Indonesia Review

Indonesia’s oil exploration lacks investments

Indonesia’s oil exploration lacks investments

Indonesia’s oil production declines, consumption rises

The lack of exploration and other investments in this sector that have resulted in the decline in the country’s oil production are said to be due to weak government management, an unclear regulatory framework and legal uncertainty regarding contracts

Starting in the 1990s Indonesia’s crude oil production has experienced a steady downward trend due to a lack of exploration and investments in this sector. In recent years the country’s oil and gas sector actually hampered national GDP growth. Oil production targets, set by the government at the start of each year, have not been achieved for a number of years in a row because most oil production stems from mature oil fields.

Today, Indonesia’s total of oil refineries have roughly the same combined capacity as a decade ago, indicating that there has been limited progress in oil production, resulting in the current need to import oil to meet domestic demand, says a report.

The decline in Indonesia’s oil production in combination with increased domestic demand turned Indonesia into a net oil importer from 2004 onward, implying that it had to terminate its long-term membership (1962-2008) in the Organisation of the petroleum exporting countries (Opec). However, Indonesia rejoined the Opec in December 2015.

The lack of exploration and other investments in this sector that have resulted in the decline in Indonesia’s oil production are due to weak government management, bureaucracy, an unclear regulatory framework and legal uncertainty regarding contracts. This creates an investment climate that is not appealing to investors, particularly if it involves costly, long-term investment, the report from Indonesia Investments says.

In contrast, Indonesia’s oil consumption is showing a steady upward trend. Due to a growing population, an expanding middle class and a growing economy, demand for fuel is increasing continuously. As domestic production cannot meet domestic demand, Indonesia imports about 350,000 bpd and 500,000 barrels of fuel per day from several countries.

Most of Indonesia’s oil production is concentrated in basins in the western part of the country. But because of few significant new oil discoveries in this western part, the government has shifted its focus towards eastern Indonesia. Proved oil reserves throughout the country, however, have fallen fast according to a publication of oil company BP. In 1991 Indonesia had 5.9 billion barrels of proven oil reserves but this amount has declined to 3.7 at end 2014. Around 60 per cent of Indonesia’s new oil field potential is located in offshore deep-water that requires advanced technology and large capital investment to start production.


One heavily criticised government policy of Indonesia was the decade-long fuel subsidy policy which – to a large extent – was subsidized by the state budget. Although this policy aimed at supporting the poorer segments of Indonesian society, it were mostly the richer segments (including the middle class) who were the ones benefiting the most from subsidized fuel. Moreover, the policy led to a significant increase in fuel demand, thus placing serious stress on the government’s budget deficit (in fact it implied that the state budget was dangerously linked to the volatile oil price). Extra allocations to meet rising subsidized fuel demand were made annually, while the artificial low price of fuel caused market distortions. Reduction of removal of fuel subsidies are a highly sensitive issue in Indonesia as it causes mass demonstrations across the country (implying political risks for the ruling elite). After two subsidised fuel price hikes in June 2013 and November 2014 (triggering high inflation and demonstrations), the Indonesian government finally decided to scrap gasoline subsidies in January 2015 (a relatively easy move amid the globe’s low petroleum prices at the start of 2015) while introducing a fixed IDR 1,000 per liter subsidy for diesel. This move was supported by international organisations such as the World Bank and the International Monetary Fund (IMF).


Indonesia’s oil and gas sector has traditionally contributed significantly to the Indonesian economy through state export revenues and foreign exchange reserves. However, as the contribution of oil has been declining during the last decades, so has its contribution to state revenue. Currently, oil and gas combined account for around 13 per cent of domestic revenues (in 1990 this figure was 40 per cent). As mentioned above the oil sector is currently actually hampering the Indonesian economy from reaching higher levels of growth.

According to information from the Ministry of Energy and Mineral Resources, existing proven reserves of crude oil in Indonesia will last around 23 years. Most oil production is carried out by foreign contractors under production sharing contracts arrangements. Chevron Pacific Indonesia, subsidiary of Chevron Corporation, is the largest producer of crude oil in the country, accounting for around 40 per cent of national production. Other major players in Indonesia’s oil industry are state-owned Pertamina, Total, ConocoPhillips, PetroChina, CNOOC, Medco, BP, Kodeco, and Exxon Mobil.

Indonesia’s oil production has been in a state of decline. However, despite several oil and gas contractors in Indonesia have reduced their drilling activities due to low oil prices, there exists expectation of a rebound as several large Indonesian oil fields are to become operational. The Banyu Urip oil field in East Java, part of the Cepu block, is the largest oil reserve (containing around 450 million barrels of oil) that Indonesia is yet to exploit and which can contribute significantly to Indonesia’s oil production volume. This $2.5 billion project in which Exxon Mobil and Pertamina each hold a 45 per cent stake (through subsidiaries Mobil Cepu and Pertamina EP Cepu) came online in 2015. Production is estimated to reach a peak rate of 165,000 bpd in 2016.

Furthermore, the Bukit Tua oil field (part of the Ketapang block in East Java, operated by Petronas Carigali) came online in March 2015 and production may rise to 20,000 bpd in late 2015.


Similar to many other countries, Indonesia seeks to lower its dependency on oil as a source for energy due to the high oil price and environmental issues. Currently, approximately 50 per cent of the country’s energy is derived from oil; a number the government intends to reduce to 23 per cent by 2025 by placing more emphasis on renewable sources and coal.

The Indonesian government still has high hopes to restore the power of its oil sector as the country still contains large oil reserves, and oil demand (in particular domestic) is increasing. Meanwhile, the oil industry remains a lucrative industry (although prices have hit severe lows in 2015) as is evidenced by Pertamina’s net profit figures. However, it will require serious effort from all stakeholders (particularly the Indonesian government) to achieve production quantities of more than one million barrels per day again (an ambitious target that is still desired by the government). In order to achieve this target, large-scale investments, supported by a transparent and secured regulatory framework (that also foresees in good coordination between the ministry and local governments), are needed. Lack of investments in new oil exploration has resulted in decreasing levels of oil production during the last two decades as the country’s oil fields mature. If the government does not provide incentives that stimulate investments in the development of the upstream oil sector, this declining trend is not likely to reverse.


Indonesia contains large reserves of natural gas. Currently, the country contains the third-largest gas reserves of the Asia Pacific region (after Australia and China), accounting for 1.5 per cent of total global gas reserves (BP Statistical Review of World Energy 2015). Most centres of Indonesian gas production are located offshore. The largest of these are: Arun, Aceh (Sumatra); Bontang (East Kalimantan); Tangguh (Papua); and Natuna Island.

Indonesia produces around twice as much natural gas as it consumes. This does not mean, however, that domestic production of gas meets domestic demand. In fact, there is a shortage of gas for domestic industries in Indonesia. State-owned gas transportation and distribution company Perusahaan Gas Negara (PGN) has not been able to satisfy domestic demand. This has far-reaching consequences as it causes state electricity company Perusahaan Listrik Negara (PLN), the biggest domestic gas consumer, to have a structural lack of gas supplies and forces PLN to turn to other – more expensive and environment unfriendly – fossil fuels, such as oil, to generate electricity. However, blackouts happen frequently across the country (in particular outside the bigger cities on Java), thus hurting the nation’s industries. Moreover, nearly 80 million Indonesians do not yet have access to electricity as is shown by Indonesia’s relatively low electrification rate of 84.1 per cent in 2014.

The government of Indonesia aims to limit the country’s gas exports in an attempt to ensure domestic supplies while encouraging usage of natural gas as a fuel source for industrial and personal consumption. A large part of Indonesia’s gas production is exported as the nation’s gas production is dominated by foreign companies that are only willing to invest if allowed to export the commodity.


Throughout its history, Indonesia’s gas production has always been directed towards export markets. However, the decline in domestic oil production in combination with a rising international oil price, made the government decide to make efforts to enlarge domestic uses of gas from the mid-2000s onward. In recent years domestic usage of gas has risen robustly at the expense of exports but limited infrastructural facilities in Indonesia’s transmission and distribution networks complicate further development of domestic consumption. Limited adequate infrastructure is partly due to the lack of investment but also because of the country’s geographical make-up. Distribution by tanker is easier than by pipeline as the key natural gas reserves are located offshore, far away from major gas demand centers.

After Qatar, Malaysia and Australia, Indonesia is currently the world’s fourth-largest exporter of liquefied natural gas (LNG). This does not mean – as mentioned above – that domestic demand can be satisfied by domestic production, resulting in the need for Indonesia to import LNG from abroad in order not to disturb export commitments. It is predicted that by 2017 additional supplies from new Indonesian gas fields will be able to replace imports. Indonesia, previously the largest exporter of LNG, is experiencing a declining global LNG market share, partly due to a policy re-orientation of the Indonesian government in the mid-2000s that targets for more gas supplies for the domestic market in the context of increasing usage of gas as a source for energy (at the expense of reliance on oil).

Indonesia’s expanding economy in combination with the government’s intention to lower reliance on oil as a source for energy supply in industries, power generation and transportation will cause domestic demand for gas to rise in the future. The country contains abundant reserves of gas that can supply Indonesia as well as foreign export markets for many more decades to come. But in order to reach an efficient and productive gas sector, large-scale investments in both exploration and (distributional) infrastructure will be needed. In order to attract more foreign investments, a clear and supportive regulatory system and legal framework is required.

In late-2015 I Gusti Nyoman Wiratmaja, Director General of Oil & Gas at the Ministry of Energy and mineral Resources, said Indonesia needs over $32 billion worth of investment (mostly from the private sector) for natural gas refineries, storage facilities, and gas-related infrastructure in order to meet domestic gas demand by 2025. Indonesia’s gas demand is estimated to rise from 6,102 million standard cubic feet per day (mmscfd) in 2015 to 8,854 mmscfd in 2025 with the bulk of demand originating from Java and Bali. Without providing clear details, Wiratmaja adds that incentives are available to the private sector for investment in the domestic gas industry.

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