Indonesia’s growing thirst for oil and gas is putting pressure on Jakarta to improve investment conditions and attract more capital into exploration, production and transportation. Over the past years, reports about unsettled regulations and political interference kept global firms wary of launching large-scale projects in the country. Officials are aware, however, of the need for sophisticated technology and foreign knowhow to revive ageing fields and develop new ones offshore. As it seeks to reduce Indonesia’s dependence on fossil fuel imports, the government has little choice but to rewrite some of its rules in the oil and gas sector. Companies offering equipment and services are set to be among the main beneficiaries.
Indonesia’s upstream sector is believed to hold significant growth potential. Wood Mackenzie estimates that 45% (more than 28 billion barrels of oil equivalent) of discovered resources have yet to be produced (See Indonesia’s Oil and Gas Sector – Upstream Challenges). “The country remains the region’s largest producer and has the highest remaining reserves. It also has access to the bulk of Southeast Asia’s deepwater exploration acreage”, the UK-based consultancy wrote in April 2013. Meanwhile, research firm Frost & Sullivan in an assessment of Southeast Asia’s oil and gas industry noted that “technological enhancements, increasing gas demand, and rising oil prices have made marginal fields attractive for development.” Indonesia and Malaysia presented “the highest potential for deepwater and marginal fields’ development,” the firm added in a press release in October 2013.
The equipment and services subsector naturally depends on activity in the wider oil and gas sector, which in turn rises and falls with upstream investment. Finding and exploiting yet-to-be discovered hydrocarbon resources requires substantial investment. Upstream spending over the past decade has proven insufficient to meet Indonesia’s rising demand, with crude oil output in decline and proven reserves falling over the past decade. The administration has so far been slow to help the sector develop its full potential through greater fiscal incentives, but this stance will become less tenable as the gap between domestic supply and demand widens.
The standard Indonesian production sharing contract (PSC) gives contractors a 15% share of oil and 30% of gas output from a project, with the remainder going to the government. (Initially, the contractor’s share can be larger to allow for the recovery of exploration and development costs). Irrespective of the standard case, the exact production split between the contractor and the government can be negotiated for a specific project to accommodate for elevated risk or other adverse factors. More favourable splits are likely to be proposed to support offshore work and the development of marginal fields. A number of high-ranking officials have suggested altering the split in favour of contractors to attract more exploration, and the upstream regulatory body, SKK Migas, has announced plans to give contractors a greater share in forthcoming projects.
In addition, the government is offering tax holidays for exploration and development of offshore and marginal fields, and the president has proposed further fiscal incentives to companies engaged in deep-sea drilling and enhanced oil recovery. More permissive rules on cost recovery are also conceivable in the future, as is leniency on the domestic market obligation (which requires contractors to sell up to a quarter of their PSC share on the local market).
Suppliers and service providers to the oil and gas industry enjoy preferential treatment on imports, since the government in 2008 exempted certain equipment from duties, including drilling platforms and subsea exploration facilities. It has also relieved importers of the burden to charge value added tax. That said, equipment and service providers still have to comply with local content obligations as stipulated in Ministry of Energy and Mineral Resources Regulation 15/2013. In force since May 2013, the regulation sets stricter requirements for the local component in upstream oil and gas procurement. It raises the minimum value of domestically-sourced content in goods and services to between 35% and 90%, depending on the project nature, but it grants procuring contractors ample time to implement these targets over the coming years (the deadlines vary with the type of work).
One way to meet the local content obligation is to make equipment in Indonesia. Numerous global companies have taken this route, including GE, which in November 2013 opened its expanded subsea manufacturing facility on Batam Island, and McDermott International, which fabricates a wide range of onshore and offshore equipment at its Indonesian yard, also in Batam. Even though in many cases the local content requirement is already satisfied, some experts have questioned whether the rules are in line with the World Trade Organisation framework, because they give preference to Indonesian suppliers. This could prompt future regulatory changes and possibly more permissive rules.
As Indonesia seeks to boost national crude oil production back up to 1 million barrels per day (a level not reached in many years), support from experienced foreign firms is indispensible, regardless of whether operations are carried out by global companies or Indonesia’s Pertamina. While the national oil company has been flexing its muscle amid calls for it to push international majors out of expiring PSCs, the provision of equipment and services is less prone to nationalist sentiment, and hence less exposed to political risk, than project operatorship.
Equipment and service providers for deep-sea development can expect increasing demand in Indonesia, because most of the country’s potential for new hydrocarbon discoveries lies offshore. Many basins at sea remain unexplored, particularly in eastern Indonesia. Sixteen of 18 blocks opened up for bidding in September 2013 are offshore. Extensive exploration is necessary to identify new deposits, and lifting resources from deep below the sea is a challenging task that requires specialist knowhow and technology. Appealing business opportunities should be anticipated for maritime drilling and oilfield services and equipment, such as jack-up rigs and semi-submersibles, drillships and floating production, storage and offloading (FPSO) vessels, as well as obviously auxiliary tasks, including inspection, repair, and maintenance.
Contractors offering geophysical surveys should also find plenty of work in Indonesia, where the quality of available hydrocarbon data is considered insufficient. Seemingly in reaction to a number of disappointing exploration projects, the government in February 2013 said it would chip in with funding new seismic surveys to support the search for oil and gas deposits.
No less important than offshore exploration and production is the adjacent transport infrastructure, including surface facilities, infield flowlines, onshore pipelines and storage tanks. This holds true particularly for natural gas infrastructure, as the government tries to shift the industry away from exports to supply the growing home market. Recent hikes of domestic gas prices have made this market more attractive for producers – which should create years of strong demand for engineering, procurement, construction and installation services.
Higher demand for oil in Southeast Asia and particularly the region’s largest market Indonesia will make developing marginal fields more profitable and reviving mature ones through enhanced oil recovery (EOR). Both tasks require sophisticated technology and knowhow, thus creating new business also onshore.
When global companies bring in foreign experts with specialist qualifications that they cannot source in Indonesia, they are legally compelled to arrange training and professional development for their Indonesian staff, with a view of eventually increasing employment for the national workforce. The lack of qualifications is an opportunity for companies that offer vocational training, safety awareness and management skills.
Global Business Guide Indonesia - 2014
Contribution to GDP: 11% (Q3 2015)
Oil & Gas Imports: $22.8 billion USD (Jan-Nov 2015)
Proven Oil Reserves: 3.7 billion barrels (2015)
Proven Gas Reserves: 101 trillion cubic feet (2015)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 29 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).