Wood Mackenzie: Fiscal incentives could help Indonesia achieve its long-term production potential

(SINGAPORE/edinburgh/houston, 10th April 2013) ? At SEAPEX 2013 today, Wood Mackenzie said that Indonesia's upstream sector is mature, but still holds huge potential, with 45% (or over 28 billion barrels of oil equivalent) of discovered resources yet to be produced. The key to unlocking this resource is to incentivise operators to invest in the remaining, more technically-challenging, projects.

"Indonesia is at an important stage in its upstream journey,? says Mr. Craig McMahon, Head of Asia Upstream Research. ?The country remains the region?s largest producer and has the highest remaining reserves. It also has access to the bulk of South East Asia?s deepwater exploration acreage. Yet its production outlook is weak, particularly for oil, and its recent exploration record is poor by regional and global standards.

Indonesia still has large tracts of unexplored deepwater acreage and over 130 trillion cubic feet of undeveloped gas reserves. However, far more investment is needed to produce these reserves, as the easiest and lower-cost opportunities have already been developed."

Wood Mackenzie says that two main challenges remain to be addressed in order to reinvigorate Indonesia's upstream sector: the lack of incentive in its fiscal terms and uncertainty regarding the future of some major Product Sharing Contracts (PSC).

Indonesia's fiscal terms rank amongst the most severe across the world. The average 86% government take is significantly higher than the global norm of 59%. "If Indonesia could offer new incentives, there may be a near-term reduction in tax revenues from oil & gas,? says Mr. McMahon. ?However, this would be offset by increased investment and a likely boost to the country's longer-term production outlook. This has been proven in other countries that have reformed their fiscal policies, attracted new investment and rejuvenated exploration and development activity."

Regional examples of this include Malaysia, which is currently experiencing strong levels of industry interest due to its progressive fiscal terms and recent efforts to encourage development of marginal and late-life fields. Further afield, Norway?s efforts to stimulate exploration activity in the 2000s resulted in a significant boost in licensing and exploration drilling and a resurgence in its upstream industry.

Another obstacle to investment in Indonesia is the lack of clarity on PSC expiry and potential extensions. Several important PSCs are due to expire within the next decade, including North West Java Sea, Sanga Sanga, Jambi Merang and Offshore Mahakam in 2017. The current uncertainty around which companies will be involved in these projects, how contracts will be extended, and under what terms, is already affecting investment decisions and development planning.

"Production is intrinsically linked to the level of upstream spend and any reduction in investment will lead to higher levels of field decline,? Mr. McMahon says. ?However, if the Indonesian authorities could make early decisions on how projects will be managed and provide incentives for incremental developments, deepwater and enhanced recovery projects, it should significantly improve its long-term production outlook."

Mr. McMahon summarises, "Indonesia has huge remaining potential, but to unlock this the fiscal environment needs to provide greater incentives. Only by creating conditions that encourage companies to invest will Indonesia breathe new life into exploration and unlock the full value of its remaining oil and gas resources." (ends)