Amahl S. Azwar, Jakarta – As the government points to the rising investment in the hydrocarbon industry this year, Indonesia's future oil and gas production is still at risk as most of the funding will be spent on maintaining current outputs rather than exploration to unearth new resources.

In a speech delivered before hundreds of the country's oil and gas contractors earlier this week, Energy and Mineral Resources Minister Jero Wacik said the total investment commitment for 2013 was expected to reach US$26.2 billion, higher than the $21.88 billion in 2012.

Jero said the increased investment showed that the investment climate in the oil and gas sector remained unharmed despite the sudden dissolution of upstream oil and gas regulator BPMigas in November last year.

"With that, we are asking all contractors to implement their program as specified in their planning in order to meet this year's oil and gas output targets as well as the revenue from the sector," he said.

Out of the $26.2 billion in investment expected this year, only around 10 percent or $2.7 billion will come from 200 contractors for exploration and the drilling of 75 oil and gas exploration wells.

This year's investment by the contractors is slightly increased compared to last year's investment of $2 billion. As specified under the 2001 Oil and Gas Law, the investment from these contractors will come entirely from the firms themselves without a cost-recovery scheme. The scheme will only be applied to those firms who successfully enter a profit-making production phase.

Meanwhile, 74 oil and gas contractors who have entered production, including US-based Chevron and France-based Total, will spend $23.5 billion, higher than the $19.8 billion invested in 2012. However, only $2.3 billion of that will go to further exploration, while $14.7 billion will be used to maintain the current output.

Indonesia, which quit the Organization of Petroleum Exporting Countries (OPEC) in 2008, has experienced a decline in oil production with output in 2012 only reaching around 870,000 barrels per day (bpd), a level much lower than the 900,000 bpd achieved in 2011.

Indonesia regularly produced around 1.3 million bpd of oil in the early 2000s. The decline in production due to aging wells means the country needs more new exploration schemes to tap into the country's undiscovered hydrocarbon reserves, particularly in the deep waters around the eastern regions.

Deep water projects are extremely expensive; it was this fact that influenced the decision by US-based oil and gas giant ExxonMobil's local subsidiary, ExxonMobil Indonesia – which was among the first to explore Indonesia's deep waters – to hand back its two oil and gas blocks in the Makassar Strait as they were considered economically unfeasible for further development.

In total, according to data from the interim upstream oil and gas regulatory task force SKMigas, around 13 working areas belonging to the oil and gas contractors – including ExxonMobil – have been returned to the government after the firms deemed reserves to be insufficient for profit making.

Separately, the executive director of the Jakarta-based energy sector think tank ReforMiner Institute, Pri Agung Rakhmanto, said that the increase in investment was due to rising production and development costs in maintaining Indonesia's aging oil wells.

"It has nothing to do with the country's improving investment climate. The maintenance costs for old oil wells are extremely high and nowadays, contractors have no other option than to sustain their existing wells," he told The Jakarta Post.

"Just look at the hard facts: declining production and minimal exploration activities. Yes, we maybe expect a rise in revenues from the sector for 2012, but that is only because of the soaring crude oil price."

According to him, the government could only claim that the sector's climate had improved if the portion of funding allocated for exploration comprised 20 percent of the total investment.

However, problems such as land acquisition and the recent decision to transform the interim SKMigas, which was formed to temporarily assume the tasks undertaken by the now-defunct BPMigas, into a special force known as SKKMigas, would create more uncertainties.

"The SKKMigas may end up just like BPMigas [disbanded by the Constitutional Court], as the transformation means the government wants SKMigas to become a permanent institution," he said.

ReforMiner's data shows that the country's current proven crude oil reserves total around 3.7 billion to 4 billion barrels, a decline of about 500 million barrels in recent years.