Indonesian oil and gas: Crooked pipelines

Indonesian oil and gas: Crooked pipelines

Sep 6th 2013, 4:54 by N.O. | JAKARTA

GIVEN his industry’s woes, Lukman Mahfoedz is surprisingly upbeat. As Indonesia’s oil-and-gas sector reels from its most recent scandal, the president of the Indonesian Petroleum Association is relaxed when he greets your correspondent at his office atop a gleaming high-rise in Jakarta’s business district. On August 13th anti-corruption investigators arrested the chairman of the country’s upstream regulator, Rudi Rubiandini, on suspicion of accepting a $700,000 bribe. He had only been in the job eight months (last November the Constitutional Court dissolved the previous regulator, an independent watchdog, to install one under the control of the energy ministry). This new scandal strikes at an ailing industry. Indonesia’s oil production has been in decline for decades. Some predict that its proven reserves of about 4 billion barrels could be exhausted by the mid-2020s.Yet Mr Mahfoedz, who is also the CEO of Medco Energi, the country’s largest private oil-and-gas firm, thinks that Indonesia “still has potential”. He points out that only 60 of the country’s 128 oil basins have been explored fully. What the country needs, he says, is for foreign firms to bring their capital and expertise. Many of the unexplored basins are situated in hard-to-drill areas, in the east of the archipelago beneath deep waters, and often contain a lot of carbon dioxide that can be removed only with expensive technology. Shale gas is something Indonesia has yet to exploit. (The energy ministry reckons 574 trillion cubic feet are up for grabs.) So-called unconventional hydrocarbons, like coal-bed methane, could also provide a fillip to the sector—as long as foreign firms keep on investing.

Lately, however, foreigners have not felt terribly welcome. Resource nationalism is on the rise ahead of elections next year. Pertamina, the state-owned oil firm, is pushing to take over foreign firms’ production-sharing contracts that are due to expire soon. In February the regulator refused to extend the work permit of the country manager for ExxonMobil, an American oil-and-gas firm; it then called on his successor to be more “flexible” in negotiations with officials. And in July a Jakarta court controversially sentenced three executives from Chevron, another American energy firm and Indonesia’s leading crude-oil producer, to prison for two years in a dispute over an environmental clean-up.

Mr Mahfoedz says these nationalist-inspired policies must be balanced with the interest of investors if the sector is to rise from the doldrums: “they will not come” if the investments are too risky, he says. Indonesia’s oil business is much more complex than it was in the mid-1990s. Then, the country produced 1.6m barrels per day from only 24 fields. Now its production of about 860,000 bpd comes from 640-odd fields. This poses management challenges. Exploration carries huge risks, too. The cost for deep-water wells (between $200m and $300m) is too much for national firms to bear alone, especially when there is no guarantee that oil will be found. “We need the investors”, he says.

Does the government share this view? Mr Mahfoedz thinks so. The president, Susilo Bambang Yudhoyono, has proposed fiscal incentives to help firms cover the costs of deep drilling and enhanced oil recovery. This may mean more favourable splits in revenue between the government and oil producers. Incentives are also necessary if Indonesia is to increase its downstream refining capacity, Mr Mahfoedz says. The country’s newest refinery was built almost two decades ago, in 1994, and potential investors have been deterred by the cheap price of petroleum products sold locally. Heavily subsidised Premium petrol, for example, sells for only 6,500 rupiah per litre (about 60 cents, or $2.30 per gallon). And that is after a recent 44% price hike.

Of course even generous incentives will count for little if investors are worried about large-scale corruption. Mr Mahfoedz is concerned that Mr Rubiandini’s arrest will drive away foreign firms, even though Kernel Oil, a Singaporean energy company alleged to have bribed the regulator, is involved in neither oil exploration nor production in Indonesia. Still, Mr Mahfoedz hopes that something positive can yet come out of the case: it shows that law enforcement is working “regardless of position”, even the most senior. For an industry worth almost $70 billion annually, foreign investors may cling to that hope.