Nationalisation of Indonesian oil and gas assets draws concern over investment in the energy sector

While Indonesia’s lawmakers have promised to safeguard the country’s lucrative oil and natural gas assets, there are concerns that recent examples of resource nationalisation may deter future investment, and President Joko Widodo has largely carried forward the resource nationalism agenda championed by his predecessor, President Susilo Bambang Yudhoyono. In a bid to cut imports, in September 2018 the government directed all oil producers to sell their crude to state-owned refiner Pertamina, a decision that has been met with mixed reactions. Opponents have raised concerns that allowing stateowned companies to dominate the market will reduce competitiveness and negatively impact investor sentiment, while those in favour believe it will boost government revenue streams and, in turn, promote wider economic growth. Regardless, Pertamina is poised to benefit from the handover of high-profile oil and natural gas blocks.

State Acquisition

Pertamina is set to take over more high-profile blocks expiring by 2022. The company already took over a number of key fields, including Mahakam block in East Kalimantan in January 2018, previously under the purview of France’s Total and Japan’s Inpex. Pertamina will also take over Indonesia’s second-largest crude oil-producing field, the Rokan block, from US firm Chevron in 2021. According to an industry report in late 2018, 15 blocks expiring between 2017 and 2021 have already been given to Pertamina. Leases on a dozen more oil and gas blocks are set to expire from 2021 to 2026.

The handover of the Rokan block will increase the share of Indonesian oil used at Pertamina refineries from approximately 35% to 40%, which will equate to savings of around $30m per day. As of the first quarter of 2018 Pertamina had seven of the country’s nine oil refineries under its purview.

The Refinery Development Master Plan and new Grass Root Refinery are two major efforts to increase existing capacity. While the overall intention of the projects is a step in the right direction, the success of these initiatives will greatly depend on attracting new private investment, as is under discussion with the refineries in Musi Banyuasin, Batam and Bojonegara.

With a total refinery capacity of only 1.1m barrels per day (bpd), Indonesia is heavily reliant on imports of refined products to meet surging domestic demand. There is some disagreement among market experts about how to reduce this import dependence. While the state’s acquisition of hydrocarbons assets is partly aimed at reducing imports by sending more oil to Indonesian refineries, a number of market reports have cited concerns that maturing fields would be better off in the hands of international oil companies as they require specialised expertise to maintain current output rates. There are also concerns that the state-run energy company may have overextended itself in assuming larger stakes in production-sharing operations.

Since its successful acquisition of French oil and gas company Maurel et Prom (M&P) in early 2017 the state-owned energy company now has operations in 12 countries spread over four continents. By some accounts, acquiring a 72.7% stake in M&P demonstrates Pertamina’s intent of becoming a large-scale national energy company while promoting Indonesia’s energy resiliency and self-sufficiency. The state-run energy company aims to produce 1.9m barrels of oil equivalent per day (boepd) by 2025, of which 650,000 boepd will come from its international operations.

A Move to Natural Gas

Given the downward trend of oil production and growing domestic need for gas, Indonesia’s energy sector is in the midst of a transitional period. As a result, its production profile continues to shift away from oil and towards natural gas, the cleaner of the two energy commodities.

Crude oil production in the country has declined significantly since the end of the 1970s. Indonesia’s energy segment previously provided a steady stream of profits for the government, with fuel production a primary driver of industrial manufacturing and broader economic growth. Despite a number of attempts to increase exploration activity, attracting a new stream of investors has proven difficult for consecutive governments.

Since 2004 Indonesia has been a net importer of oil, with crude oil production experiencing a downward trend. As it stands, most of the oil production is in mature fields, where production is around half of its former peak levels, from a national average of 1.6m bpd in 1977 to 949,000 bpd in 2017.

While there may be a growing trend of resource nationalisation, the majority of oil and gas production is still carried out by foreign contractors under production-sharing contracts (PSCs). As of the first quarter of 2018 Chevron Indonesia and Mobil Cepu were the two largest oil producers in the country, accounting for 30% and 25% of total output, respectively. This was followed by Pertamina EP (10%), Total E&P Indonesie (7%) and Pertamina Hulu Energi (4%). In terms of gas, the top producers were Total E&P Indonesie (19.7%), BP Tangguh (14.2%), ConocoPhillips (12.8%) and Pertamina EP (12.7%).

Indicators

With the government moving to nationalise its hydrocarbons resources, Indonesia was unable to meet production and investment targets in 2018. According to the Special Taskforce for Upstream Oil and Gas Business Activities, also known as SKK Migas, the oil and gas sector attracted $3.9bn in investment in the first six months of 2018, well behind its target of $14.2bn for the period. Pertamina’s latest publicly released annual report for 2017 noted that the company had experienced an increase of sales and total business to the tune of $43bn, up by 17.7% from $36.5bn in 2016. However, net income in 2017 witnessed a decrease of 19.3%, from $3.2bn in 2016 to $2.6bn.

New Deals

In previous years, market analysts have highlighted bureaucratic hurdles and regulatory uncertainty as key deterrents to exploration activity. To alleviate this strain, lawmakers have made concerted efforts to reduce red tape. An example of these attempts included the early 2017 introduction of a gross-split PSC, which has provided additional clarity on financial issues by tweaking the tender process from a net-split to a gross-split profit regime.

In addition to the new PSC requirements, the government has introduced a number of measures to reduce uncertainty and encourage further foreign and domestic investment; however, some financiers remain tentative as Indonesia has published, revised and revoked sector regulations in the past.

In the lead-up to the elections in April 2019, rhetoric from candidates, while effective in attracting votes, could translate into weaker foreign investor appeal. Estimating the exact outcome of resource nationalisation efforts on future foreign investment inflows is not an easy task. While resource nationalism may be viewed as a deterrent for investors, the trend is likely to continue as more blocks expire in the years ahead. Meanwhile, the role of gas in Indonesia’s hydrocarbons production share is almost certain to increase in the coming years as oil reserves deplete.

Government initiatives to utilise more natural gas – including the implementation of major liquefied natural gas projects to accommodate domestic demand and capture more of the lucrative Asian market – are expected to accelerate this trend going forward.