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Indonesian upstream investment falls in H1

PERFORMANCE INVESTMENT in Indonesia’s upstream
fell in the first half of the year, as the coro-
navirus (COVID-19) pandemic forced oil
and gas developers to rethink their capital
expenditure strategies.
COVID-19 has seen upstream capex budgets
trimmed throughout the world over following
the slump in oil prices, which began late last year
but outright collapsed in early March. While
Brent is once more trading around $45 per bar-
rel, the outlook for international oil prices is far
from certain.
But while Indonesia is one of many coun-
tries facing downward pressure on upstream
budgets, the Southeast Asian oil producer had
already been struggling to overcome waning New regulation
investor interest. New legislation was passed The energy ministry signed on July 15 a new
last month to introduce greater flexibility piece on regulation revoking the mandatory use
around licensing terms, but questions are still of the gross split scheme mandatory for new or
being asked over whether upstream incentives renewed PSCs.
dreamt up before COVID-19 swept across the The government introduced the gross split
globe are sufficient now. system in 2017 with the aim of bringing greater
predictability to the licensing process. Falling
Shrinking spend production and an aversion by many major for-
The Indonesian Energy Ministry announced eign investors to tangle with Indonesia’s notori-
on August 5 that oil and gas investment ous levels of bureaucracy drove the government
amounted to $5.6bn in the first half of this to reconsider its options.
year, a number that falls far short of expecta- Indonesian crude output almost halved from
tion given that the government set a whole- a peak of 1.67mn bpd in 1991 to 781,000 bpd
year target of $14.5bn. in 2019, according to BP’s Statistical Review of
“That is still far from the target, as it is only World Energy 2020. Gas production, mean-
one-third of the expectation,” the Jakarta Post while, shrank from a peak of 87bn cubic metres
quoted the ministry’s acting director-general for in 2010 to 67.5 bcm in 2019.
oil and gas, Ego Syahrial, as saying. Jakarta announced in December 2019 that it
He said the ministry would try to avoid was considering allowing upstream developers
shutting down wells during the health crisis in to choose between the two licensing models. The
order to encourage upstream investment. The pre-2017 model allowed companies to recoup
slow pace of investment was reflected in the their exploration costs before splitting produc-
country’s oil and gas production in the first six tion with the government and the shift in regime
months of the year. left many investors unimpressed.
The country produced 713,300 bpd of “These changes are to intended to provide
crude oil in the first half, down from 755,000 legal certainty and improve investment in the oil
bpd in January-June 2019. Natural gas pro- and gas industry,” the ministry said on August 1.
duction tumbled from 6.67bn cubic feet While existing contracts will remain valid,
(188.89mn cubic metres) per day to 5.61 bcf companies can opt to move their cost recovery
(158.88 mcm) per day. PSC to the gross split model. Acting Energy
SKK Migas revealed last month that gov- Minister Arifin Tasrif said: “If the field is riskier
ernment revenue from the oil and gas industry and more remote, they will choose a cost recov-
amounted to $11.89bn, less than half of a full- ery scheme. If it’s gross split, they’ll be happier to
year forecast of $32.09bn. This prompted the use it for existing fields because the potential is
upstream regulator to lower its revenue target to clear and thus the risks are lower.”
$19.91bn. The government has its hopes up that greater
With the global pandemic weighing on oil licensing flexibility will breathe life into the
and gas prices, SKK Migas has also trimmed its upstream, and it is certainly not a bad plan. More
2020 oil production target by 4% to 725,000 bpd, options for developers are certainly a good thing
while its gas production target has been dropped and if the new legislation had happened before
by 14.2% to 5.73 bcf per day. the oil price collapse and the global pandemic
Given the strain on investment, the govern- then perhaps the outlook would be better. But
ment introduced new legislation this year that as it stands, Indonesia will have to rethink its
allowed developers to choose between cost approach rapidly and dramatically to upstream
recovery or gross split-based production-shar- investment if it hopes to reverse the decline in
ing contracts (PSC). national oil and gas production.™

Week 31 06•August•2020 www. NEWSBASE .com P9