Indonesia invites bids for 14 conventional oil and gas blocks-

In the light of commencement of the first phase of oil and gas block bidding in Indonesia, it has become imperative to understand the energy environment of the country vis-à-vis the rest of the world. As a recently reactivated member of the Organization of the Petroleum Exporting Countries (OPEC), Indonesia really needs to stretch itself to even maintain current levels of oil production. Being the largest economy in Southeast Asia, an increasing domestic demand for energy and falling oil prices has made Indonesia’s situation tricky.

Auction 2016

Indonesia’s Ministry of Energy of Mineral Resources (MEMR) issued an invitation for energy companies to bid for 14 blocks under the country’s Conventional Oil and Gas Bidding Year 2016 in May, as an effort to strengthen domestic petroleum reserves. The country will be using two mechanisms for tendering blocks – a regular bidding system and a direct offer mechanism. Under the latter, a company can indicate its interest in any block not offered by the government, which is then opened up to bids from other investors. If no higher bid is submitted, the original company is automatically awarded the block. Out of a total of 14 blocks, seven will be awarded through direct negotiations while the remainder will be awarded through regular tenders.

The ministry is also offering non-conventional work areas such as the coal bed methane concessions Bungamas and Raja, as well as the Batu Ampar shale gas area.

The Indonesian government has also come up with a new scheme, known as Open Bid Split, in order to boost investors’ interest in the tender. As per this scheme, oil and gas companies can propose the signature bonus and production split. The parameters for the selection of a proposal include the company’s exploration commitment, signature bonus, and production split. The government assesses the proposals on these parameters and selects the most economically viable one. For non-conventional work areas, contractors can also get a sliding scale scheme, in which the amount is calculated based on daily production.

Challenges

Since the 1990s, Indonesia’s crude oil production has recorded a steady downward trend due to lack of exploration and investments in this sector. In recent years, the country’s oil and gas sector has hampered national GDP growth. Oil production targets, set by the government at the start of each year, have not been achieved for years in a row. Currently, the total capacity of Indonesia’s oil refineries is roughly the same as that a decade ago, indicating stagnation.

In 2015, the government floated tenders for awarding eight oil and gas blocks but none of them attracted bids even though companies were given a long four-month deadline to register an offer.  The lack of bids was despite the government having increased the revenue proportion for contractors from 15 per cent to 35 per cent for oil and  from 30 per cent to 40 per cent for gas. This was not the first time that the government failed to attract investment in Indonesia’s oil and gas blocks. In 2014, 10 out of 21 oil and gas blocks put up for auction failed to find new contractors. According to the ministry’s oil and gas director general, the failure to attract bids stemmed from weak oil prices. Furthermore, the terms and conditions offered by the government were deemed economically infeasible for potential bidders.

As a result of the muted response to invitations to bid as well as the low crude price scenario, exploration activities in the country declined over the past couple of years. Only 52 exploratory wells were drilled last year, resulting in a mere 15 discoveries, compared to 83 wells with 25 discoveries in 2014. The number of wells drilled dropped even more significantly when compared to the average of 104 wells drilled per year between 2011 and 2013. Only 10 exploratory wells had been drilled between January and April, 2016.

The OPEC connect

Indonesia had renounced its OPEC membership in 2009 as it had become a net energy importer rather than a net producer. Despite its meagre contribution, Indonesia was strategically reintegrated into the organisation owing to both market-driven and geopolitical reasons. With the abundance of North American shale and the slowing of China’s economy, OPEC has been increasingly driven to scout out new energy customers.

As for Indonesia, it needs OPEC’s technological expertise and investment to develop its domestic resources. Despite the country’s significant potential, domestic investment interest in its oil and gas sector has been on the wane in recent years. Further, factors such as an ageing energy infrastructure desperately in need of modernisation and the risky business environment have discouraged foreign investment thus far. Hence, the OPEC support has come at the right time to back Indonesia’s efforts to boost its energy sector.

The way forward

Indonesia’s high population and enormous growth potential will demand greater energy resources over the next few decades. Housing the world’s fourth largest population, Indonesia is the world’s tenth largest economy with a growth trajectory expected to clock higher numbers in the future. The energy consumption of the entire Southeast Asia region, spearheaded by Indonesia, is projected to rise 80 per cent by the year 2040. In this background, the Indonesian government is eyeing offering at least 27 potential oil and gas blocks over the period 2017-19. It is also carrying out geological and geophysical studies on potential oil and gas blocks that can be offered until 2019.

Thus, with robust growth in demand for energy, it is expected that there will be greater activity in the country’s oil and gas sector. However, this will depend on the government’s ability to elicit investor interest, which, in turn, would be determined (to a large extent) by the contours/modalities of bidding contracts. While the overall macroeconomic growth as well as crude price levels will have their own impact, it remains to be seen if the Indonesian government is able to correct its recent past record with regard to oil and gas auctions.