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Indonesia projects lower oil and gas production amid low investment

Posted by on 24 Januari 2020

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Indonesia’s oil and gas industry will continue to face challenges this year as the government projects lower crude oil prices, production and investment while demand continues to grow.

The government projects this year’s oil and gas production rate to reach 1.95 million barrels of oil equivalent per day (boepd) and Indonesian Crude Prices (ICP) at $58 to $63 per barrel. Both are lower than last year’s expectations of 2 million boepd and $70 per barrel.

“With a high sensitivity toward global dynamics, the government continues to monitor the movement of oil prices and global commodities,” said President Joko “Jokowi” Widodo at the House of Representatives complex in August 2019.

Meanwhile, the Energy and Mineral Resources Ministry expects the oil and gas industry to raise $127.3 billion in investments this year, which is lower than last year’s target of $159.8 billion and of which only 72 percent was realized.

In stimulating investment, Energy and Mineral Resources Minister Arifin Tasrif vowed his office “will no longer be a factory for rules but a facilitator of industry growth”.

This included building infrastructure, deregulating industries and improving electricity and natural resource supplies.

With such a bearish outlook, top-level stakeholders will pay more attention to the upstream industry, such as the Upstream Oil and Gas Special Regulatory Taskforce (SKK Migas), which expects 12 oil and gas projects to come onstream this year.

The largest among them is Italian Eni’s Merakes facility, which has an expected production capacity of 400 million standard cubic feet per day (mmscfd). The largest oil project is publicly listed Energi Mega Persada’s Malacca Strait Phase-1 facility with a production capacity of 3,000 bopd.

State-owned oil company Pertamina president director Nicke Widyawati said that given the declining production rates, “Pertamina will allocate the most in upstream this year. Upstream investments will be 60 percent of our total investments.”

SKK Migas also aims to launch its One Door Service Policy (ODSP) website in the second quarter. The site will allow oil and gas companies to apply for various licenses from a single platform, subsequently cutting down on bureaucratic red tape.

“We have set a target of 1 million bpd by 2030,” said SKK Migas head Dwi Soetjipto.

Commenting on the ambitious plan, Indonesian Petroleum Association (IPA) president Louise McKenzie said: “That will take a lot of investment. It's going to be hard to get that out of existing fields. It will require new projects, new discoveries as well.”

Jokowi is expected to make a critical decision on reducing industrial gas prices to US$6 per mmbtu by March as promised in a 2016 presidential regulation. The President publicly forwarded three possible solutions that are a financial incentive, domestic market obligation (DMO) and import relaxation.

“This problem has been going on since 2016. I need a solution, and those three are the options,” said Jokowi.

The Energy and Mineral Resources Ministry recently came out with a solution that combines the first two options. The ministry will order oil and gas producers to prioritize supplying gas to state-owned gas distributor PGN in suppressing midstream costs through economies of scale. Should PGN fail, the ministry can suppress upstream costs by slashing non-tax state revenue from producers. Nevertheless, the final decision rests with the President.

PGN, which is Indonesia’s largest midstream gas player, appears to favor a DMO. Out of the three options on the table, PGN only mentioned the DMO in a statement issued on Jan. 6. Under the DMO policy, the producer will be required to sell a certain percentage of its production to the domestic market under the government’s benchmark prices.

“A gas DMO is one of the solutions to ensure industry growth while still minding the long-term interest of other stakeholders, namely the government and upstream oil and gas investors,” said PGN’s corporate secretary Rachmat Hutama.

In the downstream, another ministerial agency expects the annual diesel subsidy to exceed the quota for the second consecutive year this year. In 2019, diesel subsidies exceeded the 14.5 million kiloliters (kL) ceiling by 1.28 million kL.

The Downstream Oil and Gas Regulatory Taskforce (BPH Migas) projects subsidized diesel and kerosene consumption to exceed this year’s quota by 700,000 kL. The quota is set at 26.87 million kL.

“We exceeded [last] year’s subsidized diesel and kerosene quota,” said BPH Migas head Fanshurullah Asa at a press conference in Jakarta. “With similar economic growth and consumption rates, there is a potential for an over quota in 2020,”

BPH Migas is similarly set to expand the single fuel price policy to 83 new locations this year, 50 of which are in Papua and 25 in Nusa Tenggara. The populist policy, which distributes fixed-price gasoline and diesel to remote regions, is currently available at 170 locations.

The House Commission VII overseeing energy aims to issue a revised 2001 Oil and Gas Law this year. Legislators will add the law, along with two other bills, to the 2020 national priority legislation program (prolegnas) and establish working committees to direct further deliberations.

“God willing, we will finish the three draft laws by [2020]. Though normally, we only finish two laws a year; we will forward three laws [for 2020],” said Commission head Sugeng Suparwoto.

Amendment discussions have dragged on for the past 11 years ­— handed down from three commissions since 2009 — amid disagreement over revisions that generally focus on tightening state control over oil and gas assets.

A case in point, a draft law made publicly available in 2018 grants the government more flexibility in fixing the domestic market obligation rates of oil companies.

“In a practical sense, the manifestations of this, including more fluid domestic market obligations and a less rigid approach to contractual terms, are likely to be viewed with some concern by investors,” wrote business consultancy PriceWaterhouseCoopers (PwC) in its 2019 Oil and Gas in Indonesia Investment Guide.

 source : https://www.thejakartapost.com/news/2020/01/22/indonesia-projects-lower-oil-and-gas-production-amid-low-investment.html