Indonesia Tenders 21 Oil & Gas Blocks; Overview of the Indonesian Oil Sector

Indonesia, a former OPEC member but which had to terminate its long-term membership (1962-2008) after turning into a net oil importer because of the combination of declining domestic oil output and sharply rising domestic fuel consumption, needs a considerable amount of investments to boost its declining oil sector. About a week ago, the Indonesian government proposed to revise down the oil lifting target that had been set in the 2014 State Budget (APBN 2014) from 870,000 barrels of oil per day (bpd) to 818,000 bpd as the Cepu oil field (in Blora, Central Java) can only become operational in November 2014. Moreover, Indonesian oil lifting had only reached 800,000 bpd in the first quarter of 2014.

Unsuccessful oil lifting targets have been the rule rather than the exception in recent years. The main reason that explains this weak performance is the fact that most Indonesian oil production originates from mature oil fields due to a lack of exploration and other investments in the oil sector. Lack of investments is mainly the consequence of rather weak government management, bureaucracy, an unclear regulatory framework, legal uncertainty and corruption. A good example of the latter - corruption - is the recent Rudi Rubiandini-case. Rubiandini was sentenced to seven years imprisonment for money laundering and accepting bribes being Head of Indonesia's oil & gas regulator SKK Migas. He was bribed by Singapore-based Kernel Oil Pte Ltd and Indonesia-based Kaltim Parna Industri in exchange for securing a win in an oil tender.

As a result of all aforementioned factors, Indonesian oil refineries currently have roughly the same combined capacity as a decade ago. With Indonesia being less competitive, international investors prefer to invest in oil exploration in other parts of the world. A conducive business climate is needed for such capital-intensive and long-term investments. This has been lacking in Indonesia.

In fact, Indonesia may have to face an energy crisis soon as domestic fuel consumption has been rising continuously. Consumption may exceed 1.6 million bpd by the end of 2014, implying that Indonesia needs to import over half of its oil needs. Rising oil consumption is partly government-sponsored due to massive fuel subsidies. This year, the government may spend IDR 285 trillion (USD $24.8 billion) on fuel subsidies, a massive amount of money that could and should be spent on much more long-term productive matters such as much-needed infrastructure development. However, reducing the fuel subsidies implies political and social risks as it triggers high inflation. The last time the government increased prices of subsidized fuels (by an average of 33 percent) was in June 2013 (causing inflation to accelerate to nearly 9 percent on a year-on-year basis). Still, a significant amount of fuel remains subsidized presently. However, at one point in the future the government will have to let go of these subsidies as they are simply untenable (and will lead to a fiscal crisis unless domestic oil output surges). Presidential candidate Joko Widodo, popularly known as Jokowi, said that he would like to see the prices of subsidized fuels increase gradually in the coming years. This may not be a popular viewpoint in Indonesia but it is a realistic and smart one.

Other troubles that occur when importing an increasing amount of oil are enlarged pressures on the already problematic trade balance (and the related current account), a depreciating rupiah exchange rate and declining foreign exchange reserves.

Therefore, the government has high hopes for the tenders that were announced by Edy Hermantoro. Of the 13 conventional blocks, eight will be offered as direct offerings while the remaining five are regular tenders.

Eight Direct Offerings

North Central Java Offshore Block

Kualakurun Onshore Block, Central Kalimantan

Garung Onshore and Offshore Block, Central Kalimantan

Pulau Moa Selatan Offshore Block, Moluccas

Dolok Block Onshore and Offshore, Papua

Southeast Papua Onshore Block, Papua

Abar Offshore Block, Jakarta

Anggursi Offshore Block, West and Central Java

The Abar Offshore Block and Anggursi Offshore Block are offered directly by Indonesian state-owned energy company Pertamina.

Five Regular Tenders

North Madura II Offshore Block, East Java

Yamdena offshore Block, Moluccas

South Aru II Offshore Block, Moluccas

Aru Trough I Offshore, Moluccas

Aru Trough II Offshore Block, Moluccas

To participate in the eight direct offerings, oil & gas companies can obtain all necessary tender documents at the Indonesian Ministry of Energy and Mineral Resources between 2 June and 14 July 2014. To participate in the five regular tenders, companies can obtain the documents between 2 June and 1 October 2014.

Of the eight unconventional blocks, five will be tendered as direct offerings and the remaining three are regular tenders.

Unconventional Direct Offerings

MNK Sakakemang Deep Onshore Block, South Sumatra

MNK Selat Panjang Deep Onshore Block, Riau

MNK Palmerah Deep Onshore, South Sumatra

MNK Jambi I Deep Onshore Block, Jambi

MNK Jambi II Deep Onshore Block, Jambi

The last two are directly offered by Pertamina.

Unconventional Regular Tenders

MNK Shinta Onshore, South Sumatra

MNK North Tarakan Onshore, North Kalimantan

MNK Kutai Onshore, East Kalimantan

For the unconventional direct offerings, companies can obtain documents between 23 June and 6 August 2014. Documents for the unconventional regular tenders are available between 23 June and 20 October 2014.

Indonesia currently has 3.67 billion barrels of proven oil reserves, mostly located in the western part of Indonesia (particularly Java and Sumatra).

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