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Investment friendly climate for energy needed
Lukman Mahfoedz: (JP/Simon Panggabean)The Annual Indonesian Petroleum Association Convention and Exhibition (IPA Convex) is set to take place once again
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Lukman Mahfoedz: (JP/Simon Panggabean) (JP/Simon Panggabean)
Lukman Mahfoedz: (JP/Simon Panggabean)
The Annual Indonesian Petroleum Association Convention and Exhibition (IPA Convex) is set to take place once again. This year the IPA Convex will be held from May 21 to 23, with the theme 'Strengthening Partnerships to Enhance Indonesia's Energy Resilience and Global Competitiveness'.
The Jakarta Post's contributor Simon Panggabean spoke with IPA president Lukman Mahfoedz. The following are the excerpts of the interview:
Question: This year's IPA will be held between the legislative and presidential elections. What is your view on this?
Answer: The timing of the 2014 IPA Convention and Exhibition is ideal, falling between the legislative and presidential elections. This is an opportunity for us to start a positive and constructive dialogue with the new government regarding critical issues surrounding Indonesia's energy needs in the future.
The theme of this year's IPA Convex is 'Strengthening Partnerships to Enhance Indonesia's Energy Resilience and Global Competitiveness'. How does it reflect Indonesia today?
The new government will inherit the responsibility to craft and manage the execution strategy around Indonesia's new National Energy Policy. This is an ambitious policy. Energy demand in Indonesia is expected to rise rapidly in line with Indonesia's economic ascent. By 2022, it is predicted that energy consumption will triple to 8.3m boe (barrels of oil equivalent) per day. By 2030, the gap between oil and gas supply and demand could exceed 2 Mboe per day.
The National Energy Policy is central to Indonesia's ability to close the widening supply and demand gap and address Indonesia's dangerously low reserve replacement ratio. For oil, it stands at
46 percent and for gas at 92 percent. It is important that this new strategy outlines how to boost production and support an industry that contributes 28 percent of the country's national revenues.
We need partnership from the government to create a collaborative and competitive environment in which our energy resilience can be worked toward. The new National Energy Policy must help the industry attract investment to fund hugely expensive new exploration.
Without more exploration, there will be no new discoveries, no increased production and no replacement of current reserves.
The theme this year expresses this wish: 'Strengthening Partnerships to Enhance Indonesia's Energy Resilience and Global Competitiveness'. That is why we believe the three pillars of the 2014 IPA Convention and Exhibition are so relevant to this dialogue: Energy resilience, global competitiveness and partnership.
Can you elaborate further on this?
Energy resiliency. Indonesia's energy resiliency is pivotal to the nation's continued rise as a global economic force, affecting the ability to power new high-value industrial sectors (automotive, petrochemical, high-technology, etc.), support critical infrastructure development, fuel the East Indonesia development strategy, balance trade deficits and make our home grown companies more globally competitive.
Global competitiveness. The game has changed. The global energy landscape is rapidly shifting and evolving, with new energy and fuel sources emerging and advanced technologies altering the geographic balance of power. Indonesia must foster a more globally competitive energy sector that can better compete with other nations for scarce investment resources, open the door to international expansion opportunities for local companies and invest in critical infrastructure, new technology, capacity building and the competency of our human capital.
Partnership. The energy conversation in Indonesia must shift. It's no longer about protecting the 'ownership of resources' to drive economic growth. Today it's about the resourcefulness of our energy industry to ensure the country is well positioned to compete globally to power Indonesia's economy. That level of resourcefulness can only come through collaboration. Partnership must start with government leaders inviting the energy industry to participate in the regulatory process.
What kind of environment is needed to support that?
We need an environment where we can work together to establish a strong, clear and consistent regulatory environment necessary to attract long-term, value-added investment that is good for the people of Indonesia and supports the nation's energy resiliency strategy.
What does the IPA's expect or requiree from the government to help increase investment in the oil and gas industry?
We want the new government to understand that IPA member companies ' whether they are state owned enterprises, national oil companies or international oil companies ' all share a common goal. We are all helping protect the nation's energy future in the best interests of the people of Indonesia. Exploration is moving to more technically challenging environments (deepwater, frontier/ remote areas, gas prospects with high CO2 content) resulting in higher risks for investors. Furthermore, oil production continues to decline from year to year, while energy demand steadily grows, causing the oil and gas supply demand gap to grow.
Roughly, how much investment will Indonesia need in exploration and production?
In 2013, the Indonesian Oil Reserve Replacement Ratio was at 46.60 percent, which is critically low, while the Gas Reserve Replacement Ratio was at 90.27 percent and is on a declining trend. To realize the ambitious goals of the National Energy Policy, we must be able to sustain investment in new exploration and production. Indonesia needs more than US $20 billion annually in new investment to maximize existing and future production opportunities. That's more than $200 billion over the next 10 years, an amount very difficult to sustain in the current regulatory environment.
What do we need to do to sustain that kind of investment?
We can start by shortening the time it takes from exploration to production. The global average for monetizing investment in oil and gas production is 8 to 10 years. It's not uncommon in Indonesia for that cycle to take more than 15 years. We have to eliminate the bureaucracy that adds years onto development cycles and costs the nation millions of dollars. That would have a major impact on reducing costs while increasing production.
The IPA supports the government in achieving the energy goals set in the National Energy Policy in the long term, as well as supporting the government in the short term to achieve national oil production of 1 million barrels of oil per day, a target which is clearly stated in Presidential Instruction No. II/2012, but we do need the government to work together with us and help us build the conducive and competitive environment that is required to attract the investment needed to sustain and increase production levels.
What are the challenges for foreign and Indonesian companies investing in the oil and gas sector?
Indonesia is recognized by countries around the world for the strength and national benefit of Production Sharing Contracts (PSCs). Indonesian PSCs are a model for countries looking to attract foreign investment while protecting the best interests of the country, its people and their natural resources. But for some reasons, PSCs in Indonesia are viewed as protecting companies rather than people. The reality is just the opposite.
Indonesia is asking companies to make multi-billion dollar investments in projects that have 30-year to 50-year production horizons.
Our leaders had the foresight to see the only way for companies to secure financing for these kinds of massive projects is to have confidence and predictability in the long-term production environment, which the PSCs provide. Preserving confidence in PSCs is in the best interests of the people of Indonesia and critical to realizing National Energy Policy goals.
What do investors expect the government to do?
To reassure investors, existing contracts that have been signed need to be honored by the government. The Land and Building Tax is just one example of a 'surprise tariff' that serves to erode confidence in the PSC as a powerful investment-generating tool. The Tax Office issued a Land and Building Tax assessment for 2012/203 to 23 exploration companies in Indonesia amounting to more than $260 million.
The companies most impacted are those currently facing final investment decisions on multi-billion dollar deep-water LNG projects that are essential to the nation's natural gas future. We have to find a way to work together to return predictability to the Indonesian investment climate.
What input doe the IPA have for the government through this event?
Indonesia's oil and gas sector has been a source of tremendous national pride. This industry represents more than $31 billion in annual revenues and directly accounts for more than 300,000 jobs. Our members invest tens of millions of dollars annually in social investment programs, which make a real difference in people's lives. And our universities produce world-class engineers and geological professionals that can help this country stay globally competitive for years to come.
We want to make a statement in partnership with the government that Indonesia will continue to be a leading global player in oil and gas. We want to be in a position where the best and brightest of Indonesian talent see the oil and gas sector as a place where they can build highly successful careers while making a real difference for the future of the country.
We want the oil and gas sector to continue to be a source of pride for Indonesia. But we have to realize that we are at a crossroads. We face some very challenging decisions that will determine the future vibrancy of this industry.
For example, within the next 5 years, approximately 20 PSCs representing 30 percent of the national oil production will expire. The country faces the possibility of losing an estimated 635,000 boe per day during the next 5 years and 1.2 million boe per day during the next 10 years if these companies don't have the confidence to continue investing to expand production.
We need to work together in partnership to ensure this possibility doesn't become reality. The government should therefore provide clear guidelines and a transparent mechanism for the PSC extension process.
The IPA requires a conducive and competitive climate to continue to attract investment. We need to partner with government to simplify and streamline the existing bureaucratic procedures and promote the 3C principles on regulation and policies ' clarity, consistency and certainty. One of the first major challenges the new government will face is finalizing the new Oil and Gas Law to provide certainty for investors.
This new law will make a powerful statement about how Indonesia views partners investing in the future of the country.
What is your main objective with the new government?
We want to be at the table with the new government. Our intention is to use the 2014 IPA Convention to produce a white paper outlining for the new government our partnership pledge to help achieve Indonesia's National Energy Policy in the best interest of the people of Indonesia while promoting an investment climate that advances critical exploration and production projects among our members.
