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Indonesia Energy Producers See Natural Gas as the Future

Indonesia's energy sector is at a crossroads. Oil production is on the decline. New exploration is needed to develop new wells. The country has huge natural gas reserves, but it will also require the drilling of wells, pipelines and other infrastructure to develop them. Energy industry officials says Indonesia needs foreign investment to increase energy production but that confusing regulations and corruption have made companies question whether the investing in Indonesia is worth the risk.

Indonesia produces more than a one million barrels of oil a day while it consumes 1.5 million, making it a net oil importer. And, oil production has been declining the last few years. The majority of the existing oil wells are mature wells, which means most of the oil has been extracted. Significant oil reserves still exist in areas more than 200 meters beneath the surface of the sea. Drilling at these depths would would be an very expensive undertaking.

Energy analyst William Deertz recently surveyed a number of energy producers about the investment and regulatory climate in Indonesia. He says the government had made it more difficult for private companies to invest in developing these new fields.

"Production has been declining for the last decade. That's a fact. And you have to ask yourself, 'Why is that?' Because as you see in the survey results, investors are very keen on the geological prospectively for Indonesia," said Deertz. "So you are sitting there [thinking], well if you have the resources, why are we [not] seeing the investment and seeing an increase in production? You really have to start to question that."

Deertz says oil companies still see great potential in Indonesia's oil reserves but confusing government regulations, conflicting oversight from national, regional and local authorities and corruption are making them wonder if the investment is worth the risk.

"The sector is still regarded as attractive, but I guess some of the shine has come off," he said. "There are a lot of people that are starting to question it. And we did ask in the survey, has your company ever considered leaving Indonesia, for the various reasons, the challenges? And it was upwards to almost a third of the participants said, 'Yeah, we have considered leaving.'"

Energy companies are even more concerned about natural gas exploration and development. Indonesia has the 12th largest natural gas reserves in the world. And only one third of the more than 60 identified natural gas basins have been explored.

Ron Aston, president of the Indonesian Petroleum Association says energy companies are already investing more than $1 billion in gas exploration. But he says, gas requires massive pipelines and facilities to convert it into LNG or liquefied natural gas, to export it.

"Gas is a different story. It's a different game. For one thing you have to get the gas to the market. If you find oil you can pull up a truck, or pull up a tanker and sort of suck it up and take it away," said Aston. "If you find gas, you got to build the infrastructure to commercial[ize] that. That is either pipelines for LNG receiving facilities. You've got to invest heavily in order to achieve. And with that you need a long term economic return. You've got to have surety of contract for 20 years or more to get the return from that gas."

While Aston says investors see the current political and economic climate in Indonesia as stable, the energy industry wants to see more clarity in government regulations and reassurance that their contracts will be honored.