Indonesian misstep will cool E&P [NGW Magazine]

Indonesia’s natural gas production targets for 2020 have been rattled by the Covid-19 pandemic, with the government revising down its lifting targets twice this year.

While government-ordered lockdowns can explain a dip in this year’s production and upstream investment, they do not account for the slow and steady decline in national gas output since 2010’s peak of 8.4bn ft (237.9mn m)/day.

The country produced just 6.53bn ft/day in 2019, a 7.2% decline year on year, according to BP data. Output in the first nine months of this year, meanwhile, amounted to 5.5bn ft/day, upstream regulator SKK Migas said late October.

The Indonesian regulatory environment has long been criticised for its bureaucracy and corruption, both of which have deterred new upstream players while forcing existing contractors to rethink their investment positions.

The government has strived to improve the ease of doing business in recent years, but the passing of October’s Omnibus Bill has highlighted once again the country’s regulatory shortcomings.

Omnibus bill

The government passed the bill on October 5, with the goal of simplifying the country’s general licensing environment by integrating licences in various sectors, including in the upstream and downstream.

However, while the bill requires that developers secure a business licence from the central government before engaging in any upstream work, it does not modify existing regulations that require companies to sign a co-operation contract with SKK Migas. The co-operation contracts use either the legacy production-sharing contract (PSC) system or the gross-split model, which was introduced in 2017 to replace the former before the government reintroduced the PSC system in July.

Requiring upstream operators to acquire two licences covering a single activity, with heavy sanctions in place for those that fail to secure either, does not make much sense.

“As the Omnibus bill does not remove the requirement for business entities to obtain a PSC in order to perform upstream oil and gas operations, the role of the upstream business licence in general is unclear,” Fitriana Mahiddin, a partner at independent Indonesian law firm SSEK, told NGW. “The Omnibus bill does not specify what the form would be, and when a business entity may apply and what are the prerequisites of the upstream business licence,”

The list of unknowns includes whether the licence will be limited to a simple business registration number and whether a PSC must be signed before or after the licence application has been filed.

“There are changes under the Omnibus bill that are expected to please and attract investors, as they would cut excessive regulatory requirements in Indonesia, including in downstream licensing. We view that this may not be the case for upstream oil and gas, so it is likely that investors, including existing PSC contractors, would be turned off by the latest regulatory change in the sector,” Mahiddin added.

Given the state of global economic climate, furnishing investors with reasons to second-guess their upstream commitment seems unwise, especially in light of the government’s energy security ambitions.

Project speed bumps

The energy ministry declared confidently last year that Indonesia would never again have to worry about importing foreign supplies of gas, having revised forecasts that suggested it would need its first gas deliveries in 2025. Driving this upbeat prognosis was the assumption that a raft of new projects would come on stream over the coming years.

SKK Migas said new gas production would come onstream between 2021 and 2024 from state Pertamina’s Jambaran-Tiung Biru (JTB) project in East Java; from Chevron’s Indonesia Deepwater Development (IDD) project; from Tangguh LNG’s Train 3; and from Spanish Repsol’s Sakakemang project.

The long-term future of the country’s gas self-sufficiency is now question, given the collapse in oil and gas prices and the resulting strain on developer budgets. While Jakarta had trimmed its 2020 upstream investment target earlier this year to $11.8bn, investment in the first nine months only reached $6.9bn – or 68% – of the annual target.

Chevron sidelined the IDD project in January, saying it was no longer commercially viable. The energy ministry said in early August that it had approached junior partner Eni to replace the US super-major in the offshore project, with SKK Migas announcing at the end of September that it was in final talks with Eni over a deal. The industry will be watching these developments closely to see if the two sides can find enough middle ground to convince the Italian explorer that the project is worth the risk.

Indeed, SKK Migas and Repsol are reportedly at loggerheads over the Sakakemang field and industrial gas prices. The regulator called on the Spanish major in August to submit a plan of development (PoD) for the Kaliberau 2 well before the end of this year, regardless of whether the two sides had agreed upon offtake pricing.

The start-up of the JTB project, meanwhile, could be delayed from the third quarter of 2021 to the first quarter of 2022, SKK Migas said in September.

Policy initiatives

In order to promote upstream investment, the government has unveiled nine stimulus packages that include the delay of abandonment and site restoration fees until 2021 and either the postponement or elimination of value added tax (VAT) on liquified natural gas (LNG).

“We are taking steps to prevent a greater decline in [oil and gas] investment in Indonesia. There are nine stimuli that have been and are being processed,” SKK Migas chairman Dwi Soetjipto told reporters on October 23.

In terms of additional risks to upstream investment, Soetjipto said: “We might face a second wave [of the pandemic] early next year, with other smaller waves and those will affect global oil prices.”

The government has been seeking to cut down on upstream red tape since 2018 when the then president, Joko Widodo, decried the state's poor handling of the sector.

Indeed, some positive steps have been taken, including SKK Migas’ launch of a one door service policy in January, which aims to streamline application processes and improve communication between government departments. Moreover, the introduction of contract flexibility earlier this year is also a much-needed option for developers seeking to maximise their returns.

However, the Omnibus bill is a clear example of the sort of regulatory misstep that has damaged investor confidence in the past. In most years it might be considered a small blunder, but in the current climate there is little room for mistakes of any size.