Dr Wiratmaja Puja – Director General, Migas, Indonesia
The Director General of Indonesia’s policy and regulation creator and good service executor for the oil and gas industry speaks out about rewiring the economy to run on gas rather than oil, the plans to turn Batam into a ‘city gas’ island, enhancing national energy security through incentivizing E&P, and smart gas management.
Could you please start by outlining the specific functions and mandate of Migas within the Ministry of Energy?
Migas’ mandate is essentially as a policy and regulation creator and good service executor for Indonesia’s oil and gas industry covering the entire value chain from upstream to downstream. Our core function comprises the formulation, implementation and technical standardization of policy across the sector. We also define the standards, norms and procedures that will ensure fair play within the industry.
In the upstream sphere, our mission is to create the conditions that will bring about maximization of national revenues in oil and gas exploitation and optimal utilization of the country’s hydrocarbon resource base with a view to maintaining a reliable national energy security scenario. Downstream, the task at hand is to guarantee the sustained availability of fuel and gas supply at a reasonable price in accordance with the capabilities of the national economy.
Right now Indonesia is living through a shifting paradigm in how we utilize our hydrocarbon endowments. In the past, we would sell the resource as a commodity and channel the monetary proceeds into the state treasury. Today the dynamics are different and the government instead seeks to harness those resources to power a high growth economy that is increasingly thirsty for energy. In short, we want to utilize our resource riches as an economic driver and catalyst to growth. Migas is at the forefront of implementing this strategic transformation.
You have spoken about the shortfall of gas infrastructure and the need to rewire the domestic economy to run on gas rather than oil. We also understand that there are plans to turn Batam into a ‘city gas’ island. What are the various options for viably distributing gas across the archipelago?
This is actually an issue very close to my heart as I was formerly heading up the Acceleration Team on Conversion from Oil Fuel to Gas Fuel within the ministry. We have a long-term strategy for gas utilization and infrastructure in place. For the west side of the country we are adopting a philosophy of pipelines and fixed installations because the offshore domain comprises mainly shallow water. Eastern Indonesia, by contrast, is characterized by deep water so the intention there is to resort to virtual pipelines deploying small LNG vessels to island hop around a central hub.
We are implementing a radical new strategy in the free trade zone of Batam. The dream is to develop the island into a clean energy enclave in which all diesel will be substituted with gas, this will apply to industries, households and the transportation system. Batam will become a showcase for the ‘city gas’ concept which then could potentially be transplanted elsewhere. We are simultaneously running a pilot project in Bali which strives for much the same outcomes. Bali’s tourist industry is dependent upon clean air, un-spoilt beaches if it is to continue to thrive so we want to convert the power stations and transport system to run off gas.
What has been keeping you most busy of late?
Gas management is at the forefront of our concerns. Historically, successive governments have developed energy infrastructure in the population heavy, west side of the country at the expense of the rest of the archipelago. The energy distribution and supply chains in peripheral regions, remote islands and generally the eastern parts are severely underdeveloped and this simultaneously impedes livelihoods and economic growth. The distribution of street lighting in nighttime satellite imagery depicts the deficit clearly. One big challenge for us is in enabling the build up of that infrastructure, and in managing our gas intelligently and effectively so that the entire country can be bright at night.
In the upstream domain, the priority is to foster a level of E&P activity commensurate to our natural resource abundance and vast potential reserves. Cognizant that much of the future exploration activities will take place in high-risk, technologically challenging deep water plays, our current focus is on attracting outside investment into the upstream segment. We are well aware that considerable capital injections and risk taking will be required if the country is to realize its true resource potential, so know we have to cultivate the sort of market conditions that will make Indonesian oil and gas a comparatively attractive investment destination.
Our third priority is to enhance national energy security and render the country more resilient. Today Indonesia ranks as the second largest importer of fuel and we are naturally keen to reduce this dependency. To this effect, the state is rolling out the construction of 4 new oil refineries each with a capacity of 300,000 barrels that will complement the nation’s existing 4 facilities which will also undergo upgrades. These initiatives will allow us to redress the balance between importing fuel and crude.
What do you say to those that criticize the refinery building initiative for merely substituting one form of national dependency (i.e. reliance of fuel imports) for another (reliance on crude imports)?
Some analysts may well point out that economic savings from substituting fuel imports for crude imports can be marginal, but that is to consider the issue from a purely financial standpoint. Refinery building actually entails technology and know-how acquisition, human capital development and a scaling of the value chain. The co-benefits are wide reaching. Refinery building is also emblematic of this new spirit of treating hydrocarbons not as a trade commodity, but as a generator of cluster growth, prosperity and national economic prowess.
Meanwhile there are also plans afoot to establish additional small refineries in strategic locations across the archipelago. This is important because Indonesian territory encompasses a high volume of scattered islands not all of which lend themselves to being serviced by a conventional style, large-scale refinery. Papua represents a good example of where efficiency gains could be realized. Right now the province possesses oil, but not considerable quantities. Transporting small volumes of crude all the way to Java for processing and then shipping back the refined product is clearly not very efficient and yet, to date, it represents the only option available. We are actively seeking to change this.
What practical steps are you taking to rekindle in-country enthusiasm in oil and gas exploration?
Over the past 15 years there have been very few significant oil and gas discoveries in Indonesia and this is a direct consequence of the paucity of exploration activity taking place. The ministry has taken it upon itself to review why this might be the case and it is clear that the industry is being turned off by what it perceives as an imbalance between risks and rewards. Complex licensing, complicated land acquisition procedures and unfavorable fiscal terms have all been flagged up as impediments to action. Migas has therefore been taking positive steps to rebalance risk and rewards.
Firstly we simplified and streamlined the licensing process by reducing the number of energy sector specific permits from 104 to 42. My objective is actually to get that figure down to 20 over time. Beyond that, there are over 300 additional permits granted by other elements of the state apparatus so we have been proactive in bringing those actors together to identify ways to streamline their processes too. Since 2010, various single-window service centers have helped business acquire permits in almost all sectors, except for banking and oil and gas. We are now working towards applying this process in our sector too. The idea is for the ministry to delegate over 40 processes to the Investment Coordinating Board (BKPM) such as transferring over permit issuance for surveys, storage, distribution and offshore piping.
Secondly we have proposed to parliament to do away with taxes on exploration and to overhaul the fiscal terms of the PSCs so as to reflect the heightened risk associated with exploration and production of unconventionals such as deep-water or shale. We are even open to looking beyond the PSC model altogether (such as at a tax and royalty system or gross splits) for certain specific contexts. Any such changes would be articulated in the upcoming new oil and gas law that will be debated, reviewed and enacted by parliament.
Thirdly, we are attentive to better synchronizing upstream and downstream activity so as to ensure the seamless and smooth flow of the value chain. Right now, we can see examples of gas field discoveries that have never been developed because the gas pricing structure downstream isn’t appealing enough to make it worthwhile. In other instances, gas prices have been so exorbitantly high that demand has remained low despite obvious need. Our solution has been to reduce the government take thus making it more affordable.
Indonesia ranks number 6 worldwide for coal bed methane (CBM) reserves. A few years ago there was a lot of optimism riding on CBM but that market niche hasn’t really taken off as it was supposed to. Is that due to the same risk-reward imbalance?
Absolutely. And this is another area that we are again actively setting about putting right. The problem with the incentive structures for CBM is that that segment has historically been subjected to exactly the same regulations as for conventional gas. Under those regulations you are obliged to use technologically advanced, high-pressure drills that are very costly to hire and operate. When you drill a CBM well, however, you don’t need that level of specification because the first substance to rise up is just water. Companies seeking to develop CBM therefore should be permitted to use much lower tech drills more akin to those deployed in the mining industry to avoid completely unnecessary expenses and keep their costs down. We have therefore been reworking the regulations to make them more fit-for-purpose. The final draft is on my desk right now and should be published by October. After that, we will be expecting a real upswing in CBM activity.
Shale gas is another area that is yet to take off and will require very specific regulations to make it work. This will take time. We have been striving to invite in specialist shale firms, but they have been cautious about entering the market because of the unique geological structural formations in Indonesia. It’s going to require substantial investigation and a lot of pioneering spirit to exploit this resource properly. Both the government and industry alike will need time to come up with workable concepts.
What is your final message to the international investment community?
The Indonesian oil and gas sector is open for business, both in the upstream and downstream. Our door is open and we want to hear from you. Migas is committed to engaging in dialogue with you and harnessing your inputs as we strive to redraw Indonesia’s energy future. Join us and make it happen.