Petrodollars: Trying to reverse the slide in Indonesian oil output

Indonesia used to be a major exporter of oil. It hasn’t been in that position for more than five years, and its decline in production has resisted efforts to be reversed. But have those efforts been adequate? In this week’s Oilgram News column “Petrodollars,” Platts’ Meghan Gordon–normally based in Washington, but who recently spent a month in Asia–discusses what might be needed for significant change.

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One of the world’s earliest oil producers, Indonesia has struggled for decades with declining output. It became a net importer in 2005 and left OPEC in 2009. In two decades, crude and condensate production dropped more than 40% to an expected 920,000 b/d this year.

If other early players on the world’s oil scene have turned around mature fields and declining production with shale, deepwater and other technologies, why does the birthplace of Royal Dutch Shell continue to struggle?

“Indonesia’s really a story of under-met potential when it comes to oil and gas development and resources in general,” said Ernie Bower, director of the Center for Strategic and International Studies’ Southeast Asia program. “Part of the story is governance; they’ve had a real serious corruption problem. Part of it is national strategy and ambition.”

Under former dictator Suharto, the profits and supplies from oil and gas drilling fueled the economy and gave the country a seat at the OPEC table. Then democracy broke out. In the decade-long transition from military rule, a national energy strategy never emerged.

Evita Legowo, oil and gas director for the Ministry of Energy and Mineral Resources, is hopeful that trend has started to turn around. During an interview in her Jakarta office, she said the government is considering a range of federal incentives to attract foreign investment and to spur state oil company Pertamina to drill more quickly and more extensively.

Legowo said enhanced oil recovery in mature fields will play a big role in meeting oil production targets. The government has considered offering drillers special tax treatment for chemicals used to flood the old wells.

But the turnaround also requires new exploration, something that seems to have stalled. Legowo said government solutions include developing better seismic data for offshore waters at the east end of the island chain, offering companies special contract terms in difficult-to-drill areas like deepwater, marginal or remote fields, and mediating disputes between, say, the forest or tax ministries to get projects moving.

“We have to have more and more new fields,” she said. “It means we have to do a lot of exploration. Without new exploration, we cannot increase our reserve.”

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Legowo said the government should get tough on Pertamina, insisting the company work more of its acreage. Some quietly blame Pertamina for insisting on being a technical partner as well as beneficiary without having the necessary expertise.

Member of Parliament Satya Widya Yudha, who sits on the legislature’s energy commission, offered a different assessment. Pertamina likely doesn’t want to deal with the most difficult fields, he said. “Pertamina has a chance to exploit more from their respective fields,” he said. “It’s not been really optimized. They’re just focusing on the area that’s easy to get.”

Yudha believes better performance by Pertamina and output from ExxonMobil’s promising Cepu field on Java could lift the country over the elusive 1 million b/d goal it hasn’t reached since 2006, according to the US Energy Information Administration. Yudha suggested upstream regulator BPMigas accelerate approval of projects with the best prospects. “If there is a certain field that becomes a honey pot for national production, it should be treated differently,” he said.

Even if it gets those things right, Yudha added the government must be vigilant about providing a stable fiscal regime and fair contract terms to attract new investment.

Gde Pradnyana, communications director for BPMigas, sees a completely different barrier: local interference. He said companies are reluctant to start new drilling projects in Indonesia knowing they could get hung up by contentious land disputes.

“A lot of the handicap, the problem, is beyond our control,” he said, adding that local governments were seizing more control as populations grow. “A lot of problem is generated by the people. They’re blocking the access roads. They’re stopping access to production facilities, claiming the land has not been paid yet.”

The weather also deserves part of the blame, Pradnyana said. For example, flooding in early 2011 hampered pipelines that move heavy oil from the Duri production field in Sumatra.

Pradnyana added that falling oil production is just part of the country’s resource base. “As we are moving from west to east, most of the east acreage are gas-prone rather than oil,” he said. “The more exploration we’re doing in the east, more gas is being discovered. We haven’t discovered any big oil reserves.”

CSIS’ Bower senses urgency in Indonesia to reverse declining production but an inability to steer in that direction. “At some point, it’s got to be too economically compelling not to figure it out,” he said. “All of us are Indonesia fans and want to see more business developed and look and wonder, ‘How can they get out of their way on this?’“

–Meghan Gordon in Washington

Platts