Good morning ladies and gentlemen

Transcription

1 Good morning ladies and gentlemen I am here today to talk about the imperatives of mobilizing investment for domestic oil and gas supply to help secure Indonesia s energy security and independence which are national strategic priorities.

2 I will talk briefly on the changing role of oil and gas in the national economy. And then look at the National Energy Policy with a focus on oil and gas. I will then look at upstream oil and gas trends and how these gel with the National Energy Policy Finally I will look at what incentives are required to stimulate the necessary upstream investment to meet policy objectives.

3 There is no question that oil and gas remain critical to the security and sustainability of the Indonesian economy. Its role is however in decline as oil and gas production declines and the economy expands driven by strong domestic demand. Oil and gas still make up over 60% of primary energy consumption, the steady decline from over 80% at the turn of the century being due primarily to the increased role of coal. Oil and gas contribution to state revenues have declined with production and expansion of state revenues from other sectors. More on this in a mnute. Oil and gas exports, as a % of total exports have declined more slowly with high prices and gas volumes offsetting oil production declines for a while but the trend is clear. More importantly in Q the oil and gas trade account went negative for the first time with consequences for the national trade account and the Rp exchange rate. Oil and gas investment remain very significant at over 30% of total investment however this has been in decline since Pulling it all together, the oil and gas sector contribution to GDP has declined from 12% of GDP in 2000 to 7% in The message is clear, growth of the rest of the economy and declines in oil and gas sector has lessened its role but when it comes to the key themes of the 2014 NEP, Energy Security and Energy Independence, its role remains critical.

4 This chart elucidates further how growth of non oil and gas revenues from Indonesia s growing and diversified economy has driven down the overall role of oil and gas.

5 The IEA in their 2015 Indonesia country report summed up the situation well The continuation of Indonesia s economic, political and social success story depends upon its ability to deliver sustainable and sufficient energy supply to markets and ultimately consumers Apart from oil and oil products, Indonesia is energy independent however gas independence will likely disappear this decade. There is a lot of work to be done to continue the success story The key challenge for Indonesia is to build the energy production and transportation infrastructure that matches energy consumption growth. This is compounded by the historical under investment in infrastructure and the well documented narrowing of space for the private sector, and foreign investor in particular, in the Indonesian economy.

6 Lets have a look at the details of the National Energy Policy

7 The National Energy Council (NEC) was established in 2007 as the principal energy coordination body. It brings together the seven ministries indirectly involved in the energy sector. The 2007 Energy Law mandated the NEC to draft a National Energy Policy (NEP) and update it every four to five years. Nonetheless, Indonesia was operating under NEP 2006 until A New NEP was adopted by Parliament in Feb 2014 and signed on 17 October 2014 as Government Regulation 79/2014. Simply put NEP14 focuses on re-establishing Indonesia s energy independence by : >>>> Redirecting energy resources from export to domestic >>>> Re balancing energy mix towards indigenous energy supplies In practice this means: Minimising oil consumption Exploitation and consumption of renewables and coal Optimising gas production and consumption Lets have a look in a little more detail:

8 NEP14 sets very clear energy mix targets for the economy to secure Energy Independence and Energy Security. The highlights are set our here, which I am not going to read. What is meant by the terms Independence and Security? Energy Security is a condition ensuring the availability of energy, people's access to energy at affordable prices in the long term with regard to environmental protection. Energy Independence is ensuring the availability of energy by utilizing the maximum potential from domestic sources I note specifically the need to improve resource exploration and exploitation.

9 The Policy recognizes these are a number of current deficiencies that need to be addressed: Most of these are immediately recognizable and uncontencious

10 Like the rest of non OECD Asia, that is powering world economic and energy consumption growth, the increase in GDP / capital, despite decreasing energy intensity is the driver of Indonesian energy consumption growth. In Indonesia s case the economic planning scenario at least shows GDP / capita grow 3X by 2025 and 12X by 2050 from 2013 levels. NEP14 has two scenarios. A Business as usual (BaU) and an efficiency case. Lets now have a look at the primary energy demand implications of these scenarios.

11 The plan focuses on the energy needed in 2025 and I show this graphically here and have added 2000, 2010 and 2013 to put the future in the context of past realities. Overall energy supply growth continues at between 5.8% p.a. and 7.0% p.a to 2025, declining with demographics etc. thereafter. This is above the 5.0% of the previous decade and reflective of the underlying strong economic growth assumption. The sheer challenge of the absolute energy supply targets is more striking when shown as multiples of 2013 supply: PE demand doubles between 2013 and 2025 even in the efficiency scenario In the efficiency scenario there is an explicit and dramatic increase in the role of Renewable Energy, in the energy mix rising from 8% in 2013 to 23% in 2025, a 5.6 fold increase, largely at the expense of oil. It s no wonder the NEP14 is dominated by energy security concerns. The challenge is ensuring adequate energy supply to the worlds 15 th largest country growing at 5 plus % p.a. Population growth is slowing but rising urbanization and an exploding middle class are strong demand drivers The result is a deteriorating energy trade balance and current account Growth in the role of coal is in direct conflict with the governments own emissions targets Now lets have a closer look at the renewables target which is key to future security and sustainability

12 NEP14 targets a big role for renewables coming largely from Geothermal and Biofuels. A mandatory 10% of biodiesel in the national diesel mix was mandated in Sept 2013 and increased recently to 15% with plans to go higher. This saw some 32 thousand barrels per day of bio diesel consumed in 2014, nearly 70% of which was from the mandatory mixing. The government targets over 90 thousand bpd in 2015 supported by regulation and a subsidy of some Rp4,000 / L. Infrastructure support is however lacking. CPO and biodiesel production was attractive at high oil prices but is challenging at current oil prices, even with the subsidy. If 2015 targets are achieved the Biodiesel subsidy would cost some US$1.6 billion rising to US$6.3 billion in the 2025 efficiency target. The geothermal targets look pretty challenging too especially given related capital, land access and forestry issues. Overall the Efficiency Scenario lack credibility in my view. If targets are not met then the call on imported oil and products will be even greater.

13 While the role of oil and gas in the energy mix is targeted to decline between 2013 and 2025, in either scenario total oil and gas demand will still increase by X For oil this means between 1.9 and 2.6 Million barrels/ day by 2025 with close to the higher end of the range being more likely given renewable challenges For gas this means between 9.0 and 10.0 Billion scf/day by 2025 These targets are a major challenge and should be a call to action to attract the necessary investment in supply and infrastructure. Upstream supply in particular is capital and technology intensive and needs private sector and foreign investment. This conflicts with the national economic policy theme that sees a narrowing of space for the private sector and foreign investor in particular.

14 So what does the oil and gas future hold? Here I plot the historical and projected domestic supply and demand balance. Forecast oil and gas demand uses the 2025 and 2050 NEP14 policy targets. Domestic supply uses the latest, production, development planning reserves, and resource data. Assuming all known reserves and resources are developed, a domestic supply demand gap of between 1.0 and 1.8 Million boepd has opened up by That s less than a decade away and in reality the gap will be much larger as the Undeveloped resources are mostly high on the cost curve, have been undeveloped for a long time and will likely stay that way. The options to fill this gap are simple: The import options is as far away as you can get to NEP Energy Independence and Security objectives so realizing the full potential of conventional and unconventional HC resources is a national imperative.

15 Increasing net oil imports and declining gas exports, both driven by rising domestic demand, is already having an economic impact. The oil and gas trade account turned negative in Q and net oil and gas imports were exceeding US$1.0 billion / month until oil prices collapsed. This has driven a trade account deficit and directly impacted the Rp / US$ exchange rate. In Q the monthly deficit flipped between positive and negative and averaged only $10 m / month. Prices are probably not the only factor here. The near elimination of subsidies will drive a drop in consumption. However, low oil prices have other consequences such as lower government revenue and lower upstream investment which moves us further away from Energy Independence and Security.

16 In terms of fossil fuels this chart sums up where we have come from and where we are going: Indonesia became a net oil importer in 2004 as a result of falling production and booming demand, particularly from the transport sector. Gas production peaked in 2010 and is now in decline with net exports falling faster as increased volumes are consumed domestically. Around 2012 oil and gas consumption exceeded production on a boe basis. On a $ basis, the hydrocarbon trade account is well negative as expensive product imports outweigh crude and gas / LNG exports. Overall fossil fuels exports and the national energy demand supply balance is strongly positive, and forecast to remain so, due to massive net coal exports. Coal exports are however declining rapidly as a results of low prices.. Net oil and gas imports fall short of the energy security and sustainability requirements of NEP14 however.

17 Lets have a quick look at upstream investment trends.

18 Oil production peaked in 1996 and has been in decline every since. There will be a small reversal this year as Cepu finally comes on stream however the decline will resume in 2017, exacerbated by low oil prices and under investment. Oil production is less than half of domestic needs. Gas production peaked in 2010 with the first full year of production from Tangguh. Since then overall gas production has declined and now more than 50% of production is allocated to the domestic market.

19 The official line is that all is well in the upstream sector with annual investment above US$15 Billion / annum since While some of this increased investment is a supply side response to high oil prices, the majority is due to: Increased costs that prevail in a high price environment. The increased costs of developing and producing the marginal barrel in a rapidly maturing industry. In the case of exploration it s clear more wells were not being drilled. But rig rates went up 2X or 3 X and a lot of expensive deep water wells were drilled, at up to US$200 / million each. That deep water exploration adventure found nothing and with commitments mostly satisfied, blocks are being relinquished and that activity has come to a halt. Add low oil prices and a deteriorating national investment environment and the future of development and exploration investment looks bleak.

20 New PSC signings exploded in 2007/08 with the rise in oil prices and the successful Direct Offer licensing mechanism. Block awards are sensitive to global and local fiscal and regulatory issue that collide with on and off risk appetite. CBM PSC awards have come to a halt with a lack of commercial success in any of the 54 PSC s signed. Recent declines in conventional PSC interest are driven by poor exploration track record and unfriendly policies such as GR79, LBT. The global exploration $ is very mobile and gravitates to opportunities with the best balance of prospectivity, fiscal terms and business operating environment. Indonesia is just not competitive enough.

21 While exploration investment in $ terms has shown an increasing trend, this is mainly driven by cost inflation (in rig rates in particular) and by the recent move into expensive deep water exploration. The long term decline in wildcat exploration drilling has been halted over the last few years as the massive number of PSC s signed in have drilled their exploration commitments. Unfortunately there has been little to show for this massive investment and this plus the deteriorating investment environment means the necessary increase in exploration drilling activity is unlikely to be forthcoming. In 2012, at the ESDM IPA Exploration Forum, the IPA showed that at current rates of exploration efficiency, annual exploration drilling activity would have to triple if conventional oil and gas was to fill only 50% of the 2025 oil and gas supply demand gap.

22 Over the last 15 years, the new oil and gas field that have been found have gotten smaller and smaller on average, reflective of the maturing industry and lack of success in new area. This exploration performance, measured by reserves added per well drilled is uncompetitive, and when combined with the fiscal terms and operating environment will simply not attract the necessary investment until the risk reward balance is radically readjusted.

23 So how do we incentivise exploration and exploitation investment.

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25 Just like a fall in oil prices was an excellent opportunity to eliminate petroleum product subsidies, so a fall in regional spot LNG prices is a great opportunity to eliminate the other great oil and gas subsidy. In the history of commodity supply, government management of markets and prices has never ensured proper transmission of price signals and always leads to an inefficient supply side. The US gas market is an excellent example of markets working and benefiting customers. Back in 2007/08 the US was preparing to import gas through LNG terminals and gas prices rose strongly. The upstream responded to these supply and pricing signals and invested heavily in technology and activity (horizontal drilling and multi stage fracking) to unlock gas for tight and unconventional reservoirs. This was so successful that the market soon became over supplied and prices fell. The US is now moving to export gas, has enhanced its energy independence and security and customers (end users and industry) are the ultimate beneficiaries through low prices and assured gas supply. Markets work and the prior 30 years of government meddling in pricing and supply allocation etc. did not work.

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28 So how do we incentivise exploration and exploitation investment.

29 The National Energy Policy fit of enhancing investment in upstream oil ad gas is crystal clear as are the choices. Creating a competitive fit for purpose investment environment helps deliver Energy Independence and Energy Security. An uncompetitive environment leads to falling reserves and production, higher imports and reduced energy independence and security.

30 Special thanks to Dessi Yuliana of Risco for her excellent analysis and graphics on NEP14.