Indonesia’s oil and gas sector has long been a significant contributor to its economy, but declining production levels over the decades have highlighted the urgent need for reform. The nation’s oil production, which once peaked at 1.6 million barrels per day (bpd) in the 1990s, has plummeted to less than 600,000 bpd today. Similarly, gas production has stagnated at 6 billion cubic feet per day (Bcf/d). To reverse this trend, the Indonesian government has set ambitious targets for 2030: achieving 1 million bpd of oil and 12 Bcf/d of gas production. Achieving these goals will require not only advanced technological solutions and the reactivation of idle wells but also comprehensive reforms to attract foreign investment and stimulate exploration activities.
This article examines the current challenges facing Indonesia’s oil and gas exploration landscape and explores strategic reforms that could help the country achieve its energy ambitions.
The Current State of Indonesia’s Oil and Gas Industry
Indonesia’s energy sector faces a host of challenges that impede its ability to attract significant investment. Despite being rich in resources, the nation’s exploration landscape has become less competitive compared to other countries such as Guyana, Namibia, Suriname, Mexico, and Argentina. These nations offer more favorable economics, faster timelines, and less bureaucratic red tape, making them more appealing to investors.
Recent discoveries in the Geng and Layaran fields underscore the potential for Indonesia to reverse its declining production. However, without large-scale exploration, these isolated successes are insufficient to meet the 2030 targets. Structural challenges, including regulatory inefficiencies, outdated fiscal policies, and cumbersome permitting processes, must be addressed to unlock the sector’s full potential.
Key Challenges in Indonesia’s Exploration Sector
1. Cumbersome Regulatory Framework
Indonesia’s regulatory landscape is notorious for its complexity. The exploration permitting process requires over 300 approvals, often involving multiple ministries. These bureaucratic hurdles delay projects and deter foreign investment.
2. Lack of Open Data Access
Unlike countries such as New Zealand and Australia, where geological data is publicly available after a designated period, Indonesia restricts access to seismic surveys and well logs. This limitation prevents potential investors from making informed decisions and slows exploration timelines.
3. Idle Exploration Acreage
Large exploration blocks often remain undeveloped for years due to lenient regulations. This stagnation restricts opportunities for new entrants and limits overall sector growth.
4. Stringent Local Content Requirements
Regulations mandating the use of Indonesian-flagged vessels and local drilling rigs increase costs and limit operational flexibility. Similarly, expatriate hiring is heavily regulated, adding to administrative burdens for investors.
5. Inflexible Fiscal Policies
Indonesia’s current gross split model, which taxes revenue rather than profit, is less attractive to investors compared to the cost recovery regime. Additionally, fixed domestic gas prices and restrictive tax policies further discourage investment.
Strategic Reforms to Attract Investment
To reinvigorate its oil and gas sector, Indonesia must implement targeted reforms that address these challenges. The following measures are critical:
1. Simplifying the Permitting Process
The government should streamline the permitting process, aiming for approval timelines of 60 to 90 days, particularly for offshore wells. Establishing a dedicated unit within the Ministry of Energy and Mineral Resources (MEMR) to oversee permitting could reduce bureaucratic delays and improve efficiency.
2. Enhancing Data Transparency
Indonesia should adopt an open-access model for geological data. By making seismic surveys and well logs publicly available after a specific period, the government can attract more investors and accelerate exploration activities.
3. Regulating Idle Acreage
Clearer regulations should mandate the relinquishment of unused exploration blocks, particularly in areas without recent activity. This would open up under-explored regions for new investments and foster a more competitive environment.
4. Relaxing Local Content and Hiring Requirements
The government should provide greater flexibility in hiring expatriates and sourcing equipment. Allowing contractors to bypass Indonesian-flagged vessel requirements during the exploration phase and easing local hiring mandates until discoveries are made would reduce costs and improve efficiency.
5. Revising Fiscal Policies
Reinstating the cost recovery regime could make Indonesia’s fiscal framework more attractive. This system, which taxes profits instead of revenue, enhances investor returns and stimulates exploration. Additionally, introducing tax deductions for exploration costs and offering tax holidays for new PSC investors would further incentivize investment.
Introducing Investment-Friendly Incentives
To make Indonesia a competitive destination for oil and gas exploration, the government should consider the following incentives:
1. Investment Credits
Providing investment credits for projects in remote or underdeveloped regions would offset capital costs and encourage exploration. Offering higher credits for gas development, which is more capital-intensive than oil, could further incentivize investors.
2. Flexible Domestic Market Obligations (DMO)
Expanding DMO holidays and allowing companies to prioritize export markets in regions with limited infrastructure would reduce risks and enhance profitability. A tiered pricing model for high-risk projects could also attract more investment.
3. Cost-Plus Pricing Mechanisms
Adopting a pricing model that reflects actual production costs and market conditions would align investor incentives with operational realities. This would make exploration in challenging areas more financially viable.
4. Reintroducing Interest Recovery
Reinstating interest recovery for successful exploration projects transitioning to development would provide a financial cushion for high-risk ventures, encouraging greater exploration activity.
5. Tax Reforms
Key tax reforms include removing the 5 percent tax on the sale of exploration interests and allowing tax deductions for pre-PSC costs. Additionally, reinstating the “assume and discharge” tax facility and offering a five-year tax holiday for PSC investors would make Indonesia more competitive globally.
Addressing Operational Inefficiencies
1. Streamlining Work Programs and Budgets (WP&B)
The approval process for WP&Bs and Authorization for Expenditures (AFEs) should be simplified to focus on actual exploration activities rather than cost efficiency. Relying on investors’ internal processes would expedite progress.
2. Efficient Equipment Disposal and PSC Relinquishment
Allowing investors to sell or re-export unused exploration equipment and streamlining PSC relinquishment for unsuccessful projects would reduce costs and open up acreage for new exploration.
A Roadmap to Achieve 2030 Energy Goals
Indonesia’s geology remains inherently attractive to investors, but the country’s policies and practices have historically undermined its competitiveness. By implementing the proposed reforms, the government can:
- Accelerate exploration activities.
- Attract significant foreign investment.
- Position Indonesia as a competitive global destination for oil and gas exploration.
With strategic changes to its regulatory and fiscal framework, Indonesia can transform its 2030 energy targets from aspirations into achievable milestones, ensuring greater energy security and revitalized production levels. These reforms are not only feasible but also essential to secure the country’s energy future.
