Idris, Executive Member, Bimasena, Indonesia
One of the executive members of Indonesia’s prestigious Mines and Energy Society identifies promising new growth spots across the local market including deep water and frontier exploration and mini-LNG infrastructure development.
As we understand it, Bimasena, the Mines and Energy Society was founded in 1996 as a think-tank supporting the oil and gas and extractive industries sectors. Could you please elaborate on the role of the society today?
Bimasena was founded in the mid-1990s and officially inaugurated in December 1997 by the then president of the Republic of Indonesia as a forum and neutral meeting point for energy sector stakeholders where frank and honest discussions could take place in a depoliticized manner. You can think of us very much as a bridge between the government and industry actors especially with regard to the formulation of new policy. Bimasena thus organizes focused group discussions on specific issues that can then be crystallized into recommendations so that there are tangible takeaways. The society can achieve this by bringing together all the relevant actors – private enterprise, entrepreneurs, academia, government and civil society – under the same roof and then having them engage in frank debate using Chatham house rules. The idea is to bring potential solutions to the table rather than just highlight the challenges that different stakeholders are facing. I currently sit as part of the executive team. There is also a supporting entity to the society called the Indonesian Institute or Energy Economics that acts as a research hub and has the capability to carry out targeted studies.
Indonesia represents the foremost energy consumer in the region, and successive governments have been trying to reshape the oil and gas industry by drawing in outside investment. How attractive is Indonesian oil and gas for the investment community these days?
If you look at it from the perspective of a foreign investor, there still remains a lot to be desired. The existing institutional framework does not function to Indonesia’s advantage and that is demonstrated by the paucity of exploration activity to have taken place over the past decade. The current oil and gas law is simply not well adapted to today’s business context where the bulk of future exploration and production activities will be deeper, rougher and further. Indonesia’s untapped resource potential remains enormous, but the epicenter of new exploration will be in the offshore and remote Eastern domains where there is little supporting infrastructure in place. The industry therefore requires a rulebook and terms that better match the realities of the situation they have to deal with.
Some hope is being placed with a new oil and gas law that is right now being drafted. There are, however, still many regulations that actively discourage investment into the sector. I’m thinking of the recently imposed tax on exploration activities despite the fact that these are conducted entirely at the risk of the private sector. Then there are the increasingly severe local content requirements that seem to be increasingly burdensome. This is a shame because it hampers the willingness of entrepreneurs to pursue the wide reaching opportunities in the energy sector. This should be a very promising industry. There just needs to be more impetus from the state in creating an appropriate regulatory landscape.
You talk about there being some very promising opportunities in the Indonesian energy sector for entrepreneurs to consider investing in. Tell us about some of them.
There are mega opportunities for green field development with I so many untapped reserves out there, particularly in the underexplored east of the country. I see deep water and frontier exploration as crucial to regaining momentum in the Indonesian upstream oil and gas segment. The potential is definitely there in terms of resource availability, and providing the right enabling conditions are put in place that will make such activities economically attractive in terms of return on investment (ROI), the exploitation of green field sites can be of great benefit to the national economy as a whole.
Currently, roughly 25 percent of the government’s budget is financed directly by the oil and gas industry. Instead of trying to tax exploration and have the industry artificially dominated by local firms, the government would do better to be encouraging foreign investment to the maximum so that the industry can really take off. That is where the real economic windfall is to be reaped.
Indonesian deep water also exhibits a lot of potential and has been generating a fair amount of interest on the part of the larger E&P companies. The Straight of Malacca, for example, lies right at the divide between two tectonic plates and I know from my days at Statoil that a number of the oil majors believe that this area alone could be hiding truly massive quantities of natural resources. The difficulty there of course is in locating them given the technical and financial complexities of operating in deep water. Once again the government should be encouraging such activities rather than taxing them.
How do you see the business opportunities for energy infrastructure development? In his most radical reform since taking office last October, President Widido has scrapped $20 billion worth of state fuel subsidies ostensibly with a view to freeing up funds for energy infrastructure development which seems to constitute a top priority for the new government.
Energy infrastructure is very much lacking in the more Easterly and remote regions so there are certainly business opportunities out there waiting to be grasped. The private sector will be much heartened by President Widido’s frequent pronouncements on his desire to bolster the nation’s energy infrastructure. Tenders for some ‘big-ticket’ projects should soon be forthcoming.
The hydrocarbons industry desperately needs investment in infrastructure to make it feasible to transport oil and gas to the processing plants. Currently the government is demanding that the operators develop the midstream as well as the upstream, but that inflates the project cost to such a degree that it sometimes threatens to jeopardize the economics of a project. To solve this, we need to curb the influence of special interests groups in the construction sector and EPC sphere so as to open the door to specialized engineering firms that can offer optimum cost-benefit ratios and undertake quality work at affordable prices.
Remember that infrastructure doesn’t always need to constitute fixed installations. As E&P companies start engaging more with remote regions there will be a lot of demand for transportation infrastructure to support the carriage of small hydrocarbon volumes to processing terminals.
Are you implying that mini-LNG transport solutions can soon become a boom area?
Very much so: stranded gas pockets will need mini-LNG carriers to transport the gas to the consumer markets. Right now a great many oil and gas companies are discovering small stranded gas pockets, which are too small to justify the traditional large-scale transportation options available. The answer to making such projects economically viable could well be mini-LNG. The Norwegians, for example, are very good at mini-LNG development and, if the government were to give some iron cast incentives such as tax-exemptions, then I think these sorts of projects could really take off.
Mini-LNG could potentially become one of the next investment bright spots in Indonesian Energy. We can foresee an entirely new value chain being created with natural gas production from stranded fields being rewired into the local energy mix and enabling power plants such as the Balikpapang complex to relinquish their dependency on imported foreign fuel.
What then do you see as the overall outlook for the Indonesian energy industry?
The potential of Indonesian energy has never been under question. This can be a very vibrant industry again just so long as the government makes the right moves.