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Indonesia since 2009 has required contractors of energy service projects to source a proportion of their components from local manufacturers as part of an initiative to support the growth of the domestic manufacturing industry. With the minimum requirement first set at 35% by BPMigas (now SKKMigas) and the Ministry of Industry, this policy has over the years been subject to revision and supplementary regulations that have typically raised the threshold and now place an even greater onus on companies to work with local providers of engineering services and component manufacture.
The government’s persistence in this regard has worked to widen the scope of opportunities available to producers of supporting infrastructure and equipment crucial to energy sector projects, and opens the door to foreign companies seeking to enter the market via joint ventures. Given this context, it is worth paying attention to the specific changes to local content requirements that have been made since the initial 2009 regulation as well as the areas poised to benefit most from rising demand for locally manufactured products.
Motivated by data indicative of a rise in the use of locally procured components from 49% to 63% (as a proportion of the total value of components used) between 2009 and 2010, BPMigas in 2011 increased the required local content to a minimum of 51%. Following on from this, the Ministry of Energy and Mineral Resources introduced a regulation detailing varied rates of increase in mandatory local content for different activities that fall within the category of energy projects. Passed on 22nd February 2013 and implemented a few months later in May, MEMR Regulation No. 15 of 2013 sets individual targets and implementation timeframes for different services in oil and gas as a means of better adapting Indonesia’s minimum local content policy to where demand for equipment and auxiliary infrastructure is projected to be the highest. In making these distinctions, this regulation also takes into consideration the amount of time needed for domestic manufacturers to develop the capabilities to meet new demand.
In the case of all oil and gas activities, Regulation No.15/2013 trends towards stricter local content requirements in that increases in the minimum can be found across the board. Among the most immediate and substantial changes mandated by the policy is the increase in minimum local content for oil and gas drilling from 35% to 45% (offshore) and 70%(land) after 2016. Companies offering shipping services for projects in this field are also now required to source 75% of their components, up from 35% previously.
Minimum Local Content Requirements for Oil & Gas Projects
Source: Baker & McKenzie and Hadiputranto, Hadinoto & Partners (April 2013)
Allowing for flexibility between different project types is in keeping with an earlier regulation implemented by the Ministry of Industry on the use of domestic products in the construction of electric power infrastructure (No. 48/2010 and No.54/2012). In this case, distinctions in minimum local content are made on the basis of power plant capacity and type of energy used, with more leniency shown to companies undertaking projects of a larger scale.
Minimum Local Content Requirements for Electric Power Infrastructure Projects
Source: Ministry of Industry
Domestic manufacturing industries that stand to benefit most in the near term include those that produce components for offshore oil and gas projects. Given the immediacy of a 45% local content minimum for offshore drilling and EPCI as well as a 75% threshold for oil and gas shipping services, the need for equipment such as jack-up rigs and semi-submersibles as well as infrastructure such as storage tanks is projected to reach new heights. Further fuelling demand for these products is the recent opening up of sixteen offshore oil and gas fields for bidding in September 2013 (See Better Times Ahead for Indonesia’s Oil & Gas Equipment and Services?).
Though the industry producing tanks, pipes and other auxiliary infrastructure is populated with well-established manufacturers, there continues to be gaps in the market that can be filled by the involvement of foreign companies. Specialised skills in the use of more sustainable and non-traditional materials as well as construction equipment such as automatic girth welding machinery that facilitate quick on-site construction are particularly sought after. Many of Indonesia’s newest oil and gas projects are remotely located in Maluku, Papua and East Nusa Tenggara – parts of the archipelago still lacking in infrastructure and accessibility (See Unleashing the Potential of Indonesia’s Eastern Islands in 2014). This has encouraged contractors to obtain components made from lightweight materials (i.e. fibreglass reinforced plastic) to minimise transportation costs and avoid having to bring in heavy machinery for installation.
Successful joint ventures ideally marry an international partner’s advanced methods of production and latest techniques in component manufacturing to a local company’s access to an extensive network within Indonesia and strength as a cost competitive manufacturing base. With Indonesia now moving into more complex projects such as the construction of floating LNG platforms, international expertise is positioned to become more integral to domestic manufacturers now tasked with supplying these developments.
Other opportunities to enter the market with local companies include manufacturing components for the renewable energy sector; an area of huge potential in Indonesia that remains largely untapped (See Renewable Energy in Indonesia – A Sleeping Giant). Geothermal, hydroelectric and solar power plants are already subject to minimum local content requirements that range between 28% and 70% (depending upon capacity) and are now the subject of attention with a report from the APEC Energy Working Group suggesting that Indonesia could link its feed in tariff incentives with adherence to local content policies. Photovoltaic solar energy (PV) in particular has been proposed as a subsector in which this type of initiative is feasible, given that PV panels are now increasingly easy to manufacture.
When entering Indonesia to collaborate with local manufacturers in the renewable energy industry, it is important to keep in mind that the government still offers VAT and import duty exemptions on capital goods for renewable energy projects. Intense competition from foreign manufacturers to supply local projects should thus be expected despite the local content policies. Moreover, the 2012-2013 WTO ruling against Canada’s local content mandate – implemented as part of a feed in tariff program to develop Ontario’s renewable energy industry – sets a precedent that will intensify pressure on Indonesia as it rebuts claims of noncompliance with GATT obligations. With that said, the country’s motivations for local content requirements as a means of developing its local manufacturing capabilities mean it is unlikely to face the same pushback as Canada did.
In spite of present and future roadblocks, Indonesia’s dire need for progress in its energy sector dictates that manufacturers of equipment and supporting infrastructure will not be lacking for customers. Investors should thus seek to take advantage of the bevy of upcoming projects through joint ventures and technology transfers with local partners that have market access to Indonesia’s major players in upstream and downstream energy industries. Moreover, being positioned in Indonesia can be thought of as an investment in a high potential region with substantial room to grow, in that it presents the opportunity to tap into other markets in the ASEAN that have only recently begun to carry out natural resource exploration.
Global Business Guide Indonesia - 5th May 2014
Contribution to GDP: 3.44% (2016)
Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 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).
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