Indonesia Oil and Gas Outlook 2021

The year 2020 is the most disruptive year for almost all business sectors and sides of our lives. Why not, the COVID-19 pandemic that has spread from mainland China is like a tsunami wave that destroys the economic foundations of any country, changing the order of life and social relations. Until the end of this year, more devastating aftershocks have been indicated by the discovery of a new type of virus that has been symptomatic in the UK, the Netherlands, Denmark, Ireland, China, and several other countries. The use of vaccines as a solution that is expected to restore the situation is still far from being expected.

Will this continue into 2021? It seems that no one has dared to publish with certainty and certainty when the effects of the COVID-19 pandemic will end. This of course will make economic activity in various countries also stagnant, even minus. If this situation occurs, the balance of world energy demand and supply will still be like in 2020, namely the phenomenon of “(s)low demand and oversupply”. The price of energy is cheap but no one buys it because it is not needed. And, a production that can’t be stopped will build up in the supply chain in landfills.

The most prominent effect of the COVID-19 pandemic is the prevention efforts that limit the movement of people. So, even if there are buying and selling activities in the community, it will only occur in commodities that they really need. It can also be done with the application of technology, without people having to leave the house. And, because purchasing power is also low, it causes economic growth to slow down, it can even be negative. Many businesses have gone out of business, causing layoffs (terminations) everywhere, which ultimately increases the number of unemployed. Sectors that used to consume large amounts of energy, such as tourism, restaurants, shopping centers, logistics, and transportation, experienced a drastic reduction in demand.

The same is true for the oil and gas sector as the main energy source that we use for raw materials and fuel. The low world oil and gas demand coupled with excess oil and gas supply due to the price war between Saudi Arabia and Russia still leaves this energy price uncertainty in 2021. Moreover, it is not yet known when the COVID19 pandemic will end.

Indonesia, which has various potential sources of energy, should have changed course for a long time. Not only targeting an increase in oil and gas production, but also the utilization of the downstream side (downstream), and efforts to support the development of other energy, namely new and renewable energy (EBT). Take advantage of this low oil price condition to process it into finished goods that have added value.

The initiation of research and development of battery technology carried out by a consortium of energy SOEs and several research institutes and universities must continue to be encouraged and given a wider space. Likewise, the program for mass-producing electric motorcycles and cars has been launched. These two programs are expected to be carried out more seriously with a tight timeline to immediately provide solutions to our transportation sector.

On that basis, Indonesia’s energy mix targets that have been published by the DEN (National Energy Council) should be achieved as expected. The role of NRE is slowly dominating our energy supply. Indeed, in terms of quantity (nominal) the national demand for oil and gas also continues to rise, but its utilization will have shifted considerably, from fuel to raw materials.

In 2021 several gas stations (Public Fuel Filling Stations) will continue the program that was started in 2019, namely increasing their service modifications by building gas refueling facilities (SPBG) and public vehicle electric charging (SPLU). With the increasing number of users of electric cars and motorbikes, SPLU will be placed in strategic corners. In shopping centers and in parking and office buildings, a mushrooming SPLU business will grow.

Then what will happen to Indonesia’s upstream oil and gas sector in 2021? As has been announced to the public that SKKMigas targets national oil and gas production of 1 million barrels of oil and 12 billion cubic feet of gas per day in 2030. Meanwhile, the average production per day in 2020 is still at the level of 705 barrels of oil, and 5.5 billion cubic feet of natural gas. So, the effort towards achieving the target is not an easy thing.

With the natural decline in production in each oil and gas field and the absence of new fields with large reserves, the national oil and gas production target require hard work and special attention (policy).

There are not many Indonesian oil and gas blocks that still have the potential to be maintained and increased production, including Cepu Block, Mahakam Block, Sanga-Sanga Block, Rokan Block, South Sumatra Block, ONWJ Block, Tangguh Block, IDD Block, Donggi-Senoro-Matindok Block, Madura Block, and Masela Block.

We need to map out in more detail the fields in these oil and gas blocks. Starting from subsurface conditions, well intervention, production facilities on the surface, to the point of sale.

As is well known, the increase in production can generally be obtained from several ways, such as optimization of production with new equipment and methods as well as technology, including digital technology; applying EOR (enhanced oil recovery) technology to drain the remaining reserves that remain between the rocks; accelerate the development of exploration findings into production fields; and/or field acquisitions (M&A – mergers and acquisitions).

In 2021, with the uncertainty of oil and gas prices due to low energy needs, due to the effects of the COVID19 pandemic, it will be very difficult for Indonesia, which has limited capital and reserves, to carry out these efforts.

Challenges from existing fields that are already old (mature), which have experienced a sharp decline in natural production, must be pursued in new ways. Even the Cepu Block, which is relatively new, has already reached peak production. Just watch the decline in production though slowly. Likewise, EOR technology, which is predicted to increase production, is still difficult to implement. Both technically, economically, and commercially.

Exploration findings that require time to build production facilities after development drilling and preparation of POD (Plan of Development), require a large amount of capital. Moreover, if the findings are in the form of natural gas, it is necessary to find a buyer first. The price must also be competitive. Commercially, it may not be possible to quickly approve the FID (Final Investment Decision) and produce it quickly.

The most likely thing to do immediately is corporate action through M&A for oil and gas fields that are already producing. However, this needs careful and transparent evaluation. Especially if the assets are located abroad with the aim of increasing national production. We have to consider several risks, such as country risk, fiscal terms, types of contracts, compensation, and others.

The choice of the fiscal term that has been launched by the Indonesian government which gives investors the option to choose PSC-Cost Recovery or PSC-Gross Split is an attractive policy improvement. With this policy, upstream oil and gas activities are expected to be excited again. Instead of conducting M&A abroad, oil and gas SOEs should naturally be given the opportunity to access all data available to the government (Ministry of Energy and Mineral Resources) to be able to carry out exploration activities more prudently. Because the key to successful exploration is the available data. And, our geologists and engineers actually know more about our area.

Indonesian oil and gas SOEs are also allowed to cooperate with foreign and national partners to share risk and use technology. As has been done in Sulawesi, which now produces the Donggi, Senoro and Matindok Blocks. Also off the coast of East Kalimantan near Nunukan. If this is done, it is not impossible that in 2021 some exploration findings will increase. It’s just a matter of making priorities to speed up the findings into reserves that can be produced.

2021 will also begin with the change of Pertamina’s upstream organization to become an Upstream Sub Holding. This reorganization is deemed necessary considering that Pertamina upstream currently manages several oil and gas fields/blocks ex-KKKS (Cooperation Contract Contractors) whose contracts have expired. If this policy continues, all of Indonesia’s oil and gas fields will be managed by Pertamina.

What may be of concern is the legal issues that accompanied the formation of the previous company. Because several things are related to the Oil and Gas Law, Government Regulations, and/or KepMen/PerMen. This reorganization of upstream Pertamina will be better, because it has more balanced asset management based on relatively close field locations that facilitate logistics, HSSE and operational control. Likewise, the amount of production, the size of the working area, the complexity of the infrastructure are almost commensurate.

Of all the good developments in the upstream oil and gas sector, we must also pay attention to the condition of Indonesia’s downstream oil and gas. In addition to the problem of procurement and distribution of fuel (fuel oil), the utilization of gas and LNG for domestic energy needs has not been maximized. The unprepared gas and LNG infrastructure for power generation, transportation, and national industry has created uncertainty in the gas and LNG business chain after Indonesian LNG customers terminated their purchase contracts this year. This will certainly hit the commercial side of LNG which requires extra hard work to continue to be able to distribute LNG products to international and domestic markets. There needs to be good program coordination and integration between Pertamina and PLN, which have planned the “LNG to Power” zoning in their business plans. More SSLNG (small-scale LNG) development will be built to meet gas demand in eastern Indonesia.

Significant changes from Indonesia’s oil and gas downstream business in 2021 are unlikely to occur. The construction of new (grass-root) oil refineries is still difficult to find investors. The development of an oil petrochemical refinery, especially for natural gas, is only in the early stages of planning. What may continue to be developed is a biodiesel refinery placed in an existing oil refinery.

Biodiesel and other renewable energy sources, such as geothermal, solar, wind and garbage will slowly shift the role of fossil energy oil and gas. And, this is starting to look stretched and the pace of its movement in 2021 is later.***

*Salis S. Aprilian, Ph.D., energy observer and founder and CEO of Digital Energy Asia.

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