Oil Update Indonesia: Authorities Agree on Oil Production Target
Indonesia’s Commission VII of the House of Representatives (DPR) - the commission that oversees the country’s energy affairs - and the Indonesian Ministry of Energy and Natural Resources agreed on Wednesday (28/01) to set a 825,000 barrels per day (bpd) oil production target for 2015 in the Revised 2015 State Budget (APBN-P 2015), up from an estimated 794,000 bpd of realized production in 2014. Since its peak production of 1.6 million bpd in 1995, oil output of Indonesia (a former OPEC member) has declined drastically.
Indonesian Energy and Natural Resources Minister Sudirman Said initially suggested an 849,000 bpd target for 2015 to Commission VII. However, this suggestion was revised down as current low global oil prices are expected to lead to the disruption of drilling activities in Southeast Asia’s largest economy. In the past six months, oil prices declined by more than 50 percent. This spectacular drop is caused by the global oversupply (amid the US shale gas revolution and maintained oil production volumes of the OPEC) in combination with weak oil demand due to sluggish global economic growth. Indonesia’s state news agency Antara reported on Wednesday (28/01) that the Indonesian government proposed an Indonesian crude oil price (ICP) of USD $70 per barrel for the Revised 2015 State Budget, much lower than the USD $105 per barrel that was set in the original 2015 State Budget, and significantly lower than the ICP realization of USD $100.46 per barrel in 2014.
Indonesia’s oil production has declined drastically since the mid-1990s due to a lack of investment in exploration in combination with aging oil fields. The lack of investment is blamed on the country’s weak legal certainty, lengthy and costly bureaucracy, and weak government management (and coordination among government institutions). It has become a recurrent phenomenon that Indonesia fails to achieve the oil production target that was set at the start of the year.
In an effort to encourage exploration and boost domestic oil production, the Indonesian government announced to scrap a land tax for the exploration phase in the oil and gas industry (effective from 1 January 2015). Previously a 0.5 percent tax was levied resulting in the collection of IDR 18 trillion (USD $1.4 billion) worth of tax revenues from this land tax.
One of the big new oil projects that should start production in 2015 is the Banyu Urip field in Cepu (East Java). In September 2014, the Indonesian upstream oil & gas regulator SKKMigas said that the oil field had been completed for 92.5 percent and is already producing 30,000 bpd. In the third quarter of 2015, the production rate should increase to 165,000 bpd (the field's peak rate).
The Indonesian government scrapped low-octane gasoline subsidies in early January 2015 (but due to the current low oil prices Indonesians pay more-or-less the same amount for a liter of gasoline). The government still provides a fixed IDR 1,000 per liter subsidy for diesel, IDR 5,000 per liter for biodiesel, IDR 3,000 per liter for bio-ethanol, and IDR 1,500 per liter for liquid gas for vehicles (LGV).