Quick Approvals Offer No Solution To Regulatory Uncertainty

BMI View : SKMigas' approval of Eni's plans to develop the Jangkrik North East field will boost confidence in the country's oil and gas business environment , at a time whe n missed production targets and an opaque regulatory regime cast a pall over the domestic industry. However, it will take more than the speedy approval of development plans to restore confidence in Indonesia's oil and gas industry.

Upstream regulator SKMigas has approved Eni 's plans to develop the Jangkirk North East field. Located in the Muara Bakau licence area in East Kalimantan, the Italian oil company will invest US$1.4bn to develop the offshore gas field. According to the head of SKMIgas , Rudi Rubiandini, Eni's plan will see the gas f ield brought online by 2015. Jangkrik North East could produce as much as 1.49bn cubic metres (bcm) per year from 2016 over a five and a half year period, before production winds down gradually over nine years.

Jangkrik North East, lying within the Kutei Basin, was discovered in July 2011 in water depths of 460m. It holds about 11.7bcm of commercial gas reserves and is located 15 km f rom another producing field , Jangkrik, which is also part of the Muara Bakau licence . Like Jangkrik, gas produced from Jangkrik North East will supply the Bontang liquefaction plant and 40% of output will be reserved for the domestic market. Eni holds a 55% operating interest in Muara Bakau and the remaining 45% is held by GDF Suez .

The Need For Gas

Jangkrik North East is one of two developments that newly appointed Rudi Rubiandini has approved since he assumed his position in January 2013. This is in addition to the 274 work plans and budgets that were given the green light by SKMigas in December 2012.

The rush to approve development plans is in part motivated by the country's need to bring more gas fields online to meet growing demand . Indonesia is still one of the world's top three exporters of liquefied natural gas (LNG) but is at risk of losing its dominance as domestic gas consumption ratchets up to the same level as production capacity; demand is expected to grow at an average of 4% per annum while supply growth - based on current rate s of discovery, production and depletion - is projected at about 0.79% per annum. Without new production capacity, Indonesia's net export capacity could fall from 38.3bcm in 2011 to 15.4bcm by 2022 , according to our forecasts.

New Gas Needed To Retain Crown
Indonesia's Gas Consumption, Production & Net Export Capacity (bcm)

Indonesia is already struggling to meet its current LNG export commitments . Officials from Indonesia have now been bearish on LNG export growth for two consecutive years. In December 2011, an official forecast a 36% fall in annual exports in 2012. This pessimistic outlook was again voiced in December 2012, when an unnamed official told Reuters that exports would likely fall by another 13.8% in 2013. There is now a greater sense of urgency as the country push es to realise greater gas production if it wishes to meet growing demand without l osing out on lucrative export revenue.

Regulatory Mishaps

Another reason behind Indonesia's speedy approval of development plans is to restore confidence in the country's o il and gas business environment . The investment climate took a beating when the courts d isbanded upstream regulator BPMi gas in November 2012 on the basis of its 'unconstitutionality' and its failure to put the interest s of the country first . T emporary regulator SKMigas was established in its place , but this does little to address the government's de facto rejection of the previous regulatory law governing the oil and gas industry, of which BPMigas was a pillar of ( see our online servic e , November 19 2012 , 'BPMigas Falls Victim To Resource Nationalism').

Quick project approval , as in the case of Jangkrik North East, is part of government attemp t s to demonstrate that regulatory upheaval will not stop business deal ings from proceeding as normal. Indeed, there is much to be done if the government does not wish to see a fall in much-needed investment. The Jakarta Globe reported that Chevron , the country's biggest producer of hydrocarbons, had warned the government that it will reduce its investment in Indonesia 'if there were substantial negative changes to the country's investment climate'.

However, procedural improvements - such as quick project approvals - do not sufficiently address the 'substantial negative changes' in Indonesia, which stem fro m growing resource nationalism and government interference. For example, Total 's rights to the gas-rich Mahakam block after 2017 could be given away to state-owned Pertamina ; the governor of East Kalimantan, where the Mahakam block lies, told the Jakarta Post that he would rather the central government develop the block independently of Total. Meanwhile, ExxonMobil 's then- Cepu chief , Richard J. Owen , found himself forcibly removed from his position in January 2013 when Indonesia refused to renew his work permit; this was on the basis of a fail ure to meet the May 2014 production target of 165,000 barrels per day (b/d) at the Banyu Urip field. This confused policy towards foreign investment - swinging between acceptance and rejection - is the real problem.

Threat To Cheap Gas

Many of the new projects that have been approved have seen foreign investors accede to the government's demand that 40% of new production capacity is reserved for the domestic market. This also applies to Jangkrik North East, which will see Eni sell gas to the government at US$9 per mn British Thermal Units (mnBTU) - a US$10/mnBTU discount on what sales could otherwise fetch when selling to the Japanese market at current LNG contract prices.

However, cheap gas to supply the domestic market will not be available if Indonesia's business environment deters new investment. A failure to attract foreign investment will come at the expense of the Indonesian economy, especially if production growth flounders and the country is transformed into a net gas importer - incurring large gas import charges as a result.

Domestic Gas Reservation: Losing Out On Export Profits
Platts JKM Active Contract Prices & Indonesian Gas Buying Price (US$/mnBTU)
This article is tagged to:
Sector: Oil & Gas
Geography: Indonesia

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