William Lin, President, BP Asia Pacific; Abdul Hamid Batubara, Deputy MD, Chevron Indonesia; Richard Owen, President Director, ExxonMobil Indonesia; Lukman Mahfoedz, President Director, Medco Energi; and Roberto Lorato, President Director, Premier Oil

Interview: William Lin, Abdul Hamid Batubara, Richard Owen, Lukman Mahfoedz, and Roberto Lorato

How can private and public stakeholders improve coordination to boost investment and production?

WILLIAM LIN: Coordination has improved within the energy sector in some areas, but there are still challenges. There is still a lack of clarity around roles and responsibilities and too many people or institutions involved, which can make it difficult for private stakeholders to know who is actually responsible and accountable. The government needs to make sure that the right people are empowered to make the right decisions. When this happens, then things can move very quickly, as we have seen on the approval of our plan of development for the Tangguh expansion. The industry is often misperceived by those who lack the full understanding of what the oil and gas sector actually does. This can result in decisions being taken that are counter-productive to what both the energy industry and the country needs. Investors want to bring their capital, experience and technology to this country, but there must be greater clarity around the application and adherence to regulations and legal governance. I often say the sector does not need additional incentives, but rather that the terms and conditions we have in our existing agreements are honoured and no disincentives applied.

ABDUL HAMID BATUBARA: There needs to be a paradigm shift where we recognise each party in this industry plays an equally important role. Increasing operating costs is necessary to address declining rates and boost production. Initiatives coming from the president of Indonesia to invite all stakeholders to work together to explore innovative solutions can help increase production and attract investment. This initiative has created significant optimism across the industry. Coordination and collaboration among government institutions can avoid any conflicting regulations and will help demonstrate the certainty and stability necessary for investment. Contract sanctity is also critical for sustainable partnerships.

RICHARD OWEN: Since the beginning of 2012, we have seen significant improvements in this area. The Banyu Urip full field development, for instance, which is one of our largest ongoing projects, has benefitted from a much more concerted effort between the Ministry of Energy and Natural Resources and local governments to remove barriers and help the project move forward. So, on that particular part of our business I think we can be satisfied with the achievements and optimistic that future bottlenecks will be resolved. Having said that, it cannot be denied that there are some aspects of the government’s procedures and regulations that act as disincentives to the industry. We believe that open and transparent communication between stakeholders is important. A more integrative earlier consultation process must be developed so divergences between government and industry can be avoided.

LUKMAN MAHFOEDZ: Improved coordination can be made through a regular, open and transparent discussion among the industry players, government and other stakeholders. Consultation, coordination and collaboration should all be applied as the framework of engagement in the oil and gas industry. Early engagement and coordination with industry players should be in place, in anticipation of new regulations which may impact the industry. The government should also reassess the current fiscal terms to ensure Indonesia’s competitiveness in the global marketplace. That can be achieved with extensive coordination between the regulator and the industry to increase the number of financial incentives, to improve Indonesia’s infrastructure, to develop a new energy policy and continue to push forward with effective implementation. Other aspects include harmonising conflicting regulations. We are pleased with the quick action by the government and the current discussions taking place between it and the industry.

ROBERTO LORATO: The industry has been subject to a number of unexpected changes in the past few years, the latest one being the court’s decision in November 2012 to declare BP Migas unconstitutional, followed by its immediate dissolution. This irrevocable decision came as a shock to the industry, and although the government has minimised disruptions by transferring BP Migas’s former functions to the Ministry of Energy and Natural Resources, it still shows that there is room to improve coordination and effective consultation.

There needs to be a joint commitment from public and private stakeholders to define changes or amendments, in order for both parties to continue working together. This will help build a certain and predictable environment, which will result in an increase in investments and production levels in the oil and gas sector.

How will the shift towards new developments and exploration in the eastern areas of Indonesia help solve the issue of declining production levels?

BATUBARA: We are continuing our commitment to invest in Indonesia, including exploring the eastern regions. While we see significant opportunities in this region to be the solution to declining production levels, it will depend on how appealing it is for international oil and gas companies to go there. Incentives matter, and I believe we should start looking at different models, like those seen in markets that give more flexibility in the splits depending on a vast number of different factors. Compared to them our model is very stiff.

This industry has great potential but also great risk. Often the public and the government only look at the successful cases where oil is found, but forget about unsuccessful stories. We still see a great challenge in infrastructure issues, which increase risk and costs. It will be difficult to convince investors to keep investing when supportive incentive regulations are not there.

OWEN: We see Indonesia as a prospective market and it is our intention to evaluate opportunities in every area of the country regardless of its geographic location. But there are at least two incentives that I consider fundamental. First, we need a stable investment framework where the terms and conditions negotiated with the government remain intact during the life of the project. The industry’s primary concern is the sanctity of existing contracts. Given the time frames for investment realisation in upstream energy, the existence of long-term stability is crucial to attract significant investment. Second, we need flexibility to negotiate the terms and conditions of each specific exploration opportunity with the government.

It is important to create a case-by-case analysis of each project and provide specific fiscal terms or conditions depending on the type of project or exploration needed. Oil and gas projects require massive investments over a long period of time, so for us to keep exploring opportunities, we will need these conditions met.

LUKMAN: The era of easy oil and gas in Indonesia is over. Many oil and gas fields are maturing, continuing their natural decline, while unexplored oil and gas reserves in the eastern regions are now vital to Indonesia’s future energy supply. Lack of infrastructure, remoteness and deepwater are the typical constraints in the eastern part of Indonesia, and at the end these mean higher investment to explore and develop fields. The government had launched several initiatives to encourage investment in this area, including increasing the number of working acreages offered. However the incentive looks less attractive compared to risk associated with the investment. The government needs to be more aggressive in incentives, such as a 50:50 split, easy access to bring expertise and technology to the new developments, clarity in regulations between central and local government, simplified bureaucracy and faster investment approval. Specifically for gas development, a B2B negotiated gas and liquified natural gas (LNG) contract would help increase investment.

LORATO: Over the past few years, the industry has turned its attention to the eastern part of the archipelago. However, appropriate logistics and infrastructure have to be in place in order to operate and their current insufficiency represents a substantial obstacle, with inevitable implications in terms of the costs of conducting exploration activities. To increase the rate of investment in the east, substantial efforts from the government will be required in terms of infrastructure. As always, to encourage companies to conduct high risk capital intensive activities such as oil and gas exploration and development, they will need to know that they can count on a clear, reliable and stable contractual environment. Only when such conditions are met, and if exploration is successful, will the eastern area help in raising the national production levels.

LIN: Most of the oil and gas resources in the traditional areas of Sumatra and Kalimantan have already been developed and produced. Therefore, the sector has to move more toward areas that have been less explored, like eastern Indonesia. There is great potential in this region. For BP, we have received approval from the government to go ahead with a new investment of $12bn to expand our LNG operations in Tangguh via our Train 3 expansion project. Although very promising, there are still challenges. The region is very remote and needs an efficient logistics and infrastructure to handle the transportation of workers, supplies and equipment. Moreover, dealing with the local government and local communities requires sufficient time, focus, care and knowledge to ensure we are looking after the welfare of local people in the right way and for the long term.

What is the role of natural gas in facilitating investment in the wider petroleum sector?

OWEN: I believe the government is making strong efforts to increase the production and domestic supply of natural gas, but there still needs to be significant investments in gas infrastructure to develop both downstream and upstream capacity. There are a number of regasification terminals being built that will require proper infrastructure in order to have the gas distributed. Indonesia’s present energy deficit means there is huge growth potential for gas, provided supply is available for domestic consumers. ExxonMobil recognises that every market is unique and requires a customised package of energy solutions to reach its full potential. Unfortunately, these solutions do not come pre-assembled. They require effort and cooperation among governments, suppliers and consumers to develop each individual market solution. There is, however, one common element among these diverse solutions – natural gas will be a leading source of energy in Indonesia over the medium to long term.

LUKMAN: The contribution from gas to the country has significantly increased over time and will continue to do so in the future, given the magnitude of its reserves and the intention of the government to increase its use as a substitute for oil consumption, which in the end will reduce spending on oil subsidies. To develop, significant infrastructure will be needed (such as pipelines and facilities), which will create a multiplier effect for local economies and industries. Natural gas development is therefore playing a vital role in facilitating further investment in the petroleum sector and will continue to do so in the short to medium term

LORATO: Investment in the petroleum sector is linked to the current production-sharing contract regime. The most effective way to facilitate investment is to have more flexible profit splits, tailored around specific projects and areas. These, together with the assurance from the government that the fiscal and regulatory framework will remain stable, will help increase investment in the wider sector.

LIN: Natural gas is the future for Indonesia, clearly. Oilfields are mature and have been producing for a long time – many are on a natural decline. Natural gas is more efficient and cleaner than other resources, such as coal or oil, and there are still significant undeveloped gas resources. However, the challenge for Indonesia is to have competitive pricing for the sale of natural gas. Upstream companies need to have a price that both offers a reasonable rate of return on investment and that can compete with alternative markets. Domestic LNG pricing will have to be broadly competitive with market pricing in Asia, such as in Japan and South Korea. BP does understand that supplying the domestic market with LNG is critical, with demand increasing.

BATUBARA: As the easy oil era is gone and most of the resources are in more remote and difficult locations such as deepwater, we see that natural gas exploration and production will be more attractive and play an important role in energy sector in Indonesia for years to come. As it is currently the largest crude oil producer in Indonesia, Chevron continues its investment in delivering crude oil to reach production targets, while adding the reserves into its portfolio.

At the same time some of Chevron’s major capital projects are now increasingly focused on natural gas exploration. With the great potential of natural gas, we believe the government will do its best to attract and increase investment in this sector.

How can Indonesia increase geothermal’s share in the energy mix, given its vast potential?

LUKMAN: The interest in geothermal energy has improved greatly following the establishment of a stable legal framework. Further support from the government, especially during the exploration stage, is required to attract more investors. As this renewable energy source is very capital-intensive upfront compared to oil and gas, investment support is crucial. Aid from banks and other investors is needed.

Therefore, a legal framework that can satisfy financiers and lenders should be considered. The government should also provide more competitive electricity prices for geothermal to make it a more attractive and larger contributor to the national energy mix. MedcoEnergi, together with its partner, is developing the Sarulla and Ijen geothermal project. Sarulla requires a total investment of about $1.5bn to generate some 330 MW of geothermal energy.

LORATO: Premier Oil is constantly looking for new opportunities in the sector in which we operate. We do not currently foresee entering the geothermal sector, but in general terms I believe that it is a resource with great potential and one which could substantially increase its current contribution to the overall energy mix, if the appropriate incentives and infrastructural development support is granted by the government.

LIN: Geothermal energy in Indonesia has great potential. There are businesses already operating successfully in a sector that still remains largely untapped. BP is currently focused on oil and gas, lubricants and chemicals in Indonesia and is not involved in the geothermal business. However, it is clear that the action taken by the Ministry of Energy and Mineral Resources to increase the feed-in tariff, which sets electricity tariffs for geothermal energy at different levels depending on the location of the project, has helped create more confidence for potential new investors. The challenges to face when it comes to furthering investment in geothermal centre around surface access and permits, which is also currently affecting the oil and gas sector.

BATUBARA: Some 10 years ago, when Indonesia was still a net exporter of crude oil, there was no incentive for investors to explore geothermal. But in the current situation, with Indonesia a net importer of crude oil, international oil prices above $100 a barrel and demand for energy increasing fast, it is the right time for the government to continue making the investment in alternative energy sources – particularly, in the geothermal segment.

The new tariffs mean geothermal projects begin to be bankable, which is a good first step, but more must still be done, particularly in improving government guarantees, reassessing exploration risk allocation and simplifying power purchase agreements.

OWEN: New supporting regulations and the raise in the feed-in tariff for electricity generated from geothermal energy have definitely made the sector more attractive. It will be interesting to see whether this is the definitive push needed by private companies to bet on the sector so that geothermal generation raises its contribution to the national energy mix. Currently, ExxonMobil will continue to primarily focus on growing capacity around oil and gas exploration, production and development, as this is where our competitive advantage resides and where we feel that there is still plenty of potential for us in the Indonesian market.