INDONESIA - Part 2 - The Oil & Gas Fields.

Indonesia hopes to slightly raise its crude oil and condensate output to 1.02m b/d in 2007. In 2006, it produced an average of 1.01m b/d of crude oil and condensate, down from 1.05m b/d in 2005. In January 2007, Indonesia produced nearly 860,000 b/d of crude oil, down from 950,000 b/d in early 2005, and 118,000 b/d of condensate compared to 130,000 b/d in early 2005 and 200,000 b/d in early 2001. Hoping that the natural decline of its many oilfields can be offset by production from new structures, Indonesia now consumes more than 1.2m b/d of oil and is thus a net oil importer. Indonesia's production of natural gas in 2006 averaged 8,104 MCF/day and the government is hoping this will not decline in 2007.

The government says its goal for 2007 is realistic as some of the oil firms operating in the country are planning to increase their output. Indonesia has suffered a decline over the past several years due to a lack of new finds and investment. The government hopes to boost oil production to 1.3m b/d by 2009.

President Susilo Bambang Yudhoyono in January 2007 told a gas conference Jakarta will remove regulations impeding investment in the upstream oil and gas sector to boost the country's output. He said: "We have tasked several ministries to take stock of the [regulatory] obstacles".

In 2006 the government removed import taxes on capital goods needed for oil and gas exploration in the country to lure investors to Indonesia. The government signed 16 oil and gas production contracts with international and local companies in 2006. Falling output and increasing consumption of petroleum products in the domestic market had made Indonesia a net oil importer since 2003. To ease reliance on petroleum-based fuel, the government will gradually increase the portion of natural gas for the domestic market to 50% of total output and export the remaining half. Indonesia now exports around 58% of its natural gas in LNG form, to Japan, South Korea, and Taiwan and by pipeline to Malaysia and Singapore, making it one of the world's top gas suppliers (see Part 3).

Indonesia has 60 sedimentary basins. Of these 36 are in the west of the country and have been explored, with 14 producing oil and gas at present. The east is under-explored and its infrastructure is not as adequate as in the west. According to Oil & Gas Journal (OGJ), Indonesia had 4.3 bn barrels of proven oil reserves as of January 2007, down from 4.4 bn barrels at end-2003, about 5.2 bn barrels at end-1993 and 10.1 bn barrels at end-1983. OGJ put Indonesia's natural gas reserves at 97.8 TCF as of January 2007.

With reserves depleting, Indonesia still does not give foreign investors E&P terms as attractive as the ones being offered by fellow ASEAN states. It needs at least $3.5 bn in annual investment to find and prove 4 bn barrels of additional oil reserves and have oil/condensate output above 1m b/d until 2020.

Many oilfields would stop production in the coming years. Caltex (Chevron), the biggest crude oil producer in Indonesia, expects its output to fall to less than 500,000 b/d this year, down from 550,000 b/d in 2003, 600,000 b/d in 2002, 660,000 b/d in 2001 and 785,000 b/d in 1997 (see profiles of the fields & operators below & in Gas Market Trends of this week).

It has been said since late 2002 that oil production could be increased by about 200,000-300,000 b/d within a few years if foreign and local companies activated as well as further developed about 60 marginal fields and if current operators stopped a decline in existing capacities. Energy and Mineral Resources Minister Purnomo Yusgiantoro said in October 2002: "We understand to develop those marginal fields is not easy, especially in cost. We will give them incentives but case-by-case. We want oil companies to propose something to the government on how to develop these fields". In late 2002, the then head of the state E&P regulator BP Migas, Rachmat Sudibyo, said the government was considering reducing the share it took of oil and gas revenue to encourage development of marginal fields. Nothing much has changed since then, with Sudibyo replaced by his deputy Kardaya Warnika, not even after Yudhoyono took over in October 2004 at the country's first directly elected president, although he and his deputy Jusuf Kalla have promised that the E&P and downstream incentives will be improved to encourage foreign direct investment (FDI) in the petroleum sector.

Indonesia's standard oil production sharing contract (PSC) split is 85% for the government and 15% for the contractor. In late 2004 the Constitutional Court upheld the 2001 Oil & Gas Law. But it struck down as unconstitutional three articles saying local fuel prices will be set by the market, oil or gas producers must commit 25% of their output locally and the Ministry of Energy and Mineral Resources can delegate marketing authority to the producers.

The government since early 2007 has been considering an obligation that gas producers with PSCs signed after 2001 must commit at least 41% of their gas output locally, with domestic gas prices still way below international market levels. But the government is also looking at adjusting VAT and import taxes on drilling equipment and other materials for upstream investors. It has been considering improving the government-contractor gas production split ratio from 70:30 to 51:49.

The government has pledged to raise prices of natural gas sold to the domestic market. But local and foreign gas E&P investors have been sceptical about such pledges (see background in Vol. 64 in omt10IndnsFieldsMar7-05).