Representative End User Clients
Representative Automation Clients
Representative Software Clients
Overview
Indonesia is the largest country in Southeast Asia. This applies in terms of geographical size (1.9 million sq. km); population (270 million people); and GDP ($1.1 trillion, 2019). However, while industrialization, urbanization, and an increasing population continue to drive energy demand upwards, the country has struggled to attain the self-sufficiency it should have given the generous reserves of both crude oil and natural gas that exist across the vast archipelago.
Due to insufficient investment in the oil & gas industry, Indonesia, an OPEC member as recently as 2008, is a net importer of crude oil and re-fined oil products. While the situation is somewhat better when it comes to natural gas, a widening demand-supply gap indicates that without significant production growth over the next few years, the country could also become a net importer of gas.
President Joko Widodo, who came to power in 2014 on a platform that included correcting Indonesia’s inadequate infrastructure, has taken steps to boost domestic oil and gas production. This should help the country reduce its reliance on energy imports, a major contributor to the country’s current deficit. However, to achieve energy self-sufficiency, investment in the industry needs to accelerate.
In 2016, ARC Advisory Group analyzed the Indonesian oil & gas industry; reviewed the investment and regulatory environment; and highlighted some large projects, both underway and planned across both the upstream and downstream sectors. Let’s take this opportunity to quickly review the industry and examine the status of those as well as some newer projects.
Investment and Regulatory Environment
The Ministry of Energy and Mineral Resources (MEMR) is the Indonesian government department responsible for overseeing the oil & gas industry in the country. For specific sectors, the Special Taskforce for Upstream Oil and Gas Business Activities (SKK Migas) regulates upstream (exploration and production) activities, while the Downstream Oil and Gas Regulatory Agency (BPH Migas) regulates downstream.
In terms of commercial activity, international oil companies (IOCs) such as Chevron, ExxonMobil, and BP have long had a presence in the country, co-existing with national oil company Pertamina. However, issues such as perceived unfairness of production sharing contracts (PSCs), increasing resource nationalism, and often opaque regulations contribute to a trend of high-profile IOC departures from production fields and the forsaking of future opportunities.
A major development on the regulatory front came in 2017 with the introduction of a “gross-split” PSC, made mandatory for all new contracts and contract extensions and intended to replace the cost recovery model introduced back in 1966. But after some investor backlash, a new Ministerial Regulation passed in July 2020 allows companies to choose between cost recovery and gross split PSC. In the former, the government reimburses production costs, but takes a relatively high share (up to 85 percent) of a company’s earnings from a production field. In the latter, the oil company shoulders the production costs in exchange for handing over a lower percentage (maximum 57 percent) of earnings.
In his October 2019 second-term inauguration speech, President Joko Widodo stressed the urgent need to reduce bureaucracy and simplify regulations to boost the level of both local and foreign investment in the country. This led to the introduction of the Job Creation (Omnibus Law), which seeks to create a more business friendly environment for investors. While not applicable solely to the oil & gas industry, as a result of the law, companies operating in the downstream sector will now only need a single integrated license rather than the previous multiple ones for different downstream activities (refining, transportation, storage, etc.). And to make application easier, license issuing will be centrally managed. It remains to be seen, however, to what extent the Job Creation (Omnibus Law) will stimulate much needed investment in the oil & gas sector.
Oil Production
Indonesian crude oil production has trended downward over the last decade due to declining output from existing fields and insufficient new production activity. An increasing demand-supply gap, which reached close to 1,000 barrels per day (bpd) in 2019, indicates continuing reliance on crude oil imports to meet domestic energy needs.
A review of the status of production activities of the major oil companies active in Indonesia follows.
ExxonMobil
ExxonMobil’s major discovery of crude oil resources (estimated at 400 million barrels) in the onshore Cepu block in East Java in 2001 is now reaping dividends as the block’s Banyu Urip field yields in excess of 200,000 bpd. This constitutes a quarter of national oil production. In December 2019, ExxonMobil commenced production at another Cepu block field, Kedung Keris, which it discovered in 2011. The estimated 20-million-barrels’ field is currently producing 5,000 barrels of oil per day. This figure is expected to double as activities ramp up.
Chevron
In 2018, Chevron failed to secure extension of its PSC for the Rokan oil block in Riau province which, for many years, was the country’s largest oil production block. Instead, and as evidence of increasing resource nationalism, those rights went to Pertamina after the state-owned company’s proposal was judged to be “much better” than Chevron’s. After some concern over the IOC neglecting the block as the 2021 PSC expiry date approaches, in September 2020, Chevron signed an agreement with SKKMigas to drill 104 new wells up to its exit.
Pertamina
With recoverable reserves estimated to be between 500 million and 1.5 billion barrels, the Rokan block, which Pertamina formally takes over in August 2021, should remain a mainstay of Indonesian production for several decades to come. Pertamina also further expanded its upstream presence by taking over the East Kalimantan-Attaka onshore block in 2018 after Chevron’s contract expired. The same year, Pertamina replaced CNOOC as operator of the Southeast Sumatra (SES) block.
Oil Refining
At around 1.1 million barrels per day, Indonesia’s refining capacity has remained largely unchanged over the last decade. Clearly, with increasing domestic demand for refined products, this is not an ideal situation. However, compared to upstream, more serious efforts are being made to boost refining capacity to reduce reliance on imports.
These efforts began in 2014 with Pertamina’s launch of the Refinery Master Development Plan (RDMP and the Grass Root Refinery (GRR) initiatives. Respectively, these set out plans to upgrade five of Pertamina’s six refineries and construct two greenfield oil refineries. With the ambitious target to more than double oil refining capacity to 2.3 million bpd by 2025, it is instructive to look at the progress of the expansion and new-build initiatives.
Refinery Upgrades
The Balikpapan, Balongan, Cilicap, Dumai, and Plaju refineries have been identified for upgrade. Pertamina was keen to bring in joint venture partners to help shoulder the huge expense of the expansions. Initially, Saudi Aramco was expected to play a major role in the refinery expansions.
However, in May 2020, after five years of discussions, Saudi Aramco pulled out of the Cilicap upgrade project, citing disagreements with Pertamina on the valuation. This followed an earlier decision, in 2016, by Saudi Aramco not to proceed as a partner for the Balongan and Dumai upgrades. Pertamina plans to find a replacement JV partner for Cilacap, with reports of approaches to Abu Dhabi’s ADNOC. For Balongan, while Pertamina is proceeding with the first two phases of the refinery expansion alone, in June 2020 it inked a deal with Taiwan’s CPC for phase 3. This includes construction of a $12 billion petrochemical complex to integrate with the refinery.
As for Dumai, in May 2020, Pertamina signed an MoU with Indonesian construction firm PT Nindya Karya and a South Korean consortium to examine the feasibility of a $1.5 billion refinery expansion. Meanwhile, work has started on the Balikpapan refinery upgrade, which was reported to be at 17 percent completion as of May. 2020 also saw the exit of Italy’s Eni, Pertamina’s prospective partner for Plaju. The refinery, which plans to produce palm oil-derived biofuels after the upgrade, is still at the basic engineering design phase.
ARC Advisory Group clients can view the complete report at ARC Client Portal
If you would like to buy this report or obtain information about how to become a client, please Contact Us
Keywords: Indonesia, Oil & Gas, Upstream, Downstream, Refining, LNG, ARC Advisory Group.