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nother promise of piecemeal reform of the regulatory and investment framework for investors in the oil and gas industry will not be enough to lure back oil giants to hydrocarbon prospecting in Indonesia, which has always been seen as highly risky by investors. Overall reform is urgently needed to encourage new investment in the petroleum industry amid the harsh conditions faced by the sector over the last two years, caused by both external and internal factors.

In the international market, oil prices have fallen sharply from as high as US$110 per barrel in mid-2014 to below $40 now, discouraging new exploration, except in highly promising areas. But the investment climate in Indonesia’s oil and gas sector has been greatly worsened by legal and regulatory uncertainty and arduous licensing procedures.

The number of drilled exploratory wells in the country fell to 52 last year from 83 in 2014 and an average 104 between 2011 and 2013. National oil production fell from a peak of 1.25 million barrels per day (bpd) in 2001 to the current figure of below 820,000 bpd. The success ratio of oil explorations fell as low as 15 percent from 20 percent in 2014 and almost 70 percent in 2011-2013

 The latest survey by PricewaterhouseCoopers involving 75 respondents from 53 major oil companies found that oil and gas giants were more pessimistic about their Indonesian operations than those anywhere else in the world. More than 60 percent of respondents also said their companies would not increase exploration activities in Indonesia within the next three years.

The latest analysis by consulting firm Wood Mackenzie also estimated that without any significant increase in the discovery of new reserves, Indonesia’s oil production would decline to 500,000 barrels per day (bpd) in 2019 from 800,000 bpd at present and oil imports would surge from 800,000 bpd now to 1.2 million bpd in 2019. Oil reserve replacement in Indonesia has also declined to below 50 percent, only half of what is found in most other oil-producer states.

 The government has been well briefed on the regulatory, legal and fiscal uncertainty in the oil industry. The Indonesian Petroleum Association has raised the issue at its annual conventions, including its 40th annual conference last week. But the government seems to think that investment in the industry will cause oil prices to rise again.

Chief economics minister Darmin Nasution has promised that the next (13th) economic reform package would focus on the problems in the oil and gas industry. Whatever policy package the government is preparing now, it should be comprehensive and quick and the new policies should reduce the wide gap between the regulatory and legal conditions in Indonesia and global best practices. Why? First, because Indonesia is not the only country blessed with hydrocarbon resources, international competition for oil investments has become increasingly intense and hydrocarbon prospecting is highly capital and technology intensive, as well as very risky.

 Second, oil companies operating under Indonesian production sharing contracts fully bear all risks related to explorations. Production sharing takes place only after commercial volumes of reserves are discovered for further development.