In early 2019, Indonesian President Joko Widodo pledged a major overhaul of the country’s oil and gas laws, both to ramp up domestic production and attract more multinational investment in the sagging sector.
At the time, Widodo said the legal revisions would provide momentum for regulatory reforms to make the oil and gas industry more efficient, transparent and sustainable, while adding more value to the national economy.
His Cabinet secretary, meanwhile, said that apart from boosting production the legal changes would also help to strengthen national capacities, domestic industries and human resources – all needed to boost the industry’s flagging production and competitiveness.
One year on, despite a new government program to push at least three deregulatory “omnibus” bills on job creation, taxation and small and medium enterprises, the promised oil and gas reforms have not materialized, raising new questions about Widodo’s intent.
For decades, Indonesia’s cumbersome energy regulations have repelled foreign investors who have persistently carped about lopsided profit-sharing agreements, opacity and corruption, and a perceived government bias favoring domestic over foreign interests.
As a result, foreign direct investment (FDI) in Indonesia’s oil and gas industry has historically been low considering the depth and scale of its untapped resources.
The lack of FDI, meanwhile, has translated into aging and decrepit infrastructure and a lack of technical capacity to maximize latent potential and keep afloat the nation’s many fast-maturing fields.
Moreover, policies that ensure state-run players geared towards the less lucrative domestic market – namely Pertamina – receive the lion’s share of production-sharing deals with foreign players have deterred investment in gas production, leading to a growing reliance on more expensive liquefied natural gas (LNG) imports to meet rising domestic demand.
Indonesia’s LNG exports were projected to drop by around 25% in 2019, as domestic demand rose and contracts with several overseas buyers expired, Bloomberg reported in November. The country was on track to ship 200 LNG cargoes overseas in 2019, compared with 267 in 2014, Amien Sunaryadi, head of SKK Migas, the country’s upstream oil and gas regulator, said.
Last year’s natural gas export slump, driven down by depleting gas fields and a lack of new upstream projects, marked the biggest year-on-year drop seen since the industry’s peak production in the late 1990s.
SKK Migas projects that natural gas exports for 2019 fell to 2.08 trillion Btu/d, down from 2.74 trillion Btu/d in 2018. That’s less than half of the 4.4 trillion Btu/d it exported in 2003, the earliest official data compiled by the regulator.
Irma Surya, general manager of Pertamina’s LNG sales, projected two years ago that Indonesia would become a net LNG importer by 2020, reaching an LNG deficit of as much as four billion cubic feet per day by 2030.
Commodities data provider S&P Global Platts said in August last year that Indonesia’s natural gas exports, including both pipeline and LNG, were expected to fall to a two-decade low in 2019.
“The decline underscores Indonesia’s diminishing role as an LNG exporter to Asian markets despite having one of the world’s largest gas reserves,” the report said.
The Asia-Pacific region accounts for approximately two-thirds of global LNG demand, a share projected to increase over the next decade due to growing demand in China, India, Bangladesh, Vietnam, Thailand and the Philippines – though the coronavirus outbreak is expected to crimp that demand in 2020 and perhaps beyond.
Not only is Indonesia, a former Organization of Petroleum Exporting Countries (OPEC) member, poised to become a net gas importer, its crude oil output has also plunged amid fast-rising domestic demand for the fuel.
Roby Hervindo, another Pertamina executive, predicted last year that Indonesia would run out of oil reserves by 2030, based on the country’s current 3.3 billion barrels of reserve, projected future demand and a stubborn lack of new field finds.
Oxford Business Group said in a recent report that “with recent estimates predicting that oil reserves could be exhausted before 2030, much will depend on the industry’s ability to develop new fields while boosting the production at existing ones.”
Yet, rather than courting more multinational investment and expertise to stem the decline, the government recently reportedly pressed Pertamina to seize assets held by US oil major Chevron and French energy giant Total SA, moves that will inevitably deter other foreign investors from entering the market.
Widodo’s promised foreign investment-promoting oil and gas reforms were supposed to be submitted to Parliament by the end of 2019. However, an SKKMigas official told this writer in January that the most recent energy regulation under his Cabinet’s consideration is for the coal industry while oil and gas reforms are still pending.
While it’s anybody’s guess when or even if Widodo will present his reform plan to Parliament, there is still hope that rising pressures on the natural gas industry could start to ease by later this new decade.
Last February, Spanish energy company Repsol SA and its energy partners claimed the largest natural gas discovery in Indonesia in 18 years, reputedly among the ten largest finds worldwide over the previous 12 months.
Repsol operates and maintains a 45% stake in the Kali Berau Dalam well, or KBD-2X, onshore in the Sakakemang block in South Sumatra.
The company said that the discovery may hold two trillion cubic feet or more of recoverable reserves. Malaysian oil and gas major Petronas has a 45% share in the promising field, with Japan’s MOECO holding the remaining 10%.
The discovery could push back the day Indonesia’s gas consumption outpaces its production and reduce its rising reliance on imported LNG. It could also give Indonesia a model for working with energy multinationals that could help restore profitable LNG exports.
For that to happen, the government needs to fast-track various oil and gas sector reforms to level the competitive playing field and encourage more foreign participation. But time is quickly ticking down on Widodo and Indonesia’s fuel future.