Indonesia: Oil and gas losing ground to renewables

Indonesia: Oil and gas losing ground to renewables

Oil and gas may have been king of the jungle for decades, but investors are
being reminded of the increased competition from renewable energy sources as
the government emphasizes the need for efficiency in the upstream sector.

Over the past three years, investment in the upstream oil and gas sector has
plunged to almost half of the usual figure of more than US$20 billion,
partially due to continuously low oil prices and the government's frequent
policy changes leading to uncertainty.

The current situation is not much better, with the government predicting a
$13.8 billion total investment by year-end. While this year's estimate is
higher than the $12.01 billion invested in 2016, it is still a significant
drop from $15.9 billion in 2015.

Energy and Mineral Resources Minister Ignasius Jonan reminded investors that
it was unlikely to get any easier in the future, with global crude prices
still hovering around $50 per barrel.

Furthermore, renewable energy sources have continued to become cheaper as a
result of more readily available technologies that are regarded as much
cleaner alternatives to fossil fuels.

"New and renewable energy is a sector that we have to consider seriously. I
feel that perhaps in the future, the competition between fossil or
traditional energy and renewable energy will mount from time to time [.]
they might compete in the future, whether we use oil or gas or renewable
energy," he said during the 41st Indonesian Petroleum Association (IPA)
exhibition and conference on Wednesday.

While fossil fuel-based power remains much cheaper than renewable-source
power, the gap is getting narrower. For example, electricity procured from
gas can cost from around 7 US cents per kilowatt hour (kWh) to 14 kWh
depending on the country.

On the other hand, the International Renewable Energy Agency (IRENA) states
that electricity from utility-scale solar photovoltaic systems can now cost
as little as 8 cents per kWh.

The emphasis on efficiency and cost-cutting measures has been a recurring
theme in the energy sector under President Joko "Jokowi" Widodo's
administration.

The most drastic measure taken by the government is its recent decision to
issue a new production-sharing, or gross-split, scheme, in which it will no
longer be responsible for reimbursing contractors for exploration and
exploitation activities.

Many investors have been accused of depriving the state budget of revenue
while providing little in return as oil production continues to go downhill.

The government claims the new scheme is actually more enticing for investors
and will revitalize the industry, because contractors no longer have to gain
approval from the Upstream Oil and Gas Regulatory Special Task Force
(SKKMigas) for every aspect of their upstream projects, which theoretically
translates to faster business processes.

However, there are always two sides to a story and companies argue that the
gross-split mechanism means they risk losing a lot of money for exploration
and exploitation in Indonesian areas that are mostly considered as frontier,
with difficult terrains and where most of the reserves are in deepwater
locations.

IPA president Christina Verchere emphasized that investors took the issue of
efficiency as seriously as the government.

"I think it's important to clarify that it's in the investors' interest for
costs to be low. It impacts our profit lines too, so we want to be
efficient," she said.

Wood Mackenzie's Asia Pacific research director for upstream oil and gas,
Andrew Harwood, said there had been huge exploration budget cuts since 2014
caused by low oil prices, with many companies opting to invest in
exploration opportunities that are more easily commercialized than
Indonesia's deepwater reserves.

Even so, Wood Mackenzie notes that countries like Mexico and Canada are
attracting more investment for deepwater reserves despite Indonesia's equal
potential. One of the biggest problems, Harwood added, was the lack of
transparency and cooperation between ministries.

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Link to Original Article:
http://www.thejakartapost.com/news/2017/05/18/oil-and-gas-losing-ground-to-r
enewables.html

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com