On the Brink of an Oil and Gas Crisis
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The global situation in the oil and gas industry can no longer be predicted with economic logic. Although the need for oil and gas continues to increase from year to year, the price in the global market also continues to decline, contrary to the principle of supply and demand.
The situation has severely affected the upstream oil and gas industry in the world, driving the industry into stagnation.
Indonesia is affected by the uncertainties. Despite the increase in fuel oil demand in the country, production persistently declines. Various government policies have been issued -- some even replaced and revised --- in order to attract investment in oil and gas exploration, but that effort has not been able to lure investors.
This situation is exacerbated by the "single fuel price" policy in the country, including in lagging, frontier and outermost (3T) areas as stipulated in Energy and Mineral Resources Ministry Regulation No 36/2016.
Although Pertamina said the policy was not "not a matter of profit and loss" (Kompas, 19/12/2016), it economically increases the financial burden on the state owned oil and gas company, given the difficulty in distributing fuel in those locations.
This situation is not only about the economy, but also other aspects, especially the global political constellation. If this situation is not immediately addressed and resolved with extra work based on scientific approaches, Indonesia will soon enter an era of oil and gas crisis and will have to rely on imports.
Flashback of development
Indonesia enjoyed a golden age while it held sufficient oil and gas reserves in the 1970s. However, oil and gas production continues to decline. Indonesia was originally an oil-rich country and once a member of the Organization of Petroleum Exporting Countries (OPEC), but it has now become an importing country due to oil and gas needs reaching far beyond production.
Formerly, Indonesia\'s proven oil reserves reached about 27 billion barrels. However, as of December 2015, the amount has dropped to about 3.6 billion barrels, equivalent to 0.2 percent of world oil reserves.
Data issued by the Central Statistics Agency (BPS) in early 2017 also showed that crude oil and condensate production has continued to decrease. In 1996, the crude and condensate production reached 548.648 million barrels. It dropped to 494.643 million barrels in 1999 and plunged further to 386.814 million barrels in 2015.
The same situation also occurs in Indonesia\'s gas reserves. According to the BP Statistical Review of World Energy in 2015, Indonesia currently has gas reserves of about 100 trillion standard cubic feet (TSCF), only about 1.5 percent of the world\'s gas reserves (Kompas, 18/8/2016).
Currently, the management and utilization of oil and gas in Indonesia faces several problems.
In the supply side, the constraints include sharp declines in the amount of reserves, the high cost of exploration and exploitation, the long duration between discovery and production (first oil), which takes between 13-15 years, as well as the investment climate, which is no longer attractive to investors.
If Indonesia wants to increase oil and gas production, according to the president of the Indonesia Petroleum Association (IPA), Indonesia must compete for the world’s oil and gas investment funds, which are very small.
The government has issued a number of policies in order to revive oil and gas production by encouraging more investors to enter the oil and gas sector. One of the new policies is Energy and Mineral Resources Minister’s Regulation No.8/2017 on Gross Split in oil and gas production.
With the new production split scheme, the government hopes to improve cost management efficiency, simplify the bureaucracy and accelerate exploration and exploitation. However, the new policy, where contractors bear all the operational costs, did not receive a positive response from oil and gas contractors.
With the current low level of oil and gas prices, oil and gas contractors are also in difficult times and are making every effort to reduce costs and improve operational efficiency in order to survive. So, it is logical if the value of investment continues declining from year to year. In 2015, oil and gas investment dropped to US$11.02 billion from $15.34 billion in 2015.
It is not therefore surprising that Energy and Mineral Resources Minister’s Regulation No 8/2017 was revised just three months after its issuance.
The minister revised it by issuing Regulation No. 52/2017. The revision shows the government\'s serious commitment to stimulating the upstream oil and gas investment climate. The government raises the percentage of the share of oil and gas for contractors in the production split through the revision, which involves eight important issues.
First, if oil and gas production is less than 30 million barrels of oil equivalent (MMBOE), the contractor will get a 10 percent share, up from 5 percent.
Second, the contractor gets an additional incentive of 3 percent if it develops a second oil and gas field within the same oil and gas block. Third, in the event of a fall in oil and gas prices (Article 9), the contractor gets an additional share of 11.25 percent, up from 7.5 percent with the formula (85-ICP) x 0.25 percent.
Fourth, there is the addition of the progressive component of unregulated gas prices.
Fifth, an increase in the split in the secondary production stage by 6 percent, up from 3 percent.
Sixth, changes in the variable component of hydrogen sulfide content (H 2S).
Seventh, an increase in the split for work areas (new frontier areas) that don’t have supporting infrastructure.
Eighth, the Energy and Mineral Resources Minister has the authority to provide additional or reduced splits based on the commercial aspects of the field (Migas Review, 9/9/2017).
Revisions and additions to the above provisions are thought of as a middle ground taken based on input from various parties. Nevertheless, despite the revisions, it is still not certain that the government will get the results it wants in the near future.
So, it is too early to measure the success rate.
According to data from the Strategic Plan (Renstra) from the Energy and Mineral Resources Ministry 2015-2019, in 2013 Indonesia\'s fuel demand was 1.3 million barrels per day (bpd). In order to meet domestic demand, Indonesia needed to import around 600,000 bpd with a value of more than Rp 1 trillion per day.
This number will certainly grow from year to year. In addition, Indonesia also imports crude oil for domestic refineries. Indonesia\'s crude oil production is around 800,000 bpd, but ironically, it is not entirely processed at domestic refineries.
About 40 percent of Indonesia\'s crude oil production is exported because not all local refineries are able to process Indonesian crude oil (Renstra Migas 2015/2019).
The discovery of new oil reserves is also increasingly moving away from expectations. The rate of reserves to production, or the reserve to production ratio (RRR), is about 55 percent. Ideally, the amount of oil produced is proportional to the reserves found, ie at RRRs of 100 percent or more. Although the amount of oil and gas reserves may change, depending on the discovery of new reserves, the current condition indicates that Indonesia is on the brink of an oil and gas crisis.
Oil and gas crisis
In April and May, a number of oil and gas discussions were held, including around the legal issues related to the oil and gas sector by the Upstream Oil and Gas Regulatory Special Task Force (SKK Migas) and the UGM Energy Studies Center in Yogyakarta. This was followed by the 41st IPA Convention and Exhibition in Jakarta.
The three oil and gas forums presented the strong message that oil and gas is increasingly difficult to find. It also shows that we have to be wiser in utilizing energy sources, especially oil and gas, and need to increase the use of new, renewable and environmentally friendly alternative energy based on local wisdom.
If the government fails to revive new oil and gas exploration, in the future the government’s expectation of increasing crude oil output in order to meet revenue targets will be more difficult to achieve.
However, if no efforts are taken to increase the use of new renewable energy, then slowly but surely Indonesia will soon enter an energy crisis. Indonesia will continue to rely on imports that will undoubtedly undermine its independence and sovereignty in the energy sector.
As oil and gas remains the main contributor (20 percent and above) to state revenues in the state budget (APBN), the oil and gas crisis will certainly deliver a domino effect and could trigger the emergence of other crises that endanger the country.
Therefore, it is necessary to promote public awareness on the country’s oil and gas condition so that people will be alert to the possibility of an oil and gas crisis.
JUNAIDI ALBAB SETIAWAN
Oil and Gas Legal Observer; Doctoral Candidate in Law at UGM
