As one of the largest maritime nations in the world, Indonesia has always been a top source of crude oil and gas. Despite the apparent decline in recent years, the progress of the oil and gas industry in Indonesia has enjoyed success in many areas, namely the establishment of Production Sharing Contract models and the commercialization of Liquefied Natural Gas.
- Indonesia has oil reserves of 3.7 billion barrels. It is one of the top 20 oil producers in the world with approximately 1.2% of world oil production.
- Perched in the fourth position among exporters of liquefied natural gas after Qatar, Malaysia, and Australia.
- Is the fifth-largest natural gas producer in the world in 2016.
- In 2017, total investment expenditure for oil and gas development in Indonesia was IDR 18.19 trillion (USD 1.3 billion).
World Oil and Gas Producers
Indonesia has played an active role in the international oil and gas industry for nearly 130 years after the first oil discovery in North Sumatra in 1885. Since rejoining OPEC in 2015, Indonesia has demonstrated its commitment to the oil and gas sector. As of 2018, Indonesia has oil reserves of 3.7 billion barrels and is one of the top 20 oil producers in the world.
In addition, Indonesia is in the 5th position as the largest natural gas producer in 2016. With the high level of gas oil consumption, Indonesia holds a large market share in the oil and gas industry. The income from this industry contributes more than 20% to domestic income in Indonesia.
High Potential Project
Four promising upstream oil and gas plans were initiated in 2016 under the National Strategic Project (PSN) to increase oil and gas activities. Through this initiation, infrastructure projects can be quickly tracked because they are considered the most important and strategic projects in Indonesia.
The four upstream oil and gas projects offered are Masela block Inpex; Liquefied natural gas BP Berau’s Tangguh Train 3; Cheveron’s Indonesia Deepwater Development (IDD); and Jambaran-Tiung Biru owned by Pertamina EP Cepu. In addition, in the PSN list, three downstream oil and gas projects were included, such as the Bontang refinery in East Kalimantan and the Tuban refinery in East Java.
Indonesia as an Oil and Gas Exporter
Indonesia is one of the largest oil exporters in the world and is a member of the OPEC (Organization of Petroleum Exporting Countries). However, with its oil reserves decreasing, Indonesia has initiated imports of some oil for state consumption in recent years.
Indonesia is also the fourth largest exporter of liquefied natural gas according to Qatar, Malaysia and Australia. There are three liquefied natural gas facilities, namely in Arun in Aceh, Bontang in East Kalimantan and Tangguh in West Papua. To increase production, a number of new search natural gas projects are in various stages of development, such as refineries and gas pipelines for natural gas. For example, PT PGN built a 34km gas pipeline in Semarang, Central Java to help expand Indonesia’s natural gas consumers looking to China and the west coast of the United States.
Production Sharing Contract
Indonesia’s Upstream Oil and Gas Business Activities (exploration and production activities) are carried out under Production Sharing Contracts, which have been adopted by many sovereign countries in the world, including oil exporters and several oil producers. Exploration is a series of activities to find new oil and gas reserves. If exploration finds significant profitable oil and gas reserves, this activity will continue to the production stage.
With Production Sharing Contracts, oil and gas companies only pay initial costs for upstream oil and gas business activities. Expenditure recovery will occur when the project reaches the production stage. If the business activity is not successful, all expenses will be the responsibility of the contractor.
Investments in Oil and Gas in Indonesia
As of February 2018, direct investment in Indonesia’s oil and gas sector had reached IDR 25.18 trillion (USD 1.8 billion). Indonesia is optimistic about investment growth in this sector in the next few quarters, because there are no new challenges to the investment climate in this sector.
Crude oil prices, which currently range between IDR 909,340 – IDR 979,290 (USD 65 – 70) per barrel, are showing a positive sign of recovery. This is an important stimulus for companies to invest in Indonesia’s oil and gas sector. In fact, increased investment in oil and gas exploration in Indonesia has led to higher oil prices. In just the first two months of 2018, investment in exploration accounted for 10.75% of total oil and gas investment in that period – a remarkable growth when compared to the last six years which stood at 2-8%.
Indonesia’s total oil and petroleum investment of IDR 25.18 trillion (USD 1.8 billion) in two months in 2018 as stated above can be divided into:
- Exploration: IDR 2.76 trillion (USD 197 million)
- Development: IDR 2.85 trillion (USD 204 million)
- Production: IDR17.49 trillion (USD 1.25 million)
- Administration: IDR 2.48 trillion (USD 177 million)
Oil and Gas Regulations in Indonesia
Regulatory challenges and bureaucratic processes are major barriers to investment in the oil and gas sector in Indonesia. Since early 2017, Indonesia has been actively providing solutions to reduce the overall bureaucracy by simplifying regulations and providing more clarity. This clarification includes an introduction to the concept of “Gross Production Sharing Contracts”. With the strong initiative from the government, Indonesia is optimistic about seeing new investment arriving.