As a developing country, Indonesia surely needs energy, especially petroleum. Indonesian petroleum-based fuel consumption in the past seven years has been consistently increasing. In 2007, Indonesian consumption of both subsidized and non-subsidized petroleum-based fuel reached 62.04 million kiloliters and by 2013 it had risen to 78.6 milion kiloliters, an increase of 27 percent that was driven by the increasing number of motor vehicles in Indonesia. In addition, the rapid growth of fuel consumption was also driven by the fuel subsidy.

Meanwhile, the production peak of the Indonesian petroleum industry may have already been passed. If we look at the Indonesian oil production rate of the 1970s, when extraction reached up to 1.7 million barrels per day (bpd), our current production rate is only half of that.

In addition, from 2009 to 2013, Indonesia never experienced an increase in its oil production rate. In 2009, it was at 948,800 bpd, but in 2013 it was only at 829,900 bpd. Even worse, the rate has been forecasted to only reach 800,000 bpd in 2014. The rate has been declining an average of 3.2 percent per year since 2009.

Oil production has been declining because there has been no discoveries of any huge new oil reserves and almost all oil production is still taking place in old oil fields that have been exploited since the glory days of the Indonesian petroleum industry.

Therefore, to increase production is necessary to the discover new oil reserves, but this is impossible without exploration activities. Moreover, Indonesia'€™s reserve replacement ratio is low. According to data from the Ministry of Energy and Mineral Resources and Ernst & Young in 2012, the discovery of new oil reserves could only replace 41.9 percent of the production of current oil reserves. This figure is relatively low compared to the average for the Asia Pacific region, which reaches 105 percent.

However, the potential for the discovery of new oil reserves in Indonesia is actually quite large. The ministry'€™s data shows there are 60 potential hydrocarbon fields in Indonesia, but only 16 basins are in production. Another 22 basins are already being explored and seven of those have been found to contain hydrocarbon reserves, but they are not yet under production and no hydrocarbons have not yet been found in the other 15. The remaining 22 potential fields are frontier basins that have never been explored.

Apart from that, the challenges of current exploration activities have also changed. In earlier eras, exploration was carried out in the western part of Indonesia and almost all oil fields were located under land. Currently, the Indonesian basins that have not yet been explored are located in the eastern area of Indonesia and almost all exploration must be done in offshore areas. In addition, the initial period from oil discovery to oil production needs more time compared to earlier eras. Wood Mackenzie data shows that in the 1970s, the initial discovery-to-production phase was done in less than five years. Nowadays it takes an average of eight to 10 years. Moreover, the time needed to monetize oil and gas reserves is often longer than this average. For example, the Tangguh Block needed 16 years, the Senoro Block needed 16 years, the Masela Block needed 17 years and the Banyu Urip field in the Cepu Block needed 10 years.

If we see the trend of oil and gas investments in recent years, exploration investment has the lowest proportion compared to other investment activities. From 2006 to 2013, the average proportion of oil and gas investment amounted to only 6.2 percent of total investment. In 2013, 2D and 3D seismic survey activities only achieved 67 percent and 62 percent of what was planned. Exploratory well drilling also realized only 83 percent of what was planned by the beginning of 2013. In that case, the realization of exploration is lower compared to crude oil production activities like development well drilling, work-overs and well maintenance. Drilling of development wells realized 95 percent of what was planned and even well maintenance activities are over what was planned, to the amount of 103 percent.

To maintain sustainable crude oil production in the long term, exploration activities must be increased, but there are major problems that have not yet been solved and that keep slowing exploration activities. First, the Indonesian Task Force for Oil and Gas (SKK Migas) showed that from the monitoring of 119 exploration working areas, external problems that are almost all government responsibility, like overlapping regulations, licensing problems and the social conditions of communities near the working areas, are becoming the biggest problems to conducting exploration activities. Second, regulations about oil and gas cost recovery are still unclear and this makes the country'€™s oil and gas exploration unattractive to investors. Third, investors are required to pay property tax (tax for land and buildings) during the exploration phase while they have not received any income from their activities.

Fourth, the availability of supporting infrastructure for oil and gas, such as drilling rigs and oil and gas block data provided by the government, is usually minimal. These problems must be solved by government and, furthermore, the idea to form a petroleum fund in a new oil and gas act to finance surveying should be supported.

The various challenges for exploration must be overcome so our oil and gas production can become sustainable in the long term. Under current conditions, forecasted crude oil production will keep declining because current oil fields are already mature. Building refineries alone, without an effort being made to increase production, is only switching from importing petroleum-based fuel to importing crude oil. It will happen if we keep ignoring the decline of our oil production rate.

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The writer is a financial analyst at Bank Mandiri.

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