This is undoubtedly a time of seismic transitions within the oil and gas industry — rising geopolitical tensions, changing consumer energy demand and a global clean energy transition all pose challenges for the industry.

As a regional powerhouse in oil and gas, boasting the largest reserves in Southeast Asia, second only to China in the Asia-Pacific, Indonesia must adapt in order to capture the significant opportunities for growth present in the sector today.

Challenges

Realizing opportunity within Indonesia’s upstream oil and gas sector must begin with recognition of seven critical challenges, an issue highlighted in a recent Boston Consulting Group (BCG) study on the sector’s future.

The sector must first tackle the challenges involving legacy infrastructure and the workforce, problems emerging from a short-term focus that must evolve going forward. The sector will play a significant role in meeting future energy demand, but is poorly prepared today, with a mismatch between supply and demand and gaps in abandonment and site restoration balances.

Key upstream pressures represent the second challenge. Since 2015, overall production and reserves have declined by 20 percent, with accelerated declines in late stage reserves. Capital expenditures also dropped 70 percent over this period. Investment has been a notable problem in the wake of the 2014 oil price crash.

The third obstacle is Indonesia’s constrained sector portfolio, a challenge that is particularly acute in the area of exploration. This has resulted in a gap in Indonesia’s oil and gas portfolio, with only 15 active blocks currently.

The fourth challenge is productivity and efficiency, which must be the foundations on which the future industry is built. Planned and unplanned shutdowns cost as much as 8 million barrels of oil equivalent per year. This problem is compounded by the significant number of idle wells and declining production in transitioned blocks.

Licensing processes are the fifth of the sector’s major challenges, since they are currently two to four times slower than those of competitor countries. Without reform in the bureaucratic process, sector-wide efficiency will remain a distant dream.

The sixth problem is the question of stakeholder relationships. BCG’s study revealed an uncertain relationship between regulators and upstream oil and gas players, creating an environment of stifled growth in which potentially transformative expertise is rarely shared across industry.

Finally, the burden of regulation must be tackled. Hurdles ranging from technical standards through to overlapping regulation provide unnecessary challenges to industry. Streamlining regulatory pathways is fundamental to future progress.

Oil and gas potential

The importance of oil and gas to Indonesia’s economy is clear. The sector contributed US$18 billion to state revenue in 2018 and is projected to contribute 8 percent of Indonesia’s GDP in 2020. Analysis reveals that for every $1 million invested in oil and gas, an additional $700,000 GDP is created, along with hundreds of job opportunities. Overall, investment in the sector delivers a 1.6-times multiplier effect on the economy as a whole. That is not an opportunity the nation can afford to overlook.

Indonesia’s upstream oil and gas sector now stands at a crossroads. The recent publication of IOG4.0, a 10-year plan designed by the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), represents a $500 billion revenue opportunity by 2030. Unlocking that value will require meeting ambitious production targets of 1 million barrels of oil per day, and 12 billion standard cubic feet per day of gas.

Indonesia has the capability to unlock this opportunity. The nation boasts substantial reserves in both western and eastern Indonesia, with a high success rate for discoveries particularly probable in the eastern basin. Developing these reserves will be key to unleashing the long-term potential of Indonesia’s oil and gas portfolio. We can look with reassurance at the success of recent exploration activities unlocking larger reserves per realized well compared to historic assets.

Efficient management of new assets will be equally vital. Indonesia boasts a number of legacy assets that still hold significant reserves. Support to transition these reserves to more optimized production, utilising new technologies such as enhanced oil recovery, will be essential for meeting the goals of IOG4.0. Reducing unnecessary downtime is another challenge to be tackled and one that technology is once again positioned to assist.

Regulation will, as ever, form the backbone of this transition. SKKMigas has established plans to transform from a focus on cost efficiency to cost optimization, ensuring more targeted investment opportunities. It is key that this evolution also incorporates an unlocking of vital human talent, leveraging the experienced professional workforce, creating the potential to become a center of excellence for industry.

IOG4.0 sets out a binding commitment to strengthen regulatory oversight, improve technology and increase investments. Crucially, it does so by recognizing that the regulator should be an enabler, not an inhibitor, of the upstream oil and gas sector.

Moving forward

The path ahead for Indonesia’s upstream oil and gas sector is paved with opportunity. IOG4.0 represents a route ahead, but it is up to governments, regulators and stakeholders to steer the right way forward. Clear pathways for partnerships and quantifiable performance indicators for regulators will be essential, as will be prioritising quick-win programs that can rapidly demonstrate the benefits of this transformation.

Oil and gas sector players must move to embrace their own opportunities in this changing landscape.

1. Collaboration with regulators is fundamental to this journey and will not only support transformation of the industry as a whole, but provide a notable advantage for adapting to the changing landscape. This should include partnering to ensure informed and efficient asset management that increases production and efficiency.
2. Technology will be a major catalyst of transformation and offer an avenue for growth that at once unlocks opportunities while optimising current production and exploration. One such example can be found in the substantial reserves of the East Natuna Basin, where innovations can help overcome the challenges of the high concentration of carbon dioxide present in this field. Replacing legacy equipment with new technology will also help reduce operational downtime, contributing to improved cost bases that are critical in an era of global oil price volatility.
3. This focus on efficiency and lower cost bases will be fundamental to ensure economic sustainability and promote development and production of oil and gas assets. If the plans of IOG4.0 are to be sustained, such a long-term outlook must be embraced.
4. This long-term outlook must also recognise the ongoing transition to nonconventional sources of energy.
   Indonesia’s oil and gas sector must accelerate conversion of developed resources while they remain commercially viable.

If the challenges are substantial, so too is the opportunity for Indonesia’s oil and gas sector — if the right conditions are met. IOG4.0 provides a comprehensive road map with which to navigate that journey, offering a platform for positive collaboration between the state, regulators and industry players. Ultimately, the oil and gas sector is a key pillar of Indonesia’s economy and unlocking its potential is not only beneficial for the industry, but for the nation as a whole.

Alex Dolya is a managing director and partner at Boston Consulting Group and leader of the Energy Practice in Indonesia, Eddie Martono is a principal at the Boston Consulting Group and Asheesh Sastry is a managing director and partner at Boston Consulting Group and leader of the Energy Practice in Southeast Asia.

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