Johannes Simbolon, Jakarta – The rise in oil prices is happening at the "wrong time" for Indonesia – at a time when the country is struggling to stop or reverse the decline in its oil production.
In the past, when the country's oil production was still high and the country's oil production exceeded demand, a rise in oil prices was always welcomed as good news.
The sharp rise in oil prices in the wake of the Iranian revolution in 1979, for instance, brought a windfall profit for Indonesia and enabled the country to carry out a wide range of economic development programs throughout the 1980s.
Rather than generating a windfall profit, the current rise in oil prices has caused worries among the public as the government has announced it will raise domestic fuel prices to cut the ballooning subsidies.
The declining oil output is indeed one of the main challenges now confronting the country's oil and gas industry.
Indonesia first reached its oil production peak at approximately 1.6 million barrels per day (bpd) in 1977, rising from 500,000 bpd in just 10 years. The sharp increase was attributed to the numerous discoveries made in primary producing basins and the timely development of the discoveries, former president of the Indonesian Petroleum Association (IPA) Chris Pattini said in his speech at last year's IPA Convention.
The second production peak was reached in 1995 at just over 1.6 million bpd, mainly because of the application of secondary and tertiary technology, production optimization and the discovery of new fields. Since then, production has steadily declined. The oil output averaged slightly more than 1 million bpd in 2006 and dropped to less than 964,000 last year. Oil production averaged 976,000 bpd in the first quarter of this year and stood at 979,000 bpd in April.
The amount is less than the total crude processing capacity of the country's refineries owned by state-owned oil and gas company PT Pertamina, which are only able to process 72 percent of domestic market fuel demand. The total capacity of the refineries is 1.05 million bpd.
Despite being a member of the Organization of Petroleum Exporting Countries (OPEC), Indonesia has been an oil importer for years. It is now considering quitting the organization.
Experts attribute the oil output decline to the mature status of the majority of the existing producing fields.
Except for the Cepu field in Central and East Java, which is believed to be able to produce up to 165,000 bpd at its peak production in the next decade, no major oil discoveries have been made in Indonesia in the past several decades to offset the declining reserves of the existing fields.
While news from the oil sector is not quite good, news from the gas sector is still encouraging despite a decline in the output of some big fields.
Indonesia held the status of the world's largest liquefied natural gas (LNG) exporter for many years since it started LNG shipments from the Badak LNG plant in East Kalimantan in 1977, and from the Arun LNG Plant in Nangroe Aceh Darussalam the following year.
New players have entered the market since the 1980s, including Malaysia, Australia and Qatar. Gas-rich Qatar, which first shipped a tanker of LNG in 1997, is now the world's largest LNG exporter.
LNG production from the Arun and Badak LNG plants have steadily declined over the past several years due to lower gas supplies from surrounding gas fields that have seen their reserves significantly depleted following decades of exploitation. This has made Indonesia unable to meet its LNG export commitments to buyers and has forced it to buy LNG from Qatar to meet its export commitments.
Fortunately, several big gas fields have been discovered over the past several decades, with most of them remaining unexploited. The fields include the Wiriagar, Muturi and Berau fields that will feed the Tangguh LNG plant in Papua, the Senoro Toili field in Central Sulawesi and the Abadi field of the Masela block in the Timor Sea and the Natuna D Alpha field in the South China Sea, the largest gas field ever discovered in the country with recoverable reserves of 46 trillion cubic feet (TCF).
Although it has lost the status of the world's biggest LNG exporter, gas reserves in Indonesia are basically still plentiful. There is still a lot of gas available to meet the growing demand on the domestic and export markets. However, the government is apparently not interested in regaining its status as the world's largest LNG exporter. It has decided to allocate most of the gas for the domestic market,
Indonesia reached its gas production peaks of 8.6 billion cubic feet per day (BCFD) in 1996 and 2003. The output remained above 8 BCFD in the following years.
In response to the steady decline in the country's oil output, the government has pushed consumers to cut their oil consumption and use other fuels, such as gas and coal, instead. At the same time, the government is also providing incentives to encourage investors to boost oil exploration.
The new chairman of oil and gas upstream sector regulator BP Migas, Priyono, in a recent interview with The Jakarta Post said he was optimistic that Indonesia could restore national oil output to 1 million bpd by the end of this year.
In order to reach the target, he promised to "make it easier for contractors to carry out exploration activities and speed up the production process" by, among other things, expediting the approval process of plans of development (PoD).
Another big challenge for the country's oil and gas industry is to improve its efficiencies, or, if industry players consider they have been operating efficiently, to counter the public's perception that it is an inefficient industry.
During former president Soeharto's era, the industry was considered a den of corruption, where Soeharto's family and cronies reportedly made a lot of money illegally. Following the end of the Soeharto regime, expectations were high that the industry would become an efficient industry and bring a lot of benefits for the public.
However, suspicion toward the industry has resurfaced after the Supreme Audit Agency (BPK) released a series of reports on its finding of huge potential losses suffered by the government as a result of increasing cost recovery claims by contractors. BPK claimed that some of costs recovery claims were not necessary or might have been marked up.
The cost recovery claims paid by the government to the contractors reached $8.3 billion last year, up from $7.8 billion in 2006 and $7.3 billion in 2005. Meanwhile, national oil output decreased during the period.
Under the PSC system, the government gets 85 percent of the oil output and 70 percent of the gas output of the contractors, while the contractors get the rest. The production costs, however, are covered by both parties proportionally. Thus, increases in production costs will cut the government's revenue.
The BPK reports have prompted many parties, including legislators and anti-corruption activists, to call for tighter scrutiny of the industry.
Industry players have dismissed suspicion that the rising cost recovery was due to corruption, citing in various forums that rising production costs were caused by increasing costs for drilling rigs and other services, among other things.
The fact that most of the existing oil fields are mature has also contributed to rising costs.
"Unlike in those historical growth periods, the hundreds of millions of dollars reinvested by the industry in these mature fields each year are combating base production decline rates that range from 10 to 30 percent," Pattini said during the 2007 IPA Convention.
The industry players may be right in their claims that the industry operates efficiently, but they apparently still need to continue efforts to convince the public of this.
Another big challenge for the industry is to convince the public that they are also good corporate citizens who care about their corporate social responsibility (CSR).
None would deny the industry's enormous contribution to the nation and to communities. Pattini said the industry contributed 10.8 percent of the nation's GDP, 29.5 percent of the budget's revenue, spent $7.7 billion in exploration, development and production, directly employed tens of thousands of people, indirectly employed four to seven million people and spent $34 million in community development programs.
Still, many people expect the industry to contribute more, particularly in community development programs. Is such a demand reasonable? Are there any other aspects of CSR that the public often ignores but are well implemented in the industry? Hopefully, the questions will be answered in the "CSR and Sustainable Development" discussion during the convention.