INDONESIA OUTLOOK- OIL AND GAS INDUSTRY

KIM HENG OFFSHORE AND MARINE (KIM HENG)

Established in 1968, Singapores Kim Heng Offshore & Marine provides services to oil and gas companies in the region.
It began as a tugboat company but evolved to an integrated offshore and marine services provider. With $5.7 million
(SGD 7 million) to spend on expansion and diversification of its service offerings, especially through merger and
acquisition, Kim Heng is looking worldwide for a new hub port where most activities are present for its future growth
(Rigzone, 2014).
INTRODUCTION
Indonesia has historically been associated with weak institutions and a myriad of other problems, being one of the
countries hardest hit by the 1997 Asian Economic crisis, which caused a major recession, widespread civil unrest,
sectarian violence and resulting socio-economic fallout. At the height of the crisis, foreign investment virtually dried up,
the IDR collapsed against the USD and other foreign currencies and interest rates and inflation reached unprecedented
levels.
Today, Indonesia is a politically stable democracy, has enjoyed sustained periods of record economic growth and foreign
investment, as well as now being the one of the largest economy in South East Asia. However the country is still not
without need for significant policy reforms and various challenges remain, with new ones emerging.
INDONESIA OIL AND GAS INDUSTRY
Indonesia is islands rich of oil, natural gas, geothermal to new and renewable energy a complete energy resources.
With these resources, together with the islands central location between India and the Orient, they have made Indonesia
so attractive to foreign traders, rulers and investors both historically and as of today.

Indonesia is within Asia Pacifics third largest natural resources based on Regional Proved Reserves 2011 and Indonesia
is seeing rising natural gas production (Indonesias natural gas production, 2001-2011) as well as steadily increasing
exports (Indonesias natural gas exports 2007-2011). Indonesia is also one of the largest crude oil exports in the Asia
Pacific based on World Bank 2011, with a sustained level of exports as well as imports (Indonesia Crude Oil Exports and
Imports, 2006-2011). As a matter of fact, Indonesia has 4 billion barrels of oil and natural gas (2.97 trillion cubic metres)
reserves with 1.6 million bopd (barrels of oil per day) of oil production peaked in 1995.

Oil and gas industry in Indonesia has contributed more than 25% to state revenues in 2011 and net income of the
industry in 2012 has been projected at $36 billion, which represents 14% of national total income and its gas reserves
could satisfy domestic demand for 50 years. However, The country is currently facing severe shortage of production
capacity and has to depend on imports to satisfy its energy needs due to a lack of investment and re-investment in the
country that of its estimated 128 oil basins, only 38 has been properly explored, with majority of investment focused in
central Sumatra and East Kalimantan (Eni World Oil and Gas Review, 2011).
Despite many obstacles and challenges, Indonesia has huge potential. Asia pacific is a large producer and consumer of
oil and gas, with Indonesia being the seventh largest producer and the sixth largest consumer in the region. There is also
an increase in GDP that Indonesia has seen consecutive GDP Growth for 14 Years since 1998. By 2015, the country
aims to achieve a GDP of $4 trillion
COAL BED METHANE (CBM)
Coal Bed Methane (CBM) was a hot topic in 2011. CBM is usually high in methane with a lower calorific value. The
main difference between CBM and conventional oil and gas is that coal needs to be depressurized by dewatering in order
to produce the gas. However, it can take years to pump the water out. Indonesias substantial CBM reserves have the
potential to reduce countrys growing dependency on imported energy and attract new investment to its oil and gas
industry that by 2020, the government is aiming to produce 14 mcm per day of CBM.
However, there are challenges in CBM production, such as no cut-and-dried recipes on how to complete a CBM
reservoir and in some cases, new wells can produce from virgin reservoirs, although production from such reservoirs
may decline quickly. Furthermore, there is high drilling ratio (10 CBM wells: 1 conventional well) which depends on
smart well design and optimized drilling technology to reduce costs, added with inadequate infrastructure, equipment
and roadblocks. This resulted only a very few companies have invested in CBM despite its large resource potential and
thus, unable to meet the governments target production.

ONSHORE/OFFSHORE GOING DEEPWATER
Business opportunities are amazing in Indonesia right now. Across the marine sector, a lot of business is moving from
offshore to deep-water, states Ahmad Bambang, President Director of Pertamina Trans Kontinental. Compared to
onshore development, the cost of a start-up deep water is higher, with an exponential risk factor. But the government has
sweetened prospects by removing import taxes and offering a greater revenue split, such as onshore operates on 85/15
split in favour on the state; while in deep water, this ratio favours the contractor more at 65/35. There are further
incentives of deep water, which includes removal obstructive taxes by exploration rigs and quick approval process for
submitted development plans.
Upstream sector is moving towards two directions: enhanced oil recovery and apply it at mature oil fields and marginal
fields to optimize and enhanced production, or moving towards high-cost expensive drilling, which may not be suitable
for everyone as it has a smaller market and lower chance of survival. In 2013, the rig rates start from $23-
$32/horsepower/day factoring from the total investment in exploration and production by the oil companies and although
the Chinese rigs are cheaper, the government is trying to protect the local content and investments. Still, offshore drilling
rates are on the rise right now, while onshore rates are remaining fairly stable.
Unfortunately, many drilling companies are using same technology for 30 years in Indonesia as they are resistant to
change and wary of what theyre not familiar with. But upstream operators need to utilise more advanced technology,
better trained people and improved equipment, such as: better equipped oil rig platform including mud tanks and pumps,
drill pipes and bits, supply drill ship, supply flotels and floating production and storage units.
BARRIERS, RISKS and CHALLENGES
Indonesia is a developing nation that has much potential, but on the flipside many challenges, including laws and rules,
political risks and instability, geographical remoteness, finance risks, competitors and inexperienced labour force.
Laws and Rules
Cabotage Laws- UU No.17/2008. Introduced in 2008, strict cabotage drives foreign investors away for it requires foreign
ship-owners to own a maximum 49% stake in a local joint venture and permits only locally-flagged ships to operate in
territorial waters. However, a number of exemptions were included for speciality and high-technology vessels but most
are due to phased out by 2016, with many of the oil and gas related exemptions expiring in 2014. However, obtaining an
exemption from cabotage varies and there is an uncertainty of it being granted or extended, which is a huge risk,
especially when the exemption needs to be renewed every 3 months. With regards to Mare Forum Indonesia Conference
in 2013, beyond cabotage might make it even harder as it is a continuation of cabotage laws, which involves imports
and exports to be carried with locally-flagged ships in territorial waters, although the law has yet been confirmed.
PTK007/2009 Revision 2. The Amendment explains the requirements for bidding by tenders to be classified as a
domestic company for a 7.5% price advantage. The minimum 51 percent Indonesian shareholding must consist of voting
shares with dividend rights and two-thirds of its directorial positions have to be held by Indonesian citizens. Indonesia
currently plans to offer 27 oil and gas blocks by both direct offer and regular tender with a block for $5,000 bidding.
President Regulation No. 39/2014. Under the new rules, foreign ownership of offshore oil and gas drilling services was
limited to 75 percent from 95 percent.
Presidential Regulation No.2/2012. It focuses on convenience for industry sectors of oil and gas to manage licensing of
land, primarily in the conduct of exploration. In addition, it tries to facilitate and speed up the licensing process, a
problem that has always complained contractor cooperation contract (PSC), although the regulation has yet been
confirmed.
The Investment Law No. 25/2007 and Company Law No. 40/2007. The Investment Law elaborate further on the demands
pressed upon limited liability companies operating in the downstream sector in Indonesia, prioritizing Indonesian
citizens for employment. Law No. 40/2007 demanded that most companies to engage in Corporate Social Responsibility
(CSR) and the costs of CSR for a given company must be considered in addition to operating costs submitted at the
proposal stage of a companys attempt to do business in Indonesia.
Government Regulation 79/2010 (GR79). GR79 is perceived negatively as an over-arching framework and amending
provisions on cost recovery and tax in the upstream space. However, the threat is viewed as a temporary concern since
there will be only a few of pre-2001 Production- Sharing Contracts (PSC), with the remaining contracts expected to
expire in 2017. Traditionally, oil production under PSCs was split 85-15, meaning 85% of equity oil went to the
government and 15% to the contractor after cost recovery and tax, while gas production under PSCs was split 60-40 as it
has higher risks. Equity splits were modified occasionally to encourage development of higher risk projects, for example
deep water development and projects in the underexplored areas of Eastern Indonesia.
Law No.22/2001 and Presidential Regulation No.9/2013. For a piece of information, the sector was regulated by two
state owned legal entities: SKK Migas (previously known as BP Migas and terminated in 2012) for upstream operations,
and BPH Migas for downstream operations. SKK Migas had responsibility for management of the upstream operation of
joint cooperation contracts which are predominately in the form of a Production-Sharing Contract (PSC), while the
foreign party/contractor is responsible to SKK Migas for the execution of the operation. On the other hand, BPH Migas
has responsibility for granting licenses and supervising the operation of the downstream business.
Continuously modified laws and rules. Indonesia government tend to make revisions of its laws and rules, despite the
fact that it may not share the same view regarding investments and implement contrasting regulations. However, the
government is trying to ultimately dismiss overlapping and unhelpful ones.
Indeed, uncertainty over the legal and cost framework is causing companies to pause, not necessarily to abandon their
investment programmes, but to wait and see how these regulations are implemented. At a minimum, it is causing a delay
in the projects and reducing the chances of increased production.
Political Risks
Presidential Election. July 9, 2014 will be an important date for future political stability, with current two main
presidential candidates: Joko Widodo Jusuf Kalla (PDIP Party) and Prabowo Subianto Hatta Rajasa (Gerindra Party).
Written on Kontan Newspaper on 22
nd
May 2014, Mr. Jokowi, if he were to win the election, he promised to build 2,000
km new street and road repairs in Sumatra, Java, Kalimantan, Sulawesi and Papua, build 10 new ports and renovate the
old ones, build pipeline gas and reduce oil imports by increasing exploration and exploitation, and shift towards gas, coal
and geothermal. However, if Mr. Prabowo wins, he promised to build 3,000 km new street and 4,000 km railroad,
harbour and airport, electric and communication, making train as a priority for transportation and to restore the
governance of oil and gas. Nonetheless, the future President is expected to help in Indonesias growth and correct
governance.
Remoteness at the East
The government encourage explorations at the East as there are vast under-explored areas with huge oil and gas
potential. However, the region is remote with landslides and muddy roads, far away from the consumers in Jakarta,
added with high logistic costs. In addition, geological opportunities are in offshore and in deep water which requires
advanced technology. Moreover, naming an asset in Papua New Guinea also pose a problem that if the name of is the
same as one of the tribes, they can claim it as their own. Hence, an attractive terms and conditions such as infrastructural
improvement should be offered for potential investors to be interested to invest, for instance East Indonesia has
abundance of gas resources but it requires pipelines as a mode of transportation. Still, Elisabeth Proust, president of
Indonesian Petroleum Association (IPA) states These are the challenging sites, but they are balanced by the potential of
large reserves.
Labour Force
Employers generally consider Indonesias labour laws and regulations to place overly onerous obligations on employers,
particularly in respect of ability to terminate and the level of severance and termination benefits payable. A lack of
training, cultural background and difficulty in terminating non-performing workers often mean that staff numbers can
reach higher levels than an investor may initially anticipate. Attempts by governments in the past to make aspects of the
law friendlier to employers has led to street demonstrations and is politically sensitive.
Finance
Foreign investors are concerned as financing a larger, expensive and newer assets for international trade would be
extremely difficult for a local partners. They are afraid that their partners will not have the financial capability to
contribute the requiring 51% of the cost and not having credit rating sufficient for lenders to accept credit support from
them. Moreover, despite steps being taken to tackle corruption, business confidence is low that Indonesia is ranked 114th
in Transparency Internationals 2013 corruption perception index. Excessive bureaucracy and a lack of coordination at
the ministerial level also undermine the countrys business environment. In terms of 2013 World Bank and IFC Ease of
doing business and Ease of starting a business measurements, Indonesia ranked 120th and 175th, well below East
Asia & Pacific regional averages. But a recent positive development is an announcement by the Indonesia Foreign
Investment Review Board (BKPM) which has plans to reduce the time involved in establishing a business by
providing for applications for business and investment licences to be made online.
Local banks, too, at times are also not as aggressive as they should be, not only for the oilfield block operator business,
but for services and supply operators as well. Despite its aggressiveness, Indonesians banks tend to positively perceived,
for instance, the largest commercial bank by asset- Bank Mandiri- has contributed more than $3.2 billion in loan
facilities for the countrys upstream sector in 2011 and Bank OCBC NISP is one of Indonesias top 15 lenders with long
term credit rating upgrade to BBB investment grade level by Fitch and has a specific oil and gas financing programme.
Competitors
Oil and gas industry in Indonesia has competitors globally and locally. The top 3 Indonesian major oil producers share
of domestic production in 2012 are CNOOC (47%), Pertamina (17%) and Total E&P Indonesie (10%). While major
Indonesian gas producers in 2012 are Total E&P Indonesia (33%), Pertamina (16%) and non-Indonesian: BP Berau
(16%) and Conoco Phillips (Gresik) (14%).
International oil companies (IOC) dominate Indonesia upstream. State-owned PT Pertamina is the second largest oil
producer and a member of Fortune Global 500 dominate Indonesia downstream. However, it has to balance its needs as a
corporation against its mandate as a national oil company to meet domestic demand. IOCs in Indonesia's upstream oil
sector includes but not limited to: Chevron, Premier Oil, Total, ConocoPhillips, Exxon, and BP. Other national oil
companies such as the China National Offshore Oil Corp. and South Koreas KNOC also have significant upstream
stakes.
There are other companies too, such as Blue Sky Langsa Ltd. which has acquired the working interest in Langsa field
offshore in the North Sumatra waters, Salamander Energy spudded an exploratory well on the South East Sangatta PSC
offshore Indonesia using the Ocean General rig, Lundin Petroleum expects to complete a 3D seismic survey over the
South Sokang block and INPEX was awarded several field development contracts for its Abadi LNG project.
FUTURE PROSPECTS
A report issued by Mckinsey Global Institute suggests investors need not worry as it estimates that Indonesia will be the
worlds seventh largest economy by 2030 (Dawn on a trillion, Oil and Gas Year 2013). There are 3 main items to
highlight, based on Ministry of Energy and Mineral Resources (ESDM). First, focus of the production will look to the
underdeveloped east of the country. Second, exploration and production offshore and in deep water is expected to
accelerate. Third, switch focus toward gas production, such as in 2007, Indonesia conversion from kerosene to LPG has
been called a revolution that changed peoples lives. It helps to reduce fuel subsidies the government spends on kerosene.
It also cheaper, cleaner, safer, low emission and less toxic, despite 40% slower than those petrol-run vessel. (Revolution
in Fuel, the Oil and Gas Year, 2013).
EXPANSION MASTER PLANS
Tanjung Priok Harbour. Expansion is planned in the Kalibaru area of North Jakarta by 2023 and will officially be
known as New Priok Terminal. It includes the construction of 3 container terminals and the installation of container
terminal infrastructure and related equipment, to boost its capacity. The Indonesian Port Corporation (IPC) hopes to
reduce independence on Singapores ports and to be able to sail directly to and from Tanjung Priok to other regional
destinations.
Soekarno- Hatta Airport. Jakartas main airport and 12th busiest in the world, has a master plan for an expansion by
Angkasa Pura II. Its plan includes a new cargo terminal (New Cargo Village), expansion in airports terminal 3 as well
as other nine man airports across Indonesia, including: Pekanbaru, Pontianak, Pangkal Pinang, Jambi, and a connecting
building between 1st and 2nd terminals all of these are aimed to increase the capacity of passengers.
Acceleration and Expansion of Indonesias Economic Development (MP3EI). Economic corridors on 5 major islands
master plan is running behind schedule, although it has a huge potential making Indonesia one of the 10-most powerful
economies in the world. It put an emphasis on Northern Sumatra, Kalimantan, Central Sulawesi, Eastern Papua, Java and
Bali to attract foreign investors.
BPH Migas Oil Refineries. Ro increase production (as well as to reduce imports) and alleviate the burden of subsidising
fuel from the national budget, BPH Migas called for the construction of 3 oil refineries. The current 6 oil refineries in
Indonesia do not produce enough refined petroleum products to satisfy the domestic demand (9.4 million tonnes of
refined product short), according to Eni 2011 World Oil and Gas Review.


CONCLUSION
The difficulty for oil and industry in the future lies in how to create a balance between national interest and investors
interest despite its barriers, risks and challenges. In the upstream sector, exploration area is difficult to find and costly
with high cost bureaucratic performance and inter-agencies overlapping regulations. While the downstream sector has a
problem with subsidized oil fuel price which made people to squander in oil consumption and became a burden to the
government budget which may be used for development of infrastructure. As for Presidential Elections 2014, the winner
is expected to correct governance of energy, oil and gas, coal and mineral, which may turn Indonesia to be a second
leg to potential foreign investors. Without a doubt, there are though a number of hurdles facing this move up the ladder
in the oil and gas sector but it could also be an interesting challenge for its huge potential.