Indonesia upstream investment remains strong despite global economic slump
Wednesday, February 27 2002 - 02:25 PM WIB
The Indonesian oil and gas industry has enjoyed a relatively steady inflow of investment despite a slump in U.S. economy, recession in Japan and weak performances by technology and telecommunications stocks, James Brown, a consultant at James Brown & Associates said.
Exploration and production expenditure in Indonesia peaked at near $5 billion in 1997, and reached $4 billion in 2001, Rachmat Sudibjo, Indonesia's Director-General of oil and gas told a plenary session.
Investment in oil and gas upstream activity has eased, falling a modest 20% compared with the massive swings in the Jakarta Stock Exchange index and the rupiah's fall from its high in 1997 against the U.S. dollar.
Domestically, "we have seen Indonesia weather a four year storm," Brown said.
While one may infer that weak oil and gas investment interest from low crude prices, unstable socio-economic and political conditions in Indonesia, "the reality has been far brighter," Brown said.
"Investment has been high, the industry is not in its last leg, but it can do better," Brown said.
More fiscal incentives needed
The last time Indonesia offered incentives for exploration and production activities was in 1993, and since then there has been no new government initiatives to attract foreign investors who are now enticed by other countries providing higher incentives, Brown said, echoing industry concerns.
"The easy oil has been found," he said, and Indonesia will now have to turn to boosting production from deepwater sites and frontier regions, which implies higher costs for operators.
"Indonesia's upstream fiscal regime is generally recognized as being one of the harshest in the world," said Brown.
"And with easy oil extracted, Indonesia will become less competitive" with increased focus on higher-cost finding and production cost in frontier blocks and deepwaters, he added.
Giving the government's standpoint, Rachmat Sudibjo stressed the success rate in exploration activity in Indonesia over the years has been relatively high, and reached 55% in 2001.
Aside from fiscal incentives, Brown recommended Indonesia considered tax holidays, accelerated depreciation, investment allowances and introduction of special fiscal treatment for gas infrastructure.
He also called for increased transparency in policies, and within the industry generally, to facilitate decisions for new investment.
The Indonesian new oil and gas law was passed in November last year to increase the competitiveness of the oil and gas industry as it removes state-owned Pertamina's) monopoly and strips the company of its role as a production-sharing contract manager in the upstream sector.
But so far, industry officials remain uncertain over the implementation of the new law because of a lack of clear rules and regulations which are still being prepared.
In addition, security concerns in remote areas have proven to be challenging, with thefts, blockades and local disturbances disrupting operations and output stability.(*)