Digital Energy Asia

INDONESIA OIL AND GAS OUTLOOK 2021

2020 is the most disruptive year for almost all business sectors and sides of our lives. Why not, the COVID19 pandemic that has spread from mainland China is as if a tsunami wave destroyed the joints of the economy of any country, changing the order of life and social relations. Until the end of this year, an even more devastating follow-up wave was indicated by the discovery of a new virus that was common in Britain, the Netherlands, Denmark, Ireland, China, and several other countries. The use of vaccines as a solution that is expected to change the situation is still far from what was expected.

Will this continue into 2021? No one has yet dared to publish with certainty and with certainty when the effects of the COVID19 pandemic will end. This of course will stagnate economic activity in various countries, even minus. If this situation occurs, then the balance of world energy demand and supply will still be like 2020, namely the phenomenon of “low demand and oversupply”. Energy is cheap, but no one is buying it because it is not needed. And, a production that is unable to provide color will build up in the supply chain at the shelters.

The most notable effect of the COVID19 pandemic is the prevention efforts that limit the movement of people. So, even if there is buying and selling activity in the community, it will only happen to the commodities they really need. That too can be done with technology applications, without people having to leave the house. And, because purchasing power is low, economic growth will slow down, and even be negative. Many businesses have gone out of business, which has resulted in layoffs (layoffs) everywhere, which ultimately increases the number of unemployed. Sectors that previously consumed large amounts of energy, such as tourism, restaurants, shopping centers, logistics and transportation, experienced a drastic decline in demand.

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

Indonesia, which has various potential sources of energy, should have changed direction 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 energies, 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 BUMNs and several research institutions and universities must be encouraged and given more space. Likewise, the program for mass production of motorbikes and electric cars has been launched. These two programs are expected to be carried out more seriously with a strict timeline to immediately provide solutions to our transportation sector.

On that basis, the target for Indonesia’s energy mix that has been published by the DEN (National Energy Council) should be achieved as expected. The role of EBT slowly dominates our energy supply. Indeed, in terms of quantity (nominal) the national oil and gas demand also continues to increase, but the utilization of it will shift far, from fuel to raw materials.

In 2021, several SPBU (Public Refueling Stations) will continue the program that started in 2019, namely increasing the modification of their services by building gas refueling facilities (SPBG) and public vehicle electric charging (SPLU). With the increasing number of electric car and motorbike users in the future, SPLU will be placed in strategic corners. In shopping centers and in parking and office buildings, SPLU businesses will grow.

Then what will happen to Indonesia’s upstream oil and gas sector in 2021? As it has been announced to the public that SKKMigas is targeting national oil and gas production of 1 million barrels of oil and 12 billion cubic feet of gas per day by 2030. While 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 these targets is really not an easy thing.

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

There are not many oil and gas blocks in Indonesia that have the potential to be maintained and increased, 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 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 delivery of sales.

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 and technology, including digital technology; applying EOR (enhanced oil recovery) technology to deplete the remaining reserves that remain between the rocks; accelerating 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.

The challenge from the existing mature fields, which have experienced a sharp decline in natural production, must be pursued in new ways. Even the new Cepu Block has reached peak production. It remains only to witness the decline in production, although slowly. Likewise, EOR technology, which is predicted to increase production, is still difficult to execute. Both technically, economically, and commercially.

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

What is most likely to be done immediately is corporate action through M&A for oil and gas fields that are already in production. However, this needs careful and transparent evaluation. Especially if these assets are located abroad with the aim of increasing national production. We have to consider several risks, such as country risk, fiscal term, type of contract, compensation, and others.

The fiscal term option that has been reported by the Indonesian government which provides an option for investors to choose the PSC-Cost Recovery or PSC-Gross Split is an interesting policy improvement. With this policy, it is hoped that upstream oil and gas activities will get excited again. Instead of conducting M&A abroad, it is only natural that oil and gas SOEs are given the opportunity to access all existing data in the government (Kementrian ESDM) 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 know better about our area.

Indonesian oil and gas SOEs are also allowed to collaborate with foreign and national partners to share risks and use their technology. As was 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 remains just how to prioritize to accelerate the findings into producable reserves.

2021 will also begin with a change in Pertamina’s upstream organization to become Sub Holding Hulu. This reorganization is deemed necessary considering that upstream Pertamina is currently managing several oil and gas fields/blocks of former 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 perhaps needs to be paid attention to is the legal problem 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 upstream Pertamina reorganization will be better, because it has more balanced asset management based on relatively close field locations that facilitate logistics, HSSE and operational controls. Likewise, the amount of production, the area of work, the complexity of the infrastructure which is almost commensurate.

Of all the good developments in the upstream oil and gas sector, we must also pay attention to Indonesia’s downstream oil and gas conditions. Apart from the problem of procurement and distribution of BBM (fuel oil), the utilization of gas and LNG for domestic energy needs has not been maximized. The absence of 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 terminate their purchase contracts this year. This of course will 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 is a need for good coordination and program integration between Pertamina and PLN, which have planned a zoning “LNG to Power” in their business plans. More SSLNG (small-scale LNG) developments will be built to meet gas demand in eastern Indonesia.

Significant changes from Indonesia’s downstream oil and gas business in 2021 are unlikely to happen. Construction of new (grass-root) oil refineries is still difficult to find investors. The development of petrochemical refineries for oil, especially for natural gas, is just entering the early stages of planning. What may continue to be developed are biodiesel refineries that are located in existing oil refineries.

Biodiesel and other EBT, such as geothermal, solar, wind and waste will slowly shift the role of fossil energy, oil and natural gas. And, this is starting to look stretched and the pace of motion in 2021.


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

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