Increased Investment Opportunities to Step up Oil & Gas Production
Energy consumption in Indonesia has been increasing rapidly, to meet the growing demands among various sectors, particularly the transport sector, with highest energy consumption. To meet this escalating demand, Indonesia has been facing a decline in its oil production, making it an oil importer since 2004. Aging of oil fields, lack of infrastructure and investments, and identification of potential oil and gas fields have forced it to become a net oil importer. Another reason for the fall in oil production is the "capping of cost recovery" scheme under the Production sharing Contract (PSC), which the government is planning on scrapping, to encourage investments.
Oil and gas contractors have been proposed a $16 billion investment in the exploration to step up the production. Additionally, the development of Cepu and Belanak oil fields is seen as an attractive and potential investment opportunity for suppliers and manufacturers of equipments in the future. The government is also offering exploration rights and other incentives like, favorable tax treatment and better production split, in order to encourage more investments in this sector. However, many investors have felt that these incentives would not suffice as most of the oil blocks are located in remote areas, and are more expensive to develop.
Although many attempts are being made in stepping up the domestic oil production, the government still continues to focus on other sources of energy like geothermal, Coal Bed Methane (CBM) gas, LNG and many others as alternatives to reduce oil dependency. Indonesia is the world's third largest exporter of LNG, after Qatar and Malaysia, and has witnessed a fall in its LNG demand around the world. With many of its upcoming projects, along with foreign participation, it is expected to witness a hike in its domestic demand and exports. To name a few,
Development of Kutai Basin off East Kalimantan is estimated to have reserves at 3 trillion cubic feet (Tcf) and this would meet the 25% of its domestic users.
The development of the Natuna Alpha block, estimated to have about 222 trillion cubic feet of reserves, is looking for increased investments to the tune of $40 billion. Currently, it is now a subject of debate on Pertamina’s operation rights
Donggi-Senoro LNG plant in Sulawesi, developed by Pertamina and Japan’s Mitsubishi Corporation, which is expected to be completed by 2012, is worth $1.4 billion with a capacity of 2 million tones per year.
The gas production has also taken a dip due to the poor returns from investments in production and distribution. The slow growth in the gas production, particularly from Arun gas fields is another highlight in the gas sector, which has created an impact on the exports. The main issue centering Indonesia's energy industry is the inadequate investments to strengthen the transmission and distribution network, as well as bottlenecks in the regulatory framework. Special attention towards these issues would in turn enhance the efficiency in distribution and also its production for domestic concerns and exports. The upcoming South Sumatra - West Java Gas pipeline project is a promising potential for investment in the future and this will also step up the supply of natural gas in the future.
Indonesia has huge coal reserves, up to 450 trillion cubic feet (Tcf); placing itself the world's second largest after China. However, due to environmental concerns it is focusing on development of Coal Bed Methane (CBM), and this serves to be a huge potential in the future. Large CBM reserves are located in South Sumatra, Barito, Kutai and Central Sumatra, medium scaled basins in North Tarakan, Berau and Jatibarang and small scale in South Sulawesi, Irian Jaya and Bengkulu. The CBM production is expected to begin in 2011 and government is encouraging its production by offering tax incentives. CBM can be used for natural gas production as well as for electricity generation. Although it has not been commenced commercially, to increase gas production within the country tax incentives are being offered.
Focus towards increased electrification rate
Currently, Indonesia's main concern has been its constant focus towards stepping up the electrification rate, particularly rural electrification. In the 2010, the government is planning to take several steps towards resolving this concern, by developing power plants and also expanding the distribution network towards other areas within the country. Development of transmission lines, power plants and overall improvement of other facilities are some potential areas for investors. Introducing policies and regulations on electricity prices as well as subsidies will increase the level of investments in the future.
In 2008, Indonesia's average electrification rate was 65% and the government plans to increase this to 93% by 2025, creating increased public access to electricity. The country has been facing power shortages in some areas due to inadequate infrastructure for the transmission and distribution of electricity. To meet the proposed increase in electrification rate Indonesia will also require additional capacity as well as participation by Independent Power Producers (IPP). To meet the increased demands as well as to step up production the government invites private participation.
PLN has formed a consortium with PGN and Pertamina to build LNG terminals, as a measure to reduce oil dependency for electricity generation. Increased private participation is not only going to boost production but also reduce the power shortage problem within the country.
Indonesia's future energy outlook - A renewable energy initiative
World over there has been rising concerns for energy security and climate change. Indonesia, amidst these concerns, is looking towards adopting cleaner energy initiatives. For instance, many areas in Indonesia are plagued by frequent black outs, due to the lack of adequate infrastructure to support the supply, daunting investors confidence and dwindling the industrial production. Indonesia has abundant resources of coal, gas and geothermal reserves. However, as we all know the environmental hazards created by coal, Indonesia has to choose cleaner energy initiatives at the same time step up its domestic production to meet its nation's needs. To revive from this situation, Indonesia is considering many nuclear energy initiatives, which will step up the electricity production and also help Indonesia progress towards clean energy initiatives reducing carbon emissions.
Due to the rising concerns for energy security and climate change, Indonesia plans to step up the share of its renewable energy in energy generation. It plans to increase the share of geothermal towards energy security as well as a measure towards a favorable climate change. Indonesia has about 40 % of the world's geothermal reserves, and is looking at increasing its use on a large scale. The geothermal and the mining sector have a lot of opportunities for investors as the country focuses towards increasing its production. Issuing laws in the mining sector is expected to create a legal certainty and this in turn will boost the investor's confidence.
Similarly in the oil sector, the government is focusing on increasing the biofuel production to reduce oil dependency as well as for electricity generation. Indonesia has huge potential for LNG and is likely to be the second largest LNG producer in Asia. The government is developing 25 trillion cubic feet (TCF) of gas, particularly in Papua New Guinea. This initiative will increase reserves for production as well as investment opportunities in the upstream activities.
Indonesia's cooperation with Japan is focused on increasing its share of renewable energy to 17% by 2025. For Indonesia, this is highly beneficial as this is an attractive opportunity for investors. This cooperation is likely to increase its energy diversification and energy conservation measures, as the government is incentivising and thereby encouraging the use of such measures. Their focus has also been extended towards the development of coal bed methane and coal gasification.