Andang Bachtiar – Chairman, National Exploration Committee, Indonesia
The chairman of the newly formed National Exploration Committee unveils his blueprint for unblocking investment flows into Indonesia’s upstream oil and gas segment and for incentivizing exploration activity.
Tell us about your recent appointment as chairman of the national committee on exploration and your objectives in this position.
My background is in geophysics and I have 23 years of experience in oil and gas exploration from both an academic and industry perspective including working for well-known companies such as Vico. I have also assisted successive governments since 1991, notably the Ministry of Environment as an external expert on the extractive industries and groundwater protection. Two years ago I finally joined the state apparatus in a more formal capacity taking up a seat on the National Energy Council. Most recently, I was in May appointed the chairman of a National Exploration Committee which has been tasked with increasing reserve replacement ratios and halving the time taken to award new oil and gas blocks. Indonesia‘s performance in upstream E&P activity had been below par in recent years so the national committee has been charged with turning this around. I happen to also be the Secretary General for the association for Oil and Gas Producing Regions whose members account for all 89 regions, 8 cities, 60 regencies and 21 provinces. Given my deep experience in geophysics and the strong backing I am receiving from the various layers of local authority, I am confident I can deliver much as chairman of the committee.
Why exactly is Indonesia performing so poorly on exploration when estimates point to some 103 TCF of undeveloped resources?
Indonesia reached peak production back in 1996 and subsequently there have been very few large-scale exploration successes. Over the past 17 years our replacement ratio has dropped to below 50 percent which constitutes an alarming fall. Today people are even becoming sceptical of the existence of the sort of volumes of reserves that you quote, because of a longstanding failure to exploit them. And yet the obstacle we have been facing is not insurmountable. It’s not as if we’re dealing with substantial technical sub-surface issues and have to sit around waiting for the creation breakthrough technology. On the contrary, the cause of this inaction in the upstream segment is primarily down to the oil and gas regulatory landscape that is not sufficiently supportive of E&P activity. Land acquisition complexity, sluggish decision making in the bureaucracy and an illogical fiscal regime all weigh heavily on the commercial decision to invest in exploration. Our task is to propose solutions for eradicating these issues.
What practical solutions has the committee come up with to date?
We are proposing three ‘quick wins’ or ‘low hanging fruit’ that we believe can reinvigorate upstream oil and gas and propel Indonesia into a new era of hydrocarbon discovery. Firstly the government needs to do away with those regulations that are clearly counterproductive. My committee does not want to be seen stepping on the shoes of Migas which formulates oil and gas policy and SKK Migas that executes it, but we do believe it is our duty to highlight any inconsistencies. Recently the Maritime Ministry unilaterally declared that there shall be no exploration in the zone covering 0 to 4 miles off the coastline which is clearly at odds with prevailing energy legislation and therefore I have referred the policy confliction to the Coordinating Minister. It also is clear that the current panoply of hydrocarbon policies is unnecessarily cumbersome, unwieldy and diffuse. Moreover 101 out of the 314 regulations in force take place at the regional or sub-level, making it very difficult for private enterprises to know what permits the need to acquire. We are therefore proposing a thorough streamlining and simplification of the permitting process.
Secondly we are suggesting revisiting the fiscal regime to economically incentivize exploration. The current rules state that you can recover the cost of wells drilled up to the point that you make a discovery, but not subsequent drilling. The danger there is that PSC holders will then concentrate on maximizing their production rather than exploring further so we think this should be amended. Then there is the on-going issue of land taxes on exploration that needs resolution. Let’s not forget 15 PSC holders went to court when they were unexpectedly subjected to land taxes relating to the period 2012-2013. Until there is final resolution of these cases the private sector will remain nervous an exercise caution when investing in exploration.
Thirdly we are pushing for differentiated regimes for unconventional plays. Currently we have a one-size-fits-all formula for all oil and gas exploration contracts which doesn’t sufficiently take into account the heightened risks of exploration and development of unconventional resources such as tight gas, deep water or shale. It’s been more than 8 years since we have known about Indonesia possessing substantial shale oil and gas potential and yet virtually nothing had been done to exploit and convert this potential. Private enterprise will only act if the PSC terms are fit-for-purpose and this means specific terms that are more appropriate to the types of activities that need to take place.
Given its unique geology, to what extent does Indonesia need to innovate its own E&P technologies?
Indonesia forms part of the volcanic ring of fire meaning with have 129 active volcanoes spread out across the country. This does create some very distinctive and unique geological terrain. In certain areas our oil and gas deposits are trapped under areas covered by lava which cannot be easily penetrated by the conventional seismic survey tools. This compels us to innovate our own technologies. We cannot always be looking to Europe for our methodologies when the circumstances within our home country can be markedly different. It is important that the state invests in R&D specific to our own geographical and geological context. This is one of the key messages that the committee has being keen to get across. Exactly the same can be said for our shale gas deposits. Simply applying the Texan formula will not work alone. If we are to be a success in shale we must develop and mature our solutions. The forthcoming new oil and gas law will contain provisions for a setting up of a petroleum fund. We need to be deploying some of the financing from that fund towards carefully targeted R&D.
Do you have the full support of the Finance Ministry in this endeavour?
Most certainly they will back us. I’ve already secured a commitment from the Ministry of Finance to that effect. I feel that the Ministry of Finance is finally beginning to see the merits of an active upstream sector. The national energy mix is imbalanced and we are on the brink of a crisis in energy supply. Hydrocarbons are not just a revenue generator, but a linchpin and driving force to the national economy. There is an economic reward to be reaped from oil and gas, but long-term gains trump any short-term windfall. This is an industry that needs targeted investment and careful cultivation if it is to fully mature to the point where it can really contribute to the wealth of the nation.
You have been vocal in the press about the need for the state to improve is seismic data collection and processing. Why is this so important? And what are you doing about it?
Maintaining up to date and complete seismic records is crucial to having the right sort of situational awareness to make the most of your natural resource assets. When trying to convert prospects into material reserves it is important to have as much intelligence as possible about where your best probabilities lie. Under existing legislation every PSC holder much each year file a prospective to SKK Migas in which the data and prospects for a given block are detailed. SKK, however, does not have the internal capabilities to process this data to the extent that resources are evaluated, compared and ranked in order of priority.
Geo-seismic data needs to be harnessed for the national interest, not just the interest of private enterprise. The committee has therefore resolved to undertake an audit of what we consider to be the top ten assets nationwide. This will enable the state to refocus its energies on the specific areas where there are the most gains to be had. Right now, there are highly prospective areas which are not being developed at an optimal rate and manner and we need to understand why this the case so that appropriate incentives can be put in place and so that SKK Migas can redefine the terms of the PSCs affected so as to ensure the right exploration progress is made. The committee hopes to be able to kick-start this process.
How optimistic are you that Indonesian exploration activity will pick up in the months and years ahead?
When you scrutinise the figures for the past decade it doesn’t make happy reading. Since I assumed the chair of the national committee and had a chance to properly analyse the root causes and effects, I became more optimistic however. Everything is within our capacity to change. Of course, we are also dealing with an external oil price that is making many of the oil majors draw in their horns so there’ll be a degree of waiting around for a rebound, but that is all part of the cyclical boom and bust that the industry we’re familiar with. Oil and gas companies happily operate in technically challenging environments across the world. As long as we remove the distortions and iron out our regulatory and fiscal regime, they will set to work. It’s all in our hands.