Indonesia must give more to boost oil exploration

Indonesia's plan to give contractors a bigger share of the oil they pump out was just the move to encourage exploration, but success will depend on how much the government is willing to give up, analysts said.

``It will make the country more attractive when companies take a look at what is the most competitive environment, but it would depend on how much they give,'' said Ian Cross, vice president of IHS Energy in Singapore.

``It certainly is quite a positive move, but until it's known what exactly the new split is, it's difficult to say how good it is.''

Indonesia has announced it would change its oil production sharing formula, which currently gives 85 percent of the output to the government and 15 percent to the contractors.

``I have ordered (state oil and gas firm) Pertamina to give incentives to oil contractors by reducing the government share,'' Mines and Energy Minister Purnomo Yusgiantoro said on Tuesday.

The changes will be made on a case-to-case basis, but Purnomo did not detail how much more will be offered to oil companies.

This was the first time in six years Indonesia had offered to adjust its production-sharing terms.

Global upstream competition intense

Analysts said Indonesia was competing with other regions that offered more attractive terms or better prospects and it may have to sweeten terms significantly to lure oil companies' exploration investment to its shores.

``It would have to be quite a big increase (contractors share) to encourage exploration because Indonesia's terms are very harsh when you compare them with their peers, and the oil industry is a global industry,'' said an analyst at WoodMackenzie in Edinburgh.

``The United Kingdom upstream, although it is a high-cost environment, is relatively mature in the same way that Indonesia is and the marginal government take there is only 30 percent. You compare that with Indonesia where the government take is 85 percent.''

Indonesia needs to boost its exploration and development activities to replace dwindling reserves and to raise production to meet its OPEC quota of 1.36 million barrels per day (bpd).

An official at Pertamina said Indonesia, OPEC's only Asian member, produced 1.297 million bpd in September.

Mines and Energy Minister Purnomo put Indonesia's proven and potential reserves of oil at some nine billion barrels.

Analysts said the odds against Indonesia were also higher because its political environment was seen to be unstable, deterring companies from investing in the country.

The lack of a big oil discovery in Indonesia in recent years to spur companies on has been a factor, analysts said. They said Indonesia's upstream had greater potential for gas discoveries.

``Unocal (NYSE:UCL) has been quite actively drilling in deepwater Indonesia for the past few years, but there's not been a huge oil discovery like the ones seen in Angola,'' the WoodMackenzie analyst said.

``A lot of the traditional oil producing areas in Indonesia are quite mature so the likelihood of making another big find is getting smaller,'' he said.

Analysts said Indonesia's move was a step in the right direction in response to difficult market conditions and the industry would now watch for details of the new incentives and the will of the country to push the plan through. (*)