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IPA13-BC-066

PROCEEDINGS, INDONESIAN PETROLEUM ASSOCIATION


Thirty-Seventh Annual Convention & Exhibition, May 2013
MAXIMISING INDONESIA'S POTENTIAL THROUGH THE GOVERNMENT-IOC
RELATIONSHIP
Angus Rodger*

ABSTRACT
Indonesias upstream industry lies at a crossroad. If
it continues on its current path it is likely the
countrys hydrocarbon production will continue to
decline, as will new investment by IOCs
discouraged by tough fiscal terms, a lack of
appropriate exploration incentives and uncertainty
over PSC extensions. But there is an alternative
path, where new incentives and legislation are
introduced that will encourage IOCs to invest
further in the country, provide clarity on contractual
extensions and provide for a more productive
relationship between international and domestic oil
companies.
But these are all complex issues and it is not easy
for any government to steer a straight course
through such politically-charged waters. Of
fundamental importance is the role of the regulator
in attracting and maximising foreign upstream
investment. Countries such as Norway and
Malaysia provide interesting and relevant case
studies as to how a progressive approach to fiscal
terms can achieve huge pay-offs in terms of
increased activity, and in turn, newly discovered
resources.
Changes to Indonesian fiscal terms and structures
over the last five years have in general not been
welcome by IOCs, who feel growing restrictions on
cost recovery have hampered their ability to spend
more on upstream exploration and development.
Moreover, Indonesia already sits in the top 10% of
the toughest oil and gas fiscal regimes across the
globe. Going forward, providing meaningful
incentives for companies investing in frontier
exploration, high-cost deepwater developments and
EOR could assist in unlocking the 12 billion barrels
of oil equivalent reserves that Wood Mackenzie
estimates have been discovered in Indonesia but
remain non-commercial under current fiscal
conditions.
*

Wood Mackenzie

Maximising
the
potential
of
Indonesias
hydrocarbon resources may well require Indonesia
to prioritise its long term objectives over short term
fiscal gains. But, the economic benefits for the
country of unlocking these stranded resources
would in turn be enormous.
There are also pertinent examples from other
countries of beneficial relationships being forged
between IOCs and NOC. In contrast, there are also
many examples of resource nationalism, and the
negative impact this can have on IOC investment.
Finding the right balance between supporting
domestic and state-run operators and attracting the
worlds top oil companies to invest in the country is
not easy, but it is a challenge that must be broached.
The path the Indonesian government wishes to take
will become clear as it explores the various
outcomes it can achieve by clarifying legislation
and procedure around PSC extensions. Improved
visibility here would reduce uncertainty on new
investment and subsequently have a dramatic
impact of the countrys future hydrocarbon outlook
and its ability to hit ambitious national targets.
Exploration in Indonesia is another area that needs
review, as it has greatly underperformed its regional
peers over the last decade, despite far greater levels
of overall activity. For example, during the period
2003-2012 Indonesia accounted for 42% of the total
number of exploration wells drilled in South East
Asia, yet only 20% of the discovered resources,
whereas over the same period Malaysia accounted
for 21% of the wells but 42% of the resources.
However, creaming curves suggest there is still
huge exploration prospectivity left across the
country. This potential could be realised if the fiscal
regime can be tweaked to facilitate smaller or
remoter discoveries to be commercialised within
competitive time-frames.
Falling production, exploration underperformance
and an uncertain fiscal regime have reduced
Indonesias attractiveness for new investment at a
time when it is needed most. It therefore must look

to learn from other nations that have been


successful in attracting and stimulating new
investment and activity.

If it does so, given its size and the vast scale of


resources likely left to be discovered, a brighter
future could easily be achieved.