Oil Exploration, Production & Consumption

Aug 16th, 2008, in Business & Economy, by

Callum on the causes of Indonesia's oil woes and the way forward.

Oil in Decline

BPMIGAS recently warned that at the current rate of decline in Indonesian oil production that in 8 to 10 years the country may not be producing any oil at all. In 2007 production fell to 969 thousand barrels per day, this is a substantial decline from production of 1.557 million barrels a day only 10 years ago. The problem is that depleting reserves are not being replaced with new production at a quick enough rate.

Oil Production Chart

This problem has its origins in the design of the production sharing contracts. A typical PSC allows for the government to receive 85% of the production while the oil company will only receive a 15% share plus reimbursement of their exploration and production costs. Last year the government credit for exploration and production was $8.9 billion, which seems a large sum until you compare it to the $19.8 billion that will be wasted on fuel subsidies this year.

The ballooning subsidy costs, caused by the increase in oil prices, have caused some of the less enlightened politicians to call for windfall or export taxes. This would be extremely counterproductive, given that only 4 of the 26 exploration blocks put out for tender last October have actually been taken up.

As a net oil importer, subsidies no longer make any economic sense. While oil related income has declined to the point where it only contributes 25% to the state budget, subsidies have now grown to the point that they are 25% of the state budget and are larger than the expenditure on Education and Healthcare combined. There may have been some rational in the past when oil revenue made up the majority of the state budget and subsidies only amounted to a small portion of that like in 1990 when subsidies where only $1.9 Billion. But, those days are long gone.

The government needs to take a number of steps to help the economy transition from one dependant on natural resources to one that depends on human resources.

  • Phase out oil subsidies until they are eliminated all together. This will have some effect on curtailing consumption growth and also allow valuable state resources to be used to increase the quality of Indonesia’s human capital. A better educated population is a key to raising people’s living standards. This will also allow Pertamina to become a market oriented oil company rather than an inefficient purveyor of state largess.
  • Create new incentives for exploration. The current system is failing Indonesia, more exploration activity is the only long term solution to Indonesia’s dwindling resource production. Exploring for oil is a capital intensive endeavor and costs have been accelerating with the oil price. The day rates for Offshore Drilling platforms are double what they were only 3 years ago. The government needs to create new incentives to make Indonesia more competitive as a place to explore for oil.

Only by looking at the production and consumption imbalance as a whole will the government have any hope of keeping the imbalance from worsening. By treating each aspect in isolation you will never be able to achieve that outcome. But more importantly, the oil will eventually run out and Indonesia needs to start transitioning its economy for that inevitability.


22 Comments on “Oil Exploration, Production & Consumption”

  1. avatar DXP says:

    have caused some of the less enlightened politicians to call for windfall or export taxes. This would be extremely counterproductive, given that only 4 of the 26 exploration blocks put out for tender last October have actually been taken up.

    Isn’t it a symptom of genetical problem ? btw, the windfall taxes are commonly exist only in 2 Malay dominated countries namely Indon & Malaysian who imposing exagerated excessively phobia & phatetic pribumi (Indon) or bumiputera (Malay version) priviledges to minorities in his own dominated countries.
    both malay countries are well know of ‘ambil gampangnya saja’ , use your power – fiscal policy – ‘pungutan’ – ‘cukai’, etc are no-brainers policy which will definetely counter productive …. it is unique for only this race dominant 2 countries

    You may dislike me, you may accuse me as racist but if you don’t change your attitude in life, avoid easy things, work harder & be smarter , who else can help you becoming like CHINA ?

  2. avatar ultratupai says:

    I think I am slowly coming to the conclusion that the fuel subsidies must slowly be removed in favor if investment in human resources… Is that possible to do this in Indonesia with out all that money be siphoned away into someone’s Swiss bank account? Well, essentially the massive subsidies are just being burned up without any return. Time to invest in the people in a different manner and at least have something to show for it.

    I also think that to nationalize the oil industry (and other economic sectors) is the way to go. Again, this might risk the investment from disappearing, but if it can be with some vigilance and transparency it is worth doing. If there is only eight to ten years of oil left anyway it is time to take it off the international market and use it exclusively for Indonesia. In the mean time best to ramp up alternative energy programs in a big hurry.

  3. avatar matthew says:

    who says there is only 8 years oil left?

    the problem is there is not enough return on investment (due to excessive taxes) plus there are other risks for international companies; i.e. the dreadful corruption and routine appalling human rights abuses of the Indonesian army and police.

  4. Ultraupai, I understand your concerns that getting rid of the fuel subsidy may just see that money redirected to peoples bank accounts. This happens every year with the budget, it is usaully 60% allocated when December rolls around and the suddenly 100% allocated by the end of the month. Most of it spent very badly.

    I do not however agree that nationalizing oil will help in anyway. In fact it would probably lead to more corruption. Those nationalized assets would most definately end up in politicians bank accounts. I think a better idea, since government involvement always leads to corruption, is privatizing all state owned industry including Pertamina.

  5. avatar DXP says:

    since government involvement always leads to corruption, is privatizing all state owned industry including Pertamina.

    Pertamina privatization ? isn’t it the Pertamina is the funding pockets belong to all political parties ? not a good ideas for the corruptors

  6. avatar Cukurungan says:

    I do not however agree that nationalizing oil will help in anyway. In fact it would probably lead to more corruption. Those nationalized assets would most definately end up in politicians bank accounts. I think a better idea, since government involvement always leads to corruption, is privatizing all state owned industry including Pertamina.

    Your argument is a nice pretext of the western countries to hide their real agenda to control economic of the third world countries but in now days it is only a dumb third world leader would believe to your argument, as we speak most South American countries have been privatizing their oil and gas Industry. We know corruption is bad but it even become worst to our country if it is committed by stranger who pretend to care about us.

  7. avatar tomaculum says:

    Your argument is a nice pretext of the western countries to hide their real agenda to control economic of the third world countries but in now days it is only a dumb third world leader would believe to your argument,
    You’re right, Cuk.
    The third world leader are not dumb, no, Sir, they are very, very clever. They know that they will get more money into their own pocket if the exploitation of the natural resources is managed by western companies.
    Why? Because (some explanations):
    1. The maintenance of the technical equipments is better
    2. the worker earn more money without “administrative” reductions, so that they are motivated to work accurate, so that
    3. the production is more effective and more in quality and quantity, so that
    4. they can sell more of the products to the with them related companies in the taker countries without “middlemen” (and -women, off course)
    5. so they can earn more benefit and that means
    6. more “shares” for the leaders of the third world.
    Yeah, it is better betrayed by one’s own brothers and sisters than by strangers. 🙁

  8. avatar PrimaryDrive says:

    Callum,

    I agree with all your conclusions. And we have an even bigger problem yet, namely that Indonesian politics is not likely able make the decisive move. Our politicians do not seem to fully comprehend the extent and depth of our energy problem, so they are afraid to take the decision. The size of our oil subsidy, by all measures of economy, is just insane. Yet we stick with it. So, not only that we have a huge energy problem, we are also deprived from the means to deal with it.

    Perhaps the best advice I can give to fellow indonesians is to just walk rather than using cars. The loss in productivity may be less than the 20 billions USD we pay to subsidize our fuel; so that justify coming late to office because you walk.

  9. avatar PrimaryDrive says:

    Btw, sometimes ago I started collecting articles about this energy/fuel issue See http://krisisenergi.blogspot.com/

  10. avatar Enigmatic says:

    I also think that to nationalize the oil industry (and other economic sectors) is the way to go.

    But doesn’t this create X-Inefficiency? After all by nationalising the industry there would be little incentive to be productive efficient because of complacency from the absence of competition? To add on, the endemic corruption problem would also increase the costs would it not?

    Phase out oil subsidies until they are eliminated all together.

    This is definitely a good move, even the best solution to the problem of oil subsidies… However it is very, very unpopular. Remember Indonesia is a vibrant democracy unlike it’s younger neighbour… (Can’t say it… Big Brother could be watching ;)) and so slashing fuel subsidies would become a political flashpoint and also spark off mass protests. Thank the tyranny of the majority. Leaders wouldn’t dare to cut subsidies for fear of jeopardising their political careers… Especially since cutting oil subsidies would harm the poor even more.

    Perhaps the best advice I can give to fellow indonesians is to just walk rather than using cars. The loss in productivity may be less than the 20 billions USD we pay to subsidize our fuel; so that justify coming late to office because you walk.

    Public transport and cycling are also good alternatives… It cuts the jam too…

  11. avatar PrimaryDrive says:

    Enigmatic: Public transport and cycling are also good alternatives… It cuts the jam too…

    I was just being cynical when I said “walk” 🙂

    Anyway, here is a different view. Indonesian GDP is estimated at 418 billions USD (2007). So 20 billions only counts for 4% overhead. No big deal. But it also means that our economy has to keep compensating this 4%. In terms of macro economy, every percent growth is hard hard work. So this 4%, though looking small, is really dead weight in our legs. It is much more clever to realocate this 20 billions to education and research, as Callum pointed out, so that in the future we totally eliminate our dependency on this 4%. From that point on, it will be like a free 4% growth every year, or am I wrong?

  12. avatar Enigmatic says:

    PrimaryDrive Says:

    August 20th, 2008 at 1:50 am
    Enigmatic: Public transport and cycling are also good alternatives… It cuts the jam too…

    I was just being cynical when I said “walk”

    Anyway, here is a different view. Indonesian GDP is estimated at 418 billions USD (2007). So 20 billions only counts for 4% overhead. No big deal. But it also means that our economy has to keep compensating this 4%. In terms of macro economy, every percent growth is hard hard work. So this 4%, though looking small, is really dead weight in our legs. It is much more clever to realocate this 20 billions to education and research, as Callum pointed out, so that in the future we totally eliminate our dependency on this 4%. From that point on, it will be like a free 4% growth every year, or am I wrong?

    OMG SHIT OUCH. How could I miss that darn…

    anw the ‘free 4% growth’ simply translates to an additional 4% budget available for spending… education is one thing… healthcare and hygiene campaigns also work… and don’t forget crime fighting?

  13. avatar Ally says:

    I do not however agree that nationalizing oil will help in anyway. In fact it would probably lead to more corruption. Those nationalized assets would most definately end up in politicians bank accounts. I think a better idea, since government involvement always leads to corruption, is privatizing all state owned industry including Pertamina.

    I don’t know much about this. But what about those bosses of private companies who travel in bussiness class, stay in luxurious hotels, own the most expensive cars and villas, etc.?
    Working as government one may not expect to become rich, but you can be rich if you are in private sector… How come?

  14. avatar Achmad Sudarsono says:

    Hi Callum,

    Thank you for this. But I honestly think the gradual decline of Indonesia’s oil wealth is to do with the threat the West, mainly, U.S., U.K., and Australia feel towards this country’s rise.

    It’s bad enough for many oil executives to see Indonesians drive nice cars and living in good houses. But the control of a large and powerful petroleum industry is just too much.

    Indonesia’s been busy building Asia’s most vibrant democracy in the past decade. We haven’t noticed the concerted effort of a handful of U.S. companies to withdraw capital and make all sorts of claims about “corruption,” and “political uncertainty.”

    In Indonesia, we honour guests, But it is important for a guest to also respect the right etiquette. So when Exxon, Chevron etc, complain, complain, complain, when at night their executives go to Blok M, how is Indonesia supposed to feel ?

  15. avatar DXP says:

    DXP made a study, you guys Indonesian are easily forgetful, you have another type of un-tap resources : Hizbut Tahir, Laskar Pembela Islam, FPI, JI Indonesia, Forkot organization, etc etc … (long list) – you can utilize their strong contact with Arab and bring Saudi Aramco, Kuwait Oils, Pakistan Oil to replace Exxon/Chevron/Agip-Eni/Total/Conoco/BP/PetroChina dominance in Indonesia E&P, surely you will back on green oil reserve track

  16. avatar tomaculum says:

    DXP,
    you’re kidding. Another folk looking down on Indonesian, and then with such isatiable hunger for sex?
    No, Sir, too dangerous for Indonesian maids. 🙂
    Yeah, and they won’t squeeze Indonesian natural ressources, will they?
    But I’m sure they will cooperate much, much better with Indonesian officials. 🙁

    Indonesia’s been busy building Asia’s most vibrant democracy in the past decade.
    One-sided, selective democracy?

    We haven’t noticed the concerted effort of a handful of U.S. companies to withdraw capital and make all sorts of claims about “corruption,” and “political uncertainty.”
    Every company trys to optimize their benefit. This is simply the law in the business world.
    It is the job of the Indonesian government and their in this cases authorized persons to get the best earning for Indonesia and not to get the best earning for their own pockets. How many percent of Indonesian earning of the Oil business flow into the treasury? And how many percents of it are invented for the welfare of the folk (education, health etc)?

    What are Exxon, Chevron etc complaining about?
    Maybe someone can explain it?
    I only know one complain: that they have always to pay payola for everything. 🙂

  17. avatar Cukurungan says:

    What are Exxon, Chevron etc complaining about?
    Maybe someone can explain it?
    I only know one complain: that they have always to pay payola for everything.

    It meant you know nothing because every pay payola for everything is recoverable under the term of operating cost because the operating cost of the oil lifting in Indonesia is slightly different with other country in here you may include dinner and Karaoke bill, golf membership fee, spa treatment and massage in the lifting oil cost. So actually Executive Exxon and Chevron never pay anything.

  18. avatar DXP says:

    DXP emphaty to the declining oil reserves of Indonesian, here is my advice
    1. Bring Arab oil co, and offer their executives & expat workers some ‘Pahala’ in exchange to oil lifting, surely they are motivated to help u
    2. If the american refuse to work in saturday/sunday in your oil fields then invite the Jews oil engineers to work shift in sunday because they surely work every Sunday to prove their Judaism to the christians & muslims
    3. And get the FPI, Forkot, JI to patrol everyday to guard the oil fields to ensure your assets are in good hands
    So, u will get motivated workers who can work 7 X 24 hours in the oil fields operation to improve your proven oil reserves

  19. avatar indahs says:

    I don’t understand why privatization is always being recommended to solve developing countries’ development problems. I think all Indonesians state-owned companies and government institutions should have be annually auditted not only by BPK but also being supported by external well reputated auditing agencies like EY, KPMG or PwC report to meet good & clean governance values. And of course, audit result should be published in public and official websites or any media that could be reached by people. If there were financial or public policies irregularities, then it should be investigated for later on brought to court.

    OK, I am not sure how auditting process in state-owned companies or govt institutions in Indonesia nowadays, but to I am pretty sure that by following where the money flow would help any corruption investigations or lousy-made public policies.

  20. avatar DXP says:

    government institutions should have be annually auditted not only by BPK but also being supported by external well reputated auditing agencies like EY, KPMG or PwC report to meet good & clean governance values

    I don’t think the international auditors will effectively do their jobs as the facts your BUMNs keep on struggling to reach profit targets. However, you shall try to bring your brothers of FPI, JI, Forkot auditors to audit the ‘mentality’ of the political parties & the leaders and the BUMN’s directors. In the muslim society, you must apply muslim measurement to eradicate the rampant corruption, a completely different system which immune from counter bribery – isn’t innovative proposal ?

  21. avatar sputjam says:

    only way for indonesia to benefit from the oil and gas is to remove subsides completely, as rampant smuggling have been going on for decades in the form of diesel and kerosene (added to some lower quality diesel and sold as more expensive higher quality ones). Profit from smuggling pushes up property prices in singapore and benefit its private banking sector.
    I have said many times before, countries/areas rich in natural resources seldom gets any benefit from it, except scarred and ugly environment left by the pillagers.

    Since china was mentioned by DXP, nobody digs for oil and gas in china except sinopec, CNOOC or petrochina (correct me if i am wrong) and foreign investors are invited only when local expertise are lacking. In any case BP are having some serious problems in in their china and russian investments. 90% of equipments used by chinese oil and gas extractions are locally made, benefitting the local economy in terms of maufacturing and employment.

    In the case of indonesia, probably 95% of the equipment requires for oil and gas extraction will be imported, hence no trickling down effect to the local economy, except in the form of taxation.

    windfall taxes should be imposed when prices of commodities increases exponentially and even china imposed such taxes on their local oil and gas producers and to curtail excessive speculation on properties etc.

    Presently, all western oil and gas companies have problems with third world economies not only in indonesia as in the case of exxon-mobil, but also in venezuela, bolivia etc. The ones taking over are the oil companies from other developing nations such as from china and Petronas/Petrobras etc. who understands the local/cultural mentality.

  22. avatar Purba Negoro says:

    Callum rather transparent argument yet again for Privatisation of National Assets.

    Ignoring the argument that it cannot ever happen Constitutionally- requires a reading of the 1945 Constitution where all national resources are for the benefit of the State and People alone- not Western greedy multinationals. The fool who hands over a Western nation a State asset will be signing his own death warrant.

    Who reaps the greatest benefit?
    Westerners of course.

    No the argument FOR privatisation is well disproven by a cursory examination of the UK and the US- whom suffer massive job losses, the State is beholden to the whims and threats of the Corporate moneyed aristocracies and the consumer is the biggest loser of all.

    Then what about Nigeria and Shell and BP?
    What we have is blatant corruption by Western multinationals which leads to the repression and brtual suppression of the mult-nationals’ installed opposition.

    Do we need to talk about Uniocal?
    Lets. Unocal’s head offices in Kabul were directly opposite the bin Laden compound. Hamid Karzai is a former employee of Unocal and a consultant.
    The Taliban after being feted by Bush and Texas Oil companies are lated swept aside and Unocal wins the no-bid tender for building its trans-Central Asia pipeline and developing the gas fields the Soviets were once so keenly eyeing.

    What about Chevron, Unocal Texmaco and BP in Iraq?
    Blatant military aggression for oil.

    With these sunny precedents- is it any wonder the world now nationalises its’ assets.

    National Corporation Corruption?
    What difference does it make if the money is nett reinvested in the same nation?
    Still a far better alternative than further enriching the over-privileged stuffed shirts of the West
    Russia and China are the best models for Insensate- we should follow Mr Putin’s brilliance.

    Callum- greed has its’ price.
    I hope one day your conscience lobbying the rights of the over-privileged will haunt you.

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