Oil majors are leaving Indonesia: Should we be concerned?

Three global companies — Shell, Chevron and ConocoPhillips — are selling billions of dollars’ worth of their shares in big oil and gas development projects in Indonesia despite the country badly needing huge exploration investment to cope with its everwidening oil deficit.

Seen from all the strong commitments and big targets for the reduction of carbon emissions pledged by the Indonesian government at the COP26 climate summit in Glasgow, the United Kingdom, last November, that trend may be well-timed and be greatly welcomed.

“Good riddance!” obstinate green campaigners may shout, preferring the potential hydrocarbon resources in the world’s largest archipelago country to remain stranded underground or under seawaters in order to realize the green commitments.

But looking into our short and medium-term national interests, we should be worried about the steady fall in oil production to as low as 660,000 barrels per day (bpd) last year, as against the total national need of 1.4 million bpd. Indonesian oil production peaked at 1.68 million bpd in 1981.

Forget for a moment the conveniently made long-term goal of net-zero emissions by 2050 or 2060. Even the 23 percent target for renewable energy in our national energy mix by 2025 seems still a pipe dream as the current realization is a mere 11 percent.

However unpopular it is now to talk about fossil fuels and the hydrocarbon sector, energy analysts still project oil will continue to be the main fuel in the transportation sector in Indonesia even until 2040.

Look how addicted we have become to cheap (subsidized) gasoline. As government leaders and most politicians are so obsessed with the five-year political cycle in the national leadership, they do not have the courage to consistently implement a long-term strategy to phase out fossil fuel subsidies.

In fact, the government itself has set the role of natural gas, which is cleaner burning than oil, in power generation at 25 percent in 2030, up from about 20 percent at present. Oil and gas also still account for about 10 percent of total government tax and nontax revenues.

The Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) has set the oil output target at 1 million bpd and gas at 12 billion standard cubic feet (scf ) in 2030. Natural gas production last year totaled 5.5 billion scf. The 2030 production targets require an annual investment of US$25 billion for the next eight years.

Unfortunately, Chevron’s Indonesia Deepwater Development in the Makassar Strait and Shell’s Masela gas block in Maluku, which are now in limbo are two of the four largest gas development projects in the country.

Latest SKKMigas reports show that the investment target for the upstream oil industry in 2022 is only $13.2 billion, up from $10.70 billion in 2021. Yet more worrisome is that only $1 billion of the total investment will be made in exploration. Last year only two of six oil concessions put to open tender or direct offer were taken up by investors.

Most oil executives and analysts agree Indonesia still has many sedimentary basins with large potential reserves and good geological prospects. But huge investments in exploration are required to turn the potential resources into proven oil and gas reserves.

However, national companies do not have adequate financing or the technological capacity to conduct major exploration activities. Since it is only a small chance that money spent on exploration will have a commercial return, virtually no national banks are willing to lend to hydrocarbon prospecting operations due to the high risks and the long gestation (payback) period of the business.

The departure of the three oil giants will certainly affect foreign investor confidence in the country and this is quite damaging to the petroleum industry because only international oil firms with their high credit ratings and global networks are willing to invest the required sums in high-risk oil and gas prospecting.

“The main challenge now is that the capital available for oil and gas investment has decreased because companies have to shift part of their resources to renewable energy,” Indonesian Petroleum Association (IPA) executive director Marjolijn “Meity” Wajong told The Jakarta Post last week.

Moreover, oil firms are now required to implement carbon capture and storage (CCS) as well as carbon capture, utilization and storage (CCUS) technologies to cut emissions in production operations. All this will increase production costs, she added.

The government has made significant improvements in the regulation and bureaucracy of the petroleum industry but investors demand better terms and conditions due to the dramatic change in the oil and gas landscape amid the strengthening global green commitments.

Legal and regulatory uncertainty and inefficient bureaucracy are especially inimical to investors in the upstream segment of the hydrocarbon industry—exploration and mining — as this business involves high risks, requires big capital and has a very long payback period.

With the climate crisis hastening a global shift to cleaner energy, fossil fuels will likely be cheaper than expected in the coming decades, while their carbon emissions will get more expensive. These two simple assumptions mean that tapping many oil fields, which were previously commercially viable, no longer makes economic sense.

The paradox though is that there seems to be a mounting resource nationalism among politicians as can be seen in the granting to stateowned Pertamina the right of first refusal for expiring productive oil and gas concessions.

This trend frustrates many foreign companies, they feel they are no longer welcome as their contracts are not being extended and their complaints about heavyhanded micro management are not being heeded.