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09-17-2008, 11:22 AM
Indonesia Matters (http://www.indonesiamatters.com/)
Oil Exploration, Production & Consumption (http://www.indonesiamatters.com/2147/oil-consumption-exploration/)
Posted: 15 Aug 2008 10:19 PM CDT
http://www.indonesiamatters.com/pictures/callum.jpgCallum 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 (http://www.indonesiamatters.com/1010/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.
http://www.indonesiamatters.com/images/oil-chart.jpg
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.
Callum Roxburgh (http://www.indonesiamatters.com/author/callum-roxburgh/) is a wealth manager based in Jakarta.
Callum Roxburgh
The Wealth Manager (http://offshoreadviser.blogspot.com/)
Direct +62(21) 9344 8528
Mobile +62(0)81398915456
Oil Exploration, Production & Consumption (http://www.indonesiamatters.com/2147/oil-consumption-exploration/)
Posted: 15 Aug 2008 10:19 PM CDT
http://www.indonesiamatters.com/pictures/callum.jpgCallum 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 (http://www.indonesiamatters.com/1010/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.
http://www.indonesiamatters.com/images/oil-chart.jpg
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.
Callum Roxburgh (http://www.indonesiamatters.com/author/callum-roxburgh/) is a wealth manager based in Jakarta.
Callum Roxburgh
The Wealth Manager (http://offshoreadviser.blogspot.com/)
Direct +62(21) 9344 8528
Mobile +62(0)81398915456