chairman of upstream regulator SKK Migas, Fatar Yani Abdurrahman, said the flexibility of the new contracting system would attract investors from the Middle East.
His comments come as the government strives to turn around a slide in production that is driven by a decline in upstream spending by foreign investors concerned by the country’s notoriously high levels of bureaucracy as well as an increasingly nationalistic approach to the country’s resources in recent years.
The government also wants to hold up gas production as more gas is earmarked for power generation rather than export.
More flexible and simpler
Abdurrahman, in an interview with Arab News on December 6, said the UAE’s Mubadala Petro- leum had expressed its “love” for both contract models.
“They [Mubadala] are very proud of invest- ing in Indonesia, they say they are going to grow here and put more money to explore,” he said, before adding that Abu Dhabi National Oil Co. (ADNOC) also intended to invest.
The government introduced the gross split system in 2017, which removed the cost recov- ery mechanism from PSCs. The pre-2017 model allowed companies to recoup their explora- tion costs before splitting production with the government.
Jakarta is not stopping at offering a choice of contracts, however, with Abdurrahman saying the government was also looking to simplify
the upstream approvals process. Indonesia’s notorious bureaucracy has long been cited as a deterrent to foreign investors and the official said the government hoped to change this by mak- ing SKK Migas responsible for all exploration approval applications.
“We want all oil and gas companies to come and see us, they will apply for permits and we can manage this. SKK will be the leader proposing to other institutions and we will talk to relevant departments what needs to be cut,” he said. He added that Tasrif had accepted the initiative, which was expected to reduce the number of permits required from more than 150 to around 10 within a year or two. Moreover, the official expects the streamlining of the approvals process to allow companies eventually to reach the pro- duction phase within just five years of submitting an exploration approval request.
He added that government was working on a policy that would adapt to shifts in the inter- national oil price, noting that if prices soared the government’s share of production would be revised up, while the reverse would be true if prices fell.
The official noted that any changes the gov- ernment introduced would not be applied to existing contracts. He said “When [companies] sign a PSC, they will stay until the PSC expires. The government will honour it. Long-term plan- ning depends on what you sign in the document. It will stay until you finish.”
Production and investment slump
The government’s move to introduce greater flexibility into its upstream licensing comes as Jakarta looks to stem a decline in production.
National crude output almost halved from a peak of 1.67mn bpd in 1991 to 808,000 bpd in 2018, according to BP’s Statistical Review of World Energy 2019. Gas production, mean- while, fell from a peak of 87bn cubic metres in 2010 to 73.2 bcm in 2018.
Upstream investment in Indonesia almost halved from $22bn in 2014 to just $11.9bn in 2018, according to government data. In the first half of this year, investment stood at $5.21bn.
SKK Migas intends to announce its long- term strategic plan by the end of December,
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w w w . N E W S B A S E . c o m Week 50 18•December•2019