Indonesia’s Upstream O&G Sector Shrouded in Smog

by Chee Yew Cheang, APAC Editor

It’s that time of the year, again. The skies over parts of Southeast Asia – Indonesia, Malaysia and Singapore – have been blanketed by thick, choking smoke for months, with air quality dipping to the unhealthy or hazardous level in the last few weeks.

Smog, better known in Southeast Asia as haze, often results from slash-and-burn techniques used by Indonesians to clear land for palm oil plantations in Sumatra and Kalimantan annually between May/June and October. It is obvious that efforts by the Indonesian authorities, who regularly received official complaints from neighboring countries – particularly Malaysia and Singapore – to eradicate the environmental problem have not worked, at least not during the last two decades.

You may wonder what the smog issue has to do with Indonesia’s upstream oil and gas sector. Well, the inability to resolve the recurrent environmental problem highlights the difficulties the government faces in mustering national, provincial and even inter-Ministry support for its policies, including those for the oil and gas sector, especially in a country with over 17,000 islands.

The election of Joko Widodo as Indonesian president last year has provided hopes that reforms would be implemented to create a positive business environment for investors. Such optimism receded somewhat as large oil and gas investors stayed on the sidelines after seeing industry reforms proceeding at a snail pace. Of course, Indonesian upstream investments could’ve been held back due to lower global oil prices, which is around half of its value from a year ago.

Given the current business climate in Indonesia, some energy companies opted to focus away from Southeast Asia’s largest oil and gas producer, at least for now. Sweden’s Lundin Petroleum AB is one such example as the firm retained its investments in the region, albeit centered on Malaysia, rather than Indonesia.

Lundin sold its Indonesian upstream oil and gas assets to local company PT Medco Energi Internasional Oct. 9 for $22 million. The assets sold included stakes in the producing Singa gas field, the South Sokang and Cendrawasih VII Blocks, as well as the joint study agreement (JSA) in respect of the Cendrawasih VIII Block.

“We are pleased with the sale of our assets in Indonesia, with net reserves of .9 million barrels of oil equivalents. We remain committed to our growth strategy in Southeast Asia where Malaysia continues to be one of Lundin Petroleum’s core areas,” Alex Schneiter, president and CEO of Lundin Petroleum, commented in a press release.

Meanwhile, differences emerged within the Widodo government recently over the plan of development (POD) for the Abadi gas field project in the Masela Production Sharing Contract (PSC) in the Arafura Sea in eastern Indonesia.

Japan’s Inpex Corp. submitted a revised POD Sept. 3 for the Abadi gas field to upstream regulator Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) after finding more natural gas reserves. Together with project partner Royal Dutch Shell plc, Inpex – as field operator – plans to develop the Abadi project with a floating liquefied natural gas (FLNG) plant that has an annual LNG processing capacity of 7.5 million tons, up from a FLNG with an annual capacity of 2.5 million tons as indicated in the original POD that was approved by the authorities in 2010.

While Minister for Energy and Mineral Resources (MEMR) Sudirman Said supported the idea of developing the Abadi project with a FLNG facility, Indonesia’s Coordinating Maritime Affairs Minister Rizal Ramli suggested that an onshore facility would more efficient and sensible, highlighting a lack of coordination within the top echelons of the Indonesian government.

If only the “smog” engulfing Indonesia, both in terms of policy-making and policy implementation could be cleared; the country’s urgent need to boost large upstream oil and gas investments needs not be such an uphill task.

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