Agencies
Indonesia’s oil production, once a cornerstone of its export economy, has sharply declined over the years, dropping from a peak of 1.6 million barrels per day (bpd) in the 1990s to less than 600,000 bpd today. Similarly, its gas production has fallen to 6 billion cubic feet per day (Bcf/d).
The government of Indonesia has set ambitious goals of increasing oil production to 1 million bpd and gas production to 12 Bcf/d by 2030. To achieve these goals, the government plans to simplify exploration permit processes, reactivate idle wells, and adopt advanced technologies.
However, reactivating idle wells and applying enhanced oil recovery techniques will not be sufficient alone. New exploration is essential to reversing the decline in production, as demonstrated by recent discoveries in the Geng and Layaran fields. Yet, Indonesia’s exploration attractiveness has waned in recent decades, with longer timelines and less favorable economics compared to more competitive nations like Guyana, Namibia, Suriname, Mexico, and Argentina.
To overcome these challenges, the Indonesian government needs to implement strategic reforms that foster large-scale exploration. This includes revisiting successful past practices and introducing policies tailored to a cost recovery regime that offers more appeal to investors than the current gross split model. The cost recovery system, which taxes profits rather than revenue, enhances investor returns and stimulates exploration activity. These reforms are essential for Indonesia to achieve its energy goals by 2030.
Indonesia’s oil and gas exploration sector is burdened by significant administrative and compliance challenges that hinder investment and delay exploration activities. These challenges can be addressed by simplifying regulations, improving efficiency, and aligning with global best practice.
One key area for improvement is access to exploration data. In countries like New Zealand and Australia, geological data such as seismic surveys and well logs become publicly available after a designated period. This open-access model allows investors to make informed decisions without waiting for government approval, which in Indonesia’s case would accelerate exploration timelines and boost investor confidence.
The issue of idle exploration acreage is another challenge. In Indonesia, large exploration blocks can be held for years without drilling, and producing blocks may not undertake exploration activities, which limits opportunities for new investors. Clearer regulations should be implemented to require companies to relinquish unused acreage, particularly in regions without recent exploration. This would create a more competitive environment and open up under-explored areas for new investment.
The current permitting process, which requires over 300 permits for exploration activities, often involving multiple ministries, is another bottleneck. Streamlining the permitting process and aiming for approval timelines of 60 to 90 days, especially for offshore wells, would create a more efficient system. A dedicated unit within the Ministry of Energy and Mineral Resources (MEMR) could coordinate the process, reducing bureaucratic delays.
The approval of SKK Migas, the government regulator, is also required for many procurement activities, which causes inefficiencies and delays during the exploration phase. Allowing investors to follow their own procurement procedures, especially during high-risk exploration, would accelerate activities and reduce costs.
Additionally, relaxing the requirements for using Indonesian-flagged vessels and local drilling rigs would further simplify the process, enabling investors to source equipment and services internationally when needed.
SKK Migas regulates expatriate positions, reviewing them annually during the work plan and budget process. Contractors must submit manpower charts for approval, and expatriate costs are recoverable within a salary cap set by the Ministry of Finance (MoF).
However, investors should have the flexibility to hire necessary personnel and offer competitive salaries without requiring Indonesian government approval or adherence to salary caps during the exploration phase. Local hiring requirements should be relaxed until a discovery is made and development begins.
Finally, Indonesia’s approval process for annual Work Programs and Budgets (WP&B) and Authorization for Expenditures (AFEs) should be streamlined. The current WP&B process involves close scrutiny of cost efficiency, even though only a small percentage of exploration projects progress to the development phase.
Eliminating unnecessary cost reviews during the exploration phase and focusing on actual exploration activities, while relying on investors’ own WP&B and AFEs processes, would expedite progress. Moreover, the regulations surrounding the disposal of unused exploration equipment and relinquishment of Production Sharing Contracts (PSCs) should be revisited. Allowing investors to sell or re-export unused equipment to recover costs, and streamlining the relinquishment process for unsuccessful PSCs, would lower costs and make acreage available more quickly for new investors.
To drive investment in Indonesia’s oil and gas sector, fiscal and regulatory frameworks must be realigned with market conditions and investor needs. One critical reform would be to allow cost recovery for exploration activities outside the current “ring-fenced” fields.
