Oil & Gas Industry: Indonesia to offer Open Bid Split Tender Schemes
There is few interest from the private sector to participate in Indonesia's oil & gas block tenders. Besides Indonesia's unconducive investment climate (that includes weak government management, bureaucracy, an unclear regulatory framework and legal uncertainty), low global petroleum prices have also managed to curb investors' enthusiasm. In a bid to entice private investors the Indonesian government has decided to change the concept for oil & gas tenders in 2016 from a fixed revenue split to an open bid split scheme.
In these open bid split tenders potential investors can propose revenue splits (between the private investor and the Indonesian government). However, the government must have a majority stake (at least 51 percent) in the oil & gas project. The government will then select the most attractive offer among the bidders. Djoko Siswanto, Director for Upstream Oil and Gas at Indonesia's Energy and Mineral Resources Ministry, says it is important that the country's oil and gas resources are tapped, even if that means the government's revenue portion within the project will be smaller compared to the previous scheme.
In addition to the more attractive tender scheme, the Indonesian government also plans to offer incentives to investors for oil and gas investment: (1) investment credit and (2) a tax holiday. However, it will still require several legal procedures before these incentives are allowed by law.
Revising the tender schemes in Indonesia's oil and gas sector is needed as private investors are uninterested to participate in this sector. Several weeks ago Indonesia's Energy and Mineral Resources Ministry announced that none of the eight oil and gas blocks that were offered in 2015 had gained a winning bidder despite the government having increased the (fixed) revenue proportion for contractors to 35 percent for oil projects (from 15 percent previously) and to 40 percent for gas projects (from 30 percent previously).
Meanwhile, one year earlier - in 2014 - ten out of the 21 oil & gas blocks that were put up for auction to private investors failed to find new contractors as most were deemed economically unfeasible. Siswanto said the government now plans to offer 14 oil & gas blocks in 2016 (consisting partly of blocks that failed to be taken up by investors in preceding years).
Despite the good potential, Indonesia's oil & gas sector has been seeing fewer exploration and capital spending in recent years. Research from PwC Indonesia shows that investment appetite in Indonesia's oil and gas sector stagnated as 36 percent of respondents in a survey expressed that there would occur no change in capital spending for Indonesian oil and gas reserve acquisitions, while 12 percent expects to see a decrease.
This rather pessimistic outlook would imply that investment in oil & gas exploration in Indonesia remains sluggish. Data from Indonesia's Energy and Mineral Resources Ministry shows that only 52 exploratory wells were drilled in 2015, down from 83 wells in the preceding year. In the 2011-2013 period there were 104 wells drilled each year on average. In other words, there exists a clear declining trend in terms of exploratory well drilling in Indonesia. In the January-April 2016 period, only ten wells were drilled.
It remains doubtful whether the new open bid split tender scheme can significantly boost the private sector's interest in Indonesia's oil and gas tenders. The government should focus more on improving the investment climate in the country's mining sector, especially by improving legal certainty for investors. Moreover, Indonesia has generally been favoring a more protectionist approach regarding the management of the nation's natural resources, and this approach causes limited appetite for foreign investment in the mining sector.