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Opportunities, Risks andRewards a balancing actAn investor survey of the Indonesian oil andgas industry
May 2014
www.pwc.com/id
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Contents
1 Introduction 3
2 Executive Summary 4
3 An overview of the oil and gas industry in Indonesia 6
4 Survey approach 12
5 Supply and demand for oil and gas 14
6 Employment 20
7 Capital expenditure 24
8 Challenges facing the industry 28
9 Competitiveness 34
10Other challenges 40
11 About PwC 50
12 Acknowledgements 53
13 Glossary 54
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Opportunities, Risks and Rewards a balancing act.
Indonesia has a long history in the oil and gas industry with a diversity ofgeological basins which continue to offer sizeable oil and gas potential.However, Indonesias crude oil production has continued to decline overthe last decade due to the natural maturing of producing oil elds, aslower reserve replacement rate and arguably, insufcient exploration andinvestment. The Government of Indonesia (GoI) continues to put effortinto increasing Indonesias oil production and attracting investment fromnew and existing players, but in practice this has proven to be challenging.Our survey respondents were however more optimistic about the prospectsfor further gas nds in Indonesia. Some respondents took the time in their
written comments to point out the need for investment in appropriate gasinfrastructure to complement the further development of gas.
This is the sixth edition of our survey of the Indonesian oil and gasindustry, and where applicable we have analyzed the collective trends insurvey participants responses using the current and prior reports. Thesurvey responses come from 106 respondents from 90 different companiescurrently operating in the Indonesian oil and gas sector and thereforecan be used to draw credible conclusions about the issues preventing theindustry from reaching its full potential. The survey shows that there havebeen improvements in some areas, but also suggests that new regulations,
contract sanctity, uncertainty over cost recovery and interference fromother government agencies continue to stie investment.
The level of interest in this 2014 survey, and the effort taken with detailedwritten comments, demonstrates a huge passion amongst participants tosee this industry develop and further underpin Indonesia's energy future.
We trust that this report will prove informative and would like to thank allthe individuals who took the time to participate.
Introduction1
3Opportunities, Risks and Rewards
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PwC
Executive Summary2
Supply and demand for oil andgas
Not surprisingly, survey participantsbelieve that the demand for oil and gas
will continue to grow, both globallyand in Indonesia. Similar to our 2012and 2010 survey results, the demandfor gas is expected to increase at agreater rate than the demand for oil.
Survey respondents were dividedequally as to whether or not thereare still signicant oil reserves to bediscovered in Indonesia. In regard togas, they were more optimistic with66% of respondents expecting furthersignicant gas elds. Expectations arehigh for discoveries in Eastern Indonesia(Papua, Maluku, etc.). Most respondentssuggested their companies wouldcontinue to explore for both gas and oil.
Almost three-quarters of surveyrespondents (72.5%) indicated that theprice of crude oil would remain in the
US$101-120 per barrel range for 2014, butonly 50% believe it would stay in that rangeby 2016. While 14% of respondents said theoil price would be above US$120 in 2016,36% forecast it would fall to US$100 orbelow.
Employment
In line with the continued increase inglobal demand for oil and gas, the demandfor employees working in the oil and gasindustry in Indonesia is likely to increaseover the coming years. Expatriate numbersare not expected to increase, despitean apparent need for deepwater andunconventional expertise, largely due tothe new expatriate utilisation regulationsadding some conditions on the employmentof foreign workers for the upstream andservices sectors. As in the 2012 surveyresults, a large portion of the survey
participants expect difculties in attractingsufcient (skilled) human resources. Oneof the reasons behind this is the fact that a
Photo source: PT Chevron Pacic Indonesia
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5Opportunities, Risks and Rewards
Executive Summary
We noted that survey participantswere slightly optimistic on theanticipated developments on anumber of challenges over thelonger term as they expect someimprovements within the comingve years.
In written comments to the
survey a number of respondentsagged their concerns over theneed to resolve the status of thepending revision of the Oil andGas Law. Some also expressedor implied frustration with theperceived lack of consistency orcoordination between the variousGoI Ministries.
Competitiveness
From this survey, the ve mostcompetitive features of theIndonesian oil and gas industryare as follows:
1) Political stability2) Trained workforce3) Ease of foreign ownership4) Environmental regulation5) Geological opportunities
Critically we note that foreign
ownership (read as access toacreage and being open forbusiness) remains a competitiveand positive feature of theIndonesian upstream sector.We note also that geologicalprospectivity, although stillregarded as good, is no longerregarded as the most competitivefeature of the Indonesianupstream sector.
Other challenges
Survey respondents weredivided as to whether the 2014elections would have signicantramications for the sector,but were in agreement thatthe upstream procurementregulations were and would
continue to have a negativeimpact on their business.
There was overwhelming supportfrom respondents for the GoI toprovide incentives to support thedevelopment of unconventionalgas (90% of recipients), butserious concern as to whetherIndonesia had the knowledge andexpertise to extract and produceunconventional gas.
On a concluding note, despitemost respondents indicating thatthey were not satised with thereturns of their investment, themajority (consistent with ourpast three surveys) had neverconsidered leaving Indonesia.
signicant proportion of skilledlocal employees seek employmentabroad (mostly in the MiddleEast) in search of highercompensation.
Capital Expenditure
The participants general view
seems to be that capital spendingwill stay the same or even increaseover the coming ve years. This ismore or less consistent with the2012 survey results and consistent
with the increased lifting costs formature elds and development ofdeepwater assets. Disappointingly,48% of respondents suggestedtheir appetite for furtherinvestment in Indonesia wasdeclining.
Challenges facing theindustry
Our survey indicated that the vemost critical challenges facing theindustry are as follows:
1. Interference from othergovernment agencies, suchas the tax authorities
2. Contract sanctity3. Confusion as the roles ofthe central, provincial ®ional government
4. New regulations5. Uncertainty over cost
recovery and SKK Migas/BPKP audit ndings
The challenges highlighted in boldabove were also included in thetop ve challenges in our 2010
and 2012 surveys.
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An overview of
the oil and gas industryin Indonesia
3
Introduction
The landscape of the oil and gasindustry, both in Indonesia and globally,has experienced dramatic changes inrecent years. The industry experienceda signicant resurgence in investmentcoinciding with the run up in crude oil
prices which peaked at approximatelyUS$145 per barrel in mid 2008. This
was then tempered with the onset of theglobal nancial crisis and ensuing globalrecession which gained momentum inthe latter half of 2008. From its peakin mid-2008, the oil price collapsedby more than 70% and ended 2008 atapproximately US$40 per barrel. Withmarket condence returning crudeprices recovered somewhat in 2009 toapproximately US$75 per barrel. Prices
have increased to average (on an annualbasis) approximately US$94-98 a barrel(WTI) in the period from 2011 to 2013.
Despite ongoing regulatory changes,investment in the oil and gas industryin Indonesia reached US$16.1 billion in2012 and US$19.3 billion in 2013 andcontributed around 12% of total staterevenue. In 2012 there were 25 new
oil and gas contracts entered into alongwith a further 14 in 2013. Most recently,in February 2014, seven new contracts
were signed.
Global Context
Indonesia has been active in the oil andgas sector for nearly 130 years after itsrst oil discovery in North Sumatra in1885, and continues to be a signicantplayer in the international oil and gas
industry.
Photo source: Talisman (Asia) Ltd.
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7
An overview of the oil and gas industry in Indonesia
Opportunities, Risks and Rewards
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1800
1600
1400
1200
1000
800
600
400
200
0
Indonesia holds proven oil reservesof 3.6 billion barrels and ranks 20thamong world oil producers, accountingfor approximately 1.1% of world oilproduction. Declining oil productionand increased consumption resulted inIndonesia becoming a net oil importerin late 2004. This factor, along with
high oil prices in 2004-2008, led theGovernment to substantially scale backthe domestic fuel subsidy in 2008 andto decide to temporarily withdraw from
the Organisation of PetroleumExporting Countries (OPEC) an organisation representingapproximately 45% of world oilproduction. As the only Asianmember of OPEC since 1962, theGovernment has indicated it willconsider rejoining OPEC if the
countrys oil production can beincreased and it can become a netexporter again.
Indonesia Oil Production and Consumption
Source for 2000 - 2012: BP Statistical Review of World EnergySource 2013: Energy Information Administration, US Government
Production Consumption
Thousandb
a
rrelsdaily
Signicant events in the history of Indonesias Oil and Gas Sector
1885
First commercial oildiscovery inNorth Sumatra
1921
The biggestdiscovery beforeWW II (Talang akarField)
1912
Standard Oilexploration inSouth Sumatera
1961
Government signedrst PSC in Aceh
1944
Caltex Minas -largest oil eldin Southeast Asiadiscovered
1968
Pertamina wasformed
1962
Pan AmericanOil Company signedthe rst contract of
work with Pertaminaand Indonesia joinedOPEC
2001
Oil and Gas lawNo. 22/2001introduced,revoking law No. 44
1978
First LNG plantentered production
2003
PT Pertamina(Persero)established
2002
Upstream andDownstream bodiescalled BPMIGAS andBPH MIGAS wereestablished
2008
17 Negative list(Ministerial RegulationNo. 22/2008)
Indonesia withdrewfrom OPEC
2004
GovernmentRegulationNo. 35 & 36Regulation forupstream &downstreambusiness activities
2010
GR 79 on costrecovery and incometax for upstreamsector upstream& downstreambusiness activities
2013
SKK Migasestablishment toreplace BP Migas
2011
Implementingregulation- PMK 256- PMK 257- PMK 258
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An overview of the oil and gas industry in Indonesia
PwC
Indonesia is ranked 10th in world gasproduction, with proven reserves of 104trillion cubic feet in 2012. This ranksIndonesia as 11th largest in the worldand the second largest in the Asia Pacicregion1after China. Indonesias gas
industry is also being transformed bymore competitive liqueed natural gas(LNG) markets, new pipeline exports,and increasing domestic gas demand.Indonesias natural gas production hasdecreased in recent years (Indonesiasupplied 2.6% of the worlds marketedproduction of natural gas in
Key Indicators - Indonesia's oil and gas industryIndicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Reserves
Oil (Million Barrels) 8,610 8,630 8,930 8,400 8,220 8,000 7,760 7,730 7,262 N/A N/A
Proven 4,300 4,190 4 ,370 3 ,990 3 ,750 4 ,300 4 ,230 4 ,040 3,740 4 ,000 3,600*
Potential 4,310 4,440 4,560 4,410 4,470 3,700 3,530 3,690 3,660 N/A N/A
Gas (TCF) 188.34 185.80 187.10 165.00 170.10 159.63 157.14 152.89 150.70 N/A N/A
Proven 97.81 97.26 94.00 106.00 112.50 107.34 108.40 104.71 103.35 108.4 104*
Potential 90.53 88.54 93.10 59.00 57.60 52.29 48.74 48.18 47.35 N/A N/A
Production
Crude oil (BOPD) 1,130 1,096 1,018 972 1,006 994 1,003 952 918 826 798**
Natural gas ( MMSCFD) 7,986 7,823 7,660 7,283 7,460 7,962 8,857 8,415 7,110 6,825 7229**
New contract signed 17 23 5 28 34 34 21 31 39 N/A 7
Source:2004-2012 Oil Proven and Potential Reserves: ESDM2004-2012 Gas Proven and Potential Reserves: ESDM2013-2014 Oil and Gas Proven Reserves: Energy Information Administration, US Government2004-2012 Crude Oil and Natural Gas Production: BP Statistical Review of World Energy2013-2014 Crude Oil and Natural Gas Production: SKK Migas IPA Technical Divisionpresentation, 30 April 2014New contracts: ESDM
MBOPD: Thousand Barrels per DayMMSCFD: Million Standard Cubic Feet per Day* estimate** target
Resources and Production
2010 and 2.1% in 20122) and thecountry is facing a declining global LNGmarket share to LNG producers in Qatar.
After announcing its 2006 policy to re-orient natural gas production to servedomestic needs, Indonesia dropped from
its status as worlds largest exporterof LNG in 2005 to the worlds fourthlargest exporter of LNG in 2012, behindQatar, Malaysia and Australia. It exportsto South Korea, Japan, China, Taiwan,Mexico and India around 8% of the
worlds LNG exports.
1 BP Statistical Review of World Energy June 20132 BP Statistical Review of World Energy June 2013
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An overview of the oil and gas industry in Indonesia
9Opportunities, Risks and Rewards
Indonesia struggles to maintain LNGproduction levels and continuesto feel the pressure of balancingrevenues from gas exports withmeeting stronger demand fromits domestic market and it is likely
to increase LNG imports in 2014.Indonesias three existing LNGfacilities are based in Arun in Aceh,Bontang in East Kalimantan, andTangguh in West Papua (which
commenced rst production in mid2009). The Lampung LNG facilityis expected to start-up in 2014
while Pertamina has planned fulldecommissioning of Arun LNG inorder to convert it into an import
terminal.
Oil and Gas Contribution to Domestic Revenues
Year Domestic Revenue Oil/Gas Revenue % of contribution
Rp Trillion
2004 403 85 21.09 %
2005 494 104 21.05 %
2006 636 158 24.84 %
2007 706 125 17.71 %
2008 979 212 21.65 %
2009 847 126 14.88 %
2010 992 153 15.42 %
2011 1205 193 16.02 %
2012 1338 206 15.38 %
2013* 1502 181 12.02 %
2014* 1667 197 11.79 %
Source:Ministry of Finance (MoF)* Budget
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An overview of the oil and gas industry in Indonesia
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Indonesia has a diversity ofgeological basins which continueto offer sizeable oil and gasreserve potential. Indonesia has60 sedimentary basins including36 in Western Indonesia that have
been well explored. Fourteenof these are producing oil andgas. In under-explored EasternIndonesia, 39 tertiary and pre-tertiary basins show rich promisein hydrocarbons.
About 75% of exploration andproduction is located in WesternIndonesia. The four oil-producingregions are Sumatra, the Java
Sea, East Kalimantan and Natunaand the four main gas-producingregions are East Kalimantan, Arun(North Sumatra), South Sumatraand Natuna.
Indonesias crude oil productiondeclined over the last decadedue to the natural maturationof producing oil elds combined
with a slower reserve replacementrate and decreased exploration/investment. During 2012,Indonesias total crude oilproduction,although up slightlyfrom 2011 at 0.918 million barrelsper day, was around two-thirds
Wells Completed
Source:SKK Migas IPA Technical Division presentation, 30 April 2014
* 2014 data is as of 25 April 2014
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
10
0
20
30
40
50
60
70
80
90
Dry HoleOil Gas Oil & Gas
of its 2001 daily production. Thenational oil production target for2014 is 1.01 million barrels perday. Despite this target, actualproduction for 2013 was 0.826million barrels per day and the
expectation for 2014 is 0.798barrels per day.
The number of wells completed inIndonesia dropped substantiallyin 2013 and there has been onlytwo productive wells completed(in addition to ve dry holes) upuntil the end of April 2014.
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An overview of the oil and gas industry in Indonesia
11Opportunities, Risks and Rewards
Unconventional Oil and Gas
Indonesias coal bed methane (CBM)reserves are estimated to be 453 Tcf
which is larger than Indonesias estimatednatural gas resource and ranks 6th in the
world. Its CBM reserves are spread acrossthe archipelago but are predominantlylocated in South Sumatra, SouthKalimantan, and East Kalimantan. Therst CBM contract was signed in 2008 andby the end of 2012 there were 54 CBMcooperation contracts in place. In 2013,four CBM production pilots began sellinggas to independent power producers.The Government has set daily productiontargets of 500 mmcf by 2015 rising to1,000 mmcf by the year 2020 and 1,500
by the year 2025.
Indonesias shale gas reserves areestimated to be 574 Tcf, which is even
greater than its CBM reserves.As at the end of 2013, theGovernment had received 75proposals spread across Sumatra,Sulawesi, Kalimantan and Papuaand ve, including Pertamina,
had completed a Joint Study.Pertamina signed the rstunconventional oil & gas (MNK)PSC for a work area in NorthSumatra (Sumbagut).
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Survey approach4
Survey background
This is the sixth edition of the Indonesianoil and gas survey. The purpose of thesurvey is to help inform the public andprivate sectors in Indonesia and abroadabout Indonesias upstream petroleumindustry and to highlight some of thechallenges attracting optimal investmentand achieving its full potential. Wherepossible, we have compared currentresults with the results from prior
surveys to highlight trends and to assesswhether conditions are deteriorating orimproving.
Survey coverage
The 2014 report is based on the resultsof a condential comprehensive surveycirculated by PwC Indonesia to seniormanagement (including CountryManagers, CFOs, COOs, FinanceManagers and Operations Executives) of
a wide range of companies operating inthe Indonesian oil and gas industry
(E&P, drilling, oil eld services andseismic analysis companies). Refer tocharts 4.1 and 4.2 for background onthe survey participants. The surveyquestionnaire included both quantiableand qualitative data sections. Becauseof the incomplete nature of certainquantiable data responses we havebeen unable to utilise this data in itsentirety in our report.
The survey questionnaire was sentto individuals working for more than150 different companies. We received106 responses (representing 90different companies currently activein the Indonesian oil and gas sector).Responses from several companies wereaggregated and therefore represent thecombined views of several executives.Completed surveys came fromcompanies representing almost 80% of
Indonesias petroleum production in2013 and several recent entrants to the
Photo source: PwC
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Survey approach
Opportunities, Risks and Rewards
Indonesian oil and gas sector that arecurrently in the exploration stage.
As such, the views expressed by thesurvey participants can be viewedas representative conclusions on
Chart 4.1
Survey Participants background
Seismic2%
Other11%
Drilling8%
Oil eld services20%
E&P58%
Chart 4.2
Survey participants functional role
Finance40%
Head ofce8%
Operations6%
Senior/ Executive Management46%
issues that may be preventing theindustry from reaching its fullpotential, and to make credibleobservations about investmentand spending trends.
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Supply and demand for oil and gas
Opportunities, Risks and Rewards
A. Will Indonesian and world oil and gas demand rise or fallover the next ve years?
Chart 5.1 Indonesian and world oil demand
Remain stable
Moderately increase
No Opinion
Signicantly increase
54%
11%18%
10%
0%
4%
32%
71%
Indonesia
World
World
51%
Indonesia
42%
1%
59%
36%
0% 5%
6%
Chart 5.2 Indonesian and world gas demand
Remain stable
Moderately increase
No Opinion
Signicantly increase
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Supply and demand for oil and gas
6 PwC
The rise of industrial nations such as China and India will be the main
drive to increased demand in gas, particularly for industrial and powergeneration sectors.Survey participant comment
If there are signicantuntapped oil reserves, itwould be in challenginglocations such as deep seas.Survey participant comment
The worlds populationcontinues to grow and thedeveloping economies arebuilding a higher standard ofliving. All this requires moreenergy. Oil and gas are a keypart of that mix. Indonesiahas some mature basins andthe easy elds have beenfound. But there is a stilllot of potential for smaller
nds. This requires lots ofexploration.Survey participant comment
B. Are there signicant Indonesian oil reserves yet to be discovered?
Chart 5.3
Signicant oil reserves will be discovered?
Dont know/ No opinion22%
Yes39%
No39%
C. Are there signicant Indonesian gas reserves yet to be discovered?
Chart 5.4
Signicant gas reserves will be discovered?
Dont know/ No opinion17%
Yes66%
No17%
Excluding those participants withno opinion, the responses were splitequally between whether there would be
signicant new oil reserves (yes: 39%) ornot (no: 39%).
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Supply and demand for oil and gas
17Opportunities, Risks and Rewards
Many difcult wells need to be developed.Survey participant comment
Gas discoveriesin Africa andpotentially [the]unlocking of[the] Artic willsignicantlyincrease world oiland gas reserves.Survey participant comment
D. Are there signicant oil and gas reserves will be discoveredglobally?
Chart 5.5
Signicant oil and gas reserves will be discovered globally?
Alternativeenergy, e.g.gas, needs to bedeveloped further.Survey participant comment
Dont know/ No opinion20%
Yes
74%
No6%
Whilst only 39% of the surveyrespondents indicated that theybelieved that there are still signicantoil reserves to be discovered inIndonesia, 66% of respondentsthought there were signicant gas
reserves untapped, especially inEastern Indonesia (Papua, Maluku,etc.). We note that sentiment has
weakened signicantly since the2012 survey, when still 72% and97% of the participants believedthere would be (signicant) oiland gas reserves to be discovered(respectively), noting that at the
time geological opportunitieswere regarded as Indonesias mostattractive aspect.
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Supply and demand for oil and gas
8 PwC
E. Which of the following areas offer the greatest potential for
new discoveries of crude oil and gas reserves?Chart 5.6
Potential for new reserves
F. Will your company increase its explorations activities in the next three years?
Chart 5.7 Increase explorations activities
As can be seen in chart 5.6 above, the majority of oil and gas reserves are believed to be in Eastern Indonesia(Papua, East Timor, Maluku, etc.) followed by North Central Indonesia (Kalimantan, Sulawesi). Consistent
with prior surveys, participants are less optimistic about nding new oil reserves in North Western Indonesia(Sumatra) notwithstanding that this basin provides a large percentage of the countrys current oil production.In our 2012 survey, 50% of the survey participants indicated that new oil discoveries would be in EasternIndonesia, this percentage has now increased to 51%, whereas in 2014 only 20% of survey participantsbelieved new oil discoveries are expected in North Western Indonesia (2012: 24%). The expectations forSouth Western and North Central Indonesia have remained more or less the same with our 2010 and 2012survey results.
The high expectations for gas in Eastern Indonesia is a very promising feature of the industry feedback.
Eastern
Indonesia
(Papua,
East Timor,
Maluku, etc)
North Western
Indonesia
(Sumatera)
South
Western
Indonesia
(Java, Bali,
Lombok)
North Central
Indonesia
(Kalimantan and
Sulawesi)
0%
50%
40%
30%
20%
10%
60%
Oil
Gas
18%
21%
8%9% 2%
20%
71%
51%
70%
Governmentmust build gasinfrastructurefrom upstream todownstream whichprovides a good
incentive for foreignand local investors.Survey participant comment
Yes
73%
No27%
No37%
Yes63%
Indonesia
World
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Supply and demand for oil and gas
19Opportunities, Risks and Rewards
The demand for gas will be signicantly increased
when the infrastructure for gas transportationbecomes available.Survey participant comment
G. What will be the focus of your companys Indonesianexploration activities for the next three years?
Given the expectations of survey participants that there are still signicantundiscovered oil and gas reserves in Indonesia, it is not surprising that themajority of the participants indicated that they will focus on a combinationof oil and gas exploration for the next three years. This is generallyconsistent with prior surveys. Participants also indicated that they willfocus, albeit it to a lesser extent, on unconventional gas (e.g. CBM, CSG and
shale).
Chart 5.8
Focus of exploration activities
Sumatera
Jawa
Papua
Sulawesi
Kalimantan
Bali
Maluku
Oil Gas
Map of Indonesia
NORTHWESTERN
NORTHCENTRAL
EASTERN
SOUTHWESTERN
With the new [Oil& Gas] Law andits uncertaintieslooming, plusan unwelcomecrackdown onforeign expert
workers, this veryprospective countryfor Oil & Gasexploration ndsit hard to attractinvestment andcapabilities.Survey participant comment
Combinationof oil and gas
55%
Oil10%Unconventional gas
(e.g. CBM, CSG, shale)17%
Gas18%
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0 PwC
Employment6
A. Compared to last year, will the level of employment inthe oil and gas industry in Indonesia increase or decrease?
The belief that signicant undiscovered oil and gas reserves exist inIndonesia, undoubtedly gives rise to the high percentage of surveyparticipants who think that employment in the Indonesian oil andgas industry will increase over the coming years. More than 42% ofthe participants believe that employment will increase however, thepercentage is lower when compared to the 2012 survey (52 %). Thebalance of the participants indicated that they think employment willremain stable (41%) or decrease (16%).
Chart 6.1
Employment in oil and gas industry
Still lots ofcompetition forskilled staff in theindustry. Thereforeevery country needsto look outsideto supplement.
Indonesia [is] nodifferent althoughIndonesia hasa bigger pool ofexperienced peoplethan many countries,given the size and ageof its industry.Survey participant comment Increase
41%
Signicantly increase
1%
Remain the same41%
Decrease
17%
Photo source: PwC
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Employment
Opportunities, Risks and Rewards
B. Compared to last year, will the number of employees inyour company increase or decrease?
Chart 6.2 Employee numbers
In regards to expatriate headcount,there has been a shift towardsexpecting numbers to remain thesame, or even decrease. A numberof survey participants commentedthat the decrease in expatriatenumbers is a worry as they have a
wealth of experience. One of thereasons for this decrease could bethe age limit now imposed by theMinistry of Energy and MineralResources (MoEMR). A largepercentage of survey participantsindicated that they expect to increasetheir hiring of local staff. However,a recurring theme in the commentsmade by survey participants was thatthey consider attracting qualiedand talented staff to be one of the
most signicant challenges facing
the industry in Indonesia andacross the globe, both now andin the future. Consistent with our2010 and 2012 surveys, severalrespondents commented onthe trend for skilled (national)employees to leave Indonesia to
work in other locations (mostlythe Middle East).
Decrease Remain thesame
Increase Signicantlyincrease
0%
50%
40%
30%
20%
10%
60%
70%
80%
28%
13%19% 19%
1%
44% 45%
69%
3%0%
3%0%
Local 2010 Expatriates 2010 Local 2012 Local 2014Expatriates 2012 Expatriates 2014
28%
8% 8%
36%35%
31%36%37%
59%
50%
5%
26%
The internationalmarket, particularlythe Middle East,attracts many of theskilled Indonesians
because of higherpay. This leaves thelocal industry shortof highly skilledtechnical resources.Further restrictionson Expat labourmakes it difcultto bring in skilled
technical resources,thus slowingindustry activity.Survey participant comment
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Employment
2 PwC
C. Do you expect the industry to encounter difculties inhiring and retaining employees in 2014?
Chart 6.3
Difculties in hiring and retaining employees
It is very hard to get competent staff anywhere,but in Indonesia the new max age and length of
stay restrictions are hopelessly damaging. Comparee.g. with Malaysia which is retaining internationaltalent through 10 year Talent Pass work permitsincluding spouse employment.Survey participant comment
No29%
Dont know11%
Yes
60%
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Employment
23Opportunities, Risks and Rewards
Retirement ages[are] too low and[it is] too difcult toget work permits forhighly skilled andexperienced expatsover 55.Survey participant comment
Developing skilled staff requires commitment and a long termplan. At this time there is just mixed signals that impact foreigninvestor commitment. Bureaucracy and red tape as well ascomplicated employment laws are discouraging for foreigninvestors.Survey participant comment
D. Does the Indonesian oil and gas industry have a sufcientnumber of skilled staff to perform these activities?
That more than half (54%) of surveyparticipants (Chart 6.4) still believe
that the Indonesian oil and gassector lacks a sufcient number ofskilled staff, combined with the factthat 60%(Chart 6.3) also expectdifculties in hiring and retainingemployees, is not a positive sign forthe industry. A number of surveyparticipants named the newly issued
manpower regulations (MoEMRissued Decree No.31/2013 on
Expatriate Utilisation and theDevelopment of IndonesianEmployees in the Oil and GasBusiness, dated 24 October 2013)as a partial cause of the issuesmentioned above.
Chart 6.4
Sufcient skilled staff
No52%
Dont know9%
Yes39%
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Capital expenditure7
A. What are your companys plans for capital spendingcompared to last year?
There are a numberof mega projects inthe process or tryingto get launched (IDD,Jangkrik, Tangguh 3,Cepu, Masela) whichare run by IOCs. Thisis where the largestcapital will comefrom. These companieswant to invest in theseprojects. Longer term,the late 60s PSC willexpire and SOE/NOCswill play a bigger roleby taking over these bigold PSCs.Survey participant comment
As can be seen in Chart 7.1 onthe next page, the participantsgeneral view seems to be thatcapital spending will stay thesame or even increase over thecoming ve years. This is moreor less consistent with the 2012
survey results. However, a farbigger portion of the surveyparticipants now indicate thatthere will be no change, or evena decrease. This pessimistic viewunfortunately comes at a time
when the GoI is keen to see anincrease in investment in theIndonesian oil and gas industry.Some survey participantsindicated that they will not
spend any money in Indonesiagoing forward, as no budget hasbeen allocated to Indonesia andtheir companies had decided tospend their investment fundselsewhere. This is a trend thatstarted in 2012 and does not
augur well for Indonesian reservereplacement.
Photo source: PwC
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25
Capital expenditures
Opportunities, Risks and Rewards
Chart 7.1 Capital spending in Indonesia and internationally
B. What will be the primary source ofcapital for the Indonesian oil and gasindustry over the next ve years?
As can be seen in Chart 7.2, the primary anticipatedsource of capital continues to be related party debt/parent company funding, which is consistent withprior year surveys and not surprising as the industryis dominated by a few large international players.The use of third party debt seems to have increased
slightly compared to the 2012 survey. Given recentlow interest rates, we would have expected the use ofthird party debt to play a more substantial role. It isinteresting to see that the anticipated increase in theuse of public equity as a primary capital source hasbeen identied by respondents (from 5% in 2012 to9% in 2014).
Chart 7.2 Source of capital
Public Equity9%
Related party debt/Parent Company funding
78%
Third party debt
13%
Decrease No change Increase Signicantly
increase
0%
25%
20%
15%
10%
5%
30%
35%
40%
45%
50%
12%
16%14%
22%
18%
10%
7% 7%6%
36%
30%
44% 45%
4%
1%
6%8%
2%4%
34%36%37%
33%
23%
29%28%
25%
22%22%
19%
Dont know
Indonesia Reserve acquisitions International Reserve acquisitions
Indonesia Development International Development
Indonesia Exploration International Exploration
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Capital expenditures
6 PwC
Chart 7.4 Investment appetite
Decrease48%
Remain the same
26%
Increase 25%
Signicantly increase1%
Not surprisingly a majority of theindustry participants believe that the
need for capital will continue to increaseover the next ve years. The anticipatedincrease in capital spending is likely tobe a result of the increased expenditureson mature elds and the focus on moreremote (i.e. difcult) exploration/deepwater activities which are morecostly to run/operate. The fact that
Chart 7.3 Need for capital
Signicantlyincrease
18% Remain the same13%
Increase64%
Decrease5%
The looming [new Oil & Gas] law and related changes will make itvery hard to make investment decisions until this is fully claried.Also the proposed mandatory participation of regional authoritiesinvestment vehicles in new PSCs is a major obstacle and is highly likelyto frustrate progress.Survey participant comment
C. Compared to 2012, how will the Indonesian oil and gasindustrys need for capital change over the next ve years?
industry participants still expect theneed for capital to increase, but at the
same time almost half of respondentsare indicating less investment appetitefor Indonesia, is a red ag for theIndonesian upstream sector.
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Capital expenditures
27Opportunities, Risks and Rewards
D. What do you anticipate to be the average US$ price in perbarrel of crude oil in 2014, 2015 and 2016?
Chart 7.5
Average price in US$ per barrel of crude oil
The vast majority of the survey
respondents indicated that theyexpect that the price of crude oil
would remain in the US$101120per barrel range for 2014 but eitherincrease to US$ 120135, or decreaseto US$ 81100 per barrel in 2015(the survey was undertaken in early2014 when oil prices ranged betweenUS$101 and US$120 per barrel).Not surprisingly, the further intothe future the projection is carried,
the wider the range of responses
from respondents. Although someof the respondents thought thatthe price of oil would go belowUS$81100 per barrel, none ofthem thought that the price of oil
would exceed US$135 per barrelin 2016.
2014 projection from2012 survey
2014 2015 20160%
50%
40%
30%
20%
10%
60%
70%
80%
$50 or less $51 - $65 $66 - $80 $81 - $100 $101 - $120 $121 - $135 $136 or more
35%
62%
68%
12%
38%
53%
32% 34%
24% 28%
0%
6%
0% 1%0% 0%0%0% 1%0%3% 3%
Price per barrel
Year
Expecta
tionofsurveyparticipants
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Challenges facing
the industry
8
To gain an understanding of the most critical challenges facing the
industry we asked survey participants to rate 15 different challengesconfronting the Indonesian oil and gas industry, as well as indicatingany other challenges they deemed relevant. On a scale of 1 to 5 (1being Signicantly Important, 3 being Moderately Important and 5being Not Important at All) survey participants were asked to rate thefollowing challenges.
Table 8.1
Critical Industry Challenges
Confusion as to the roles of the central,provincial and regional governments
Local government relations
Interference from other governmentagencies, such as the tax authorities
Confusion as to the role of SKK Migas and theMinistry of Energy and Mineral Resources
SKK Migas performance Contract sanctity
Community relationsConfusion over Law No. 22/Implementingregulation and GR 79/2010
Security of assets, people and ownershiprights
Confusion over SKK Migas regulations/grandfathering of prior Pertamina rulings
Labour regulationsConfusion over energy policy and supporting
blueprints (gas utilisation etc.)
Upcoming presidential electionUncertainty over cost recovery and SKK Migas /
BPKP audit ndingsNew regulation (such as: Land andBuilding Tax on PSCs)
Photo source: PwC
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Challenges facing the industry
Opportunities, Risks and Rewards
Contract Sanctity is most important for aninvestor, any change of law/regulation will not
supersede [the] rights and obligations [of the] PSC.The new law/regulation should be applicable tonew PSC instead [of] unilaterally force into effect to[an] old PSC.Survey participant comment
Top ve challenges facing the industry
Table 8.2
Challenge
2014 survey % ofresponses rated issueas 1 - Signicantly
Important
2012 survey % ofresponses rated issueas 1 - Signicantly
Important
2010 survey % ofresponses rated issueas 1 - Signicantly
Important
Interference fromother governmentagencies, such as thetax authorities
59% 49% 55%
Contract sanctity 51% 54% 48%
Confusion as theroles of the central,provincial & regional
government
49% 42% 38%
New regulations 48% - -
Uncertainty over costrecovery and SKKMigas/ BPKP auditndings
44% 48% 48%
The challenges highlighted above inTable 8.2 were also included in thetop ve challenges in our 2012 and2010 surveys.
The newcomer (i.e. new regulations)in the top 5 of the signicantlyimportant challenges in the 2014survey results is probably notsurprising given the recently issuedregulations related to Land andBuilding Tax on PSCs, as well asthe manpower regulations for theupstream and oileld service sector
which stipulates the maximum agefor foreign workers at 55 years.The 2014 survey participants are
clearly aligned with the past two
surveys in terms of the otherareas which continue to besignicantly important to theindustry: interference from othergovernment agencies, such as thetax authorities; Contract sanctity;confusion as to the roles of thecentral, provincial and regionalgovernments; and uncertaintyover cost recovery and SKKMigas/BPKP audit ndings.
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Challenges facing the industry
0 PwC
Chart 8.1
Survey participants views on the development of challenges over the next 12 months
2010
Gettingsignicantly
worse
Stayingabout
the same
Getting
signicantlybetter
1
3
5
3.003.213.15 3.15 3.10
3.48
3.34
2.10
3.30
3.04
3.40
3.273.11
Interferencefrom other
governmentagencies,
such as taxauthorities
Newregulation(such as:Land and
Building Taxon PSCs)
Uncertainty overcost recovery
and SKK Migas/ BPKP audit
ndings *
Contractsanctity
Confusionover LawNo. 22/
Implementingregulation
: improving
: staying about the same
: deteriorating
2012
Change from 2012
survey
2014
New oil and gas law should stimulate the industry to invest [in] oil and
gas in Indonesia.Survey participant comment
Although not directly impacting oil and gas, the changes in miningregulations and the many disputes regarding ownership have a majorimpact on investor sentiment and therefore the ability to raise fundsto invest in Indonesian oil and gas projects. The rule of law needs to bestrengthened.Survey participant comment
* risk of suspense account treatment added for this issues in the 2014 survey
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Challenges facing the industry
31Opportunities, Risks and Rewards
Costs [are]rising as industrymatures, so [the]governmentresponds byincreasingmicromanagementwhich increases
costs furtherSurvey participant comment
Chart 8.2
Survey participants views on the likely status of challenges over thenext one to ve years
1
3
5
2.932.80
2.70
3.16 3.073.113.10
2.70
3.07
2.89
Contractsanctity
Interferencefrom other
governmentagencies, such
as the taxauthorities
2.93
2.80
3.12
Gettingsignicantly
worse
Stayingabout the
same
Gettingsignicantly
better
2010: improving
: staying about the same
: deteriorating
2012 2014
Uncertaintyover cost
recovery andSKK Migas /BPKP auditndings*
New regulation(such as: Landand BuildingTax on PSCs)
Confusion overLaw No.22/
Implementingregulation
Change from 2012survey
As can be seen in Chart 8.1, survey participants were generally neutralon the likely developments in these challenges over the next 12 months.We noted that survey participants expected some improvement in thedevelopment of these challenges over the longer term although they weremore pessimistic about the pace of improvement compared to the viewsof respondents in the 2012 survey (Chart 8.2). We suspect that the mainreasons behind this cautious view may be that many of the challengesconfronting Indonesia, such as regulatory reform, require consistentcoordination between multiple Ministries in the GoI a behavior which hasnot necessarily been observed in recent years.
* risk of suspense account treatment added forthis issues in the 2014 survey
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Challenges facing the industry
2 PwC
A. Over the next 12 months what will happen to the level ofgovernment regulation which affects the industry?
As can be seen in Chart 8.3 below, the majority of respondentsbelieve thatthe government regulations will remain the same or actually improve or
signicantly improve. It is difcult to assess whether respondents havefactored in the proposed new Oil and Gas Law in forming their view.
Further deteriorate30%
Signicantly improve8%
Improve17%
Remain the same45%
Chart 8.3 Government regulation
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Challenges facing the industry
33Opportunities, Risks and Rewards 33Opportunities, Risks and Rewards
Photosource:PwC
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Competitiveness9
Indonesias petroleum industry has for decades been viewed by internationalpetroleum investors as an attractive destination for investment, however forsome years now there has been concern that the countrys competitiveness isslipping. To gauge the accuracy of this concern we asked the survey participantsto rate Indonesias competitiveness compared to other countries on thefollowing features (1: highly competitive, 3: neutral, 5: not competitive at all):
Table 9.1
Feature
Geological opportunities Infrastructure
Trained workforce Risk premium
Political stability Regulatory framework
Environmental regulations Contract and project approvalprocess
Ease of foreign ownership The existing scal framework
Photo source: ExxonMobil Oil Indonesia Inc.
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35
Competitiveness
Opportunities, Risks and Rewards
What are the most attractive features of investing inIndonesia?
Table 9.2
Feature 2014 Score 2012 Score Change from2012 survey
Political stability 2.6 2.8
Trained workforce 2.5 2.4
Ease of foreign ownership 3.0 2.9
Environmental regulation 2.9 2.8
Geological opportunities 2.3 1.9
Please note that all of the above features were also highlighted as the top 5competitive features in the 2012 survey.
As can be seen in Table 9.2, survey participants indicated that Indonesiasmost attractive features for investment have remained almost the samecompared to the last survey. Although its geological opportunities hashistorically always been regarded as Indonesias best feature for oil andgas activities, this feature has been ranked lower now, albeit it is stillconsidered one attractive feature. It is interesting to note that politicalstability is getting more recognition as one of Indonesias most attractive
features and this reects positively on the GoI leadership in this youngdemocracy. Against a backdrop of political unrest and uncertainty in manyother emerging markets as of 2014, Indonesia remains open for foreigninvestment in the upstream sector. Although an NOC exists, it has notcrowded out Indonesian and foreign investors.
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Competitiveness
6 PwC
What are the least competitive features of investing in Indonesia?
Table 9.3
Feature 2014 Score 2012 ScoreChange from2012 survey
Contract and project approval process 3.5 3.5
Existing scal framework 3.4 3.5
Regulatory frame work 3.6 3.4
Infrastructure 3.3 3.2
Risk Premium 3.3 3.2
Please note that the above features were alsohighlighted as the 5 least competitive featuresin the 2012 survey.
The fact that the views on the regulatoryframework have deteriorated is not surprisinggiven the recent regulatory developmentsaround the suspense account process, landand buildings tax and the conditions onhiring of expatriate labour in the upstreamand oileld service sectors. This may also be
the reason why risk premium scored lowercompared to our 2012 and 2010 surveys.
In addition, we asked survey participants theirviews on the developments they expectedin the competitiveness of these features.
As shown in charts 9.1 and 9.2, surveyparticipants indicated that they believe thatIndonesias most competitive features willslightly improve or stay the same at best overthe coming 12 months and Indonesias lesscompetitive features will remain the same, orget slightly worse.
However it should be noted that, as inour 2010 and 2012 surveys, participantsremain relatively optimistic regarding thedevelopment of all features over the comingve years.
Comparing the results of our past surveys in2005, 2008, 2010 and 2012 with our 2014survey suggest that there has been littlepositive change in features described asproblematic.
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Competitiveness
37Opportunities, Risks and Rewards
Gettingsignicantly
worse
Staying aboutthe same
Signicantlyimproving 1
3
5
2.59
2.64
3.06
2.86
3.193.17
2.81
A JIHGFEDCB
Geological opportunities
Trained workforce
Enviromental regulations
Political stability
Infrastructure
Ease of foreign ownership
The existing scal framework
Risk premium
Contract and project approval process
Regulatory framework
A
J
I
H
G
F
E
D
C
B
2.88
3.053.00
Development
Chart 9.1Development of competitiveness (within 12 months)
Chart 9.2Development of competitiveness (within 1- 5 years)
Gettingsignicantly
worse
Staying aboutthe same
Signicantlyimproving 1
3
5
2.37
2.50 2.55
2.66
A F JIE HGDCB
Geological opportunities
Trained workforce
Political stability
Infrastructure
Ease of foreign ownership
The existing scal framework
Risk premium
Contract and project approval process
Regulatory framework
Environmental regulationsA F
J
I
E
H
G
D
C
B
2.53
2.882.91
Development
2.96 2.94 2.91
Although no signicant changes were noted compared to the 2012 surveyresults, it seems that survey participants are slightly less optimistic andexpect less improvement on certain challenges during the 1 - 5 year
window. Again this may be because the majority of these challenges areregarded as structural and require ministerial coordination.
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Competitiveness
8 PwC
Indonesias competitiveness compared to other oil & gasproducing countries
Survey participants were also asked to rate the relative competitiveness ofdifferent countries in comparison with Indonesia on four different features,namely geological opportunities, infrastructure, political stability andregulatory framework. Please see the map on the inside of this fold outpage for the results.
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Nigeria 2 01 2 2 014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Chart 9.3
Angola 2 01 2 2 014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Vietnam 2 01 2 2 014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
UAE 2 01 2 2 014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Venezuela 2012 2014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
China 2 01 2 2 014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
: More competitive than Indonesia
: Less competitive than Indonesia
: Same as Indonesia
Norway 2012 2014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Opportunities, Risks and RewardsCompetitiveness
PwC Indonesia
USA 2 01 2 2 014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Thailand 2 01 2 2 014
Geologicalprospects
(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Malaysia 2012 2014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
Australia 2012 2014
Geologicalprospects(including accessto acreage)
Infrastructure
Political stability
Regulatoryframework
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Competitiveness
39Opportunities, Risks and Rewards
As can be seen in chart 9.3 on theprevious page, based on surveyresponses Indonesia appears to belosing its competitive edge over otheroil and gas countries. Of the countriesincluded in the survey, Norway,
Australia, Malaysia, China, the USAand the UAE are seen as competitiveor better than Indonesia across thefour features of geological prospects,infrastructure, political stability andregulatory framework.
Indonesia remains more competitivethan Nigeria, Venezuela and Angolain all but geological prospects.Compared to Thailand, Indonesiais thought to have better geological
prospects and political stability(which we assume is a reectionof the ongoing political issues inThailand), whilst perception is thatIndonesia now lags Thailand in termsof infrastructure and regulatoryframework.
For completeness and balance,please note that the surveyrespondents were also asks tocomment on other features,including Indonesia's relativeposition in regard to ease of
foreign ownership and having atrained workforce. In these twoareas Indonesia is regarded ashaving slightly more favourableconditions than other traditionaloil and gas investmentdestinations.
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0 PwC
Other Challenges10
A. There have been several high prole arrests in relation tocorruption. Do you think that these will improve the perceptionof Indonesias commitment to ghting corruption?
Chart 10.1
Do the recent arrests have a positive impact on the perception around thecommitment to ghting corruption?
No impact13%
Dont know5%
Yes
61%
No
21%
Photo source: PwC
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41
Other challenges
Opportunities, Risks and Rewards
As can be seen in chart 10.1, themajority (61%, 2012: 58%) of thesurvey participants indicated thatthe recent high prole arrests inrelation to corruption are having apositive impact on the perception
of Indonesias commitment toghting corruption. However, itshould be noted that a substantial34% of respondents are still of theopinion that the GoIs approach has
Indonesia hasall the resourcesto save its oiland gas forexport and [inits] own marketdevelop CBM andgeothermal powerplants to deliver
electricity to theentire countryat a very low kWrate.Survey participant comment
2025 and 2050 Targeted Energy Mix
Crude oil CoalNatural gasNew and
renewableenergy
Source:MoEMR
25%
20%
25%
24%
31%
30%
2025
2050
22%
23%
no impact or no positive impacton perceptions of commitmentto ghting corruption. This maybe an indication that surveyparticipants are remainingskeptical about the effectiveness
of the GoIs approach to ghtingKKN.
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Other challenges
2 PwC
As shown in Chart 10.2, almost half of the survey participants believe that there will besignicant changes (positive or negative) after the 2014 elections, whereas 51% of theparticipants indicated no (signicant) impact as a result of the elections on the industry.
B. This year (2014) Indonesia will hold general elections and presidentialelections. Do you anticipate signicant changes in the industry after theelections?
Chart 10.2
Do you anticipate signicant changes in the industry after the elections?
No impact14%
Dont know1%
Yes48%
No37%
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Other challenges
43Opportunities, Risks and Rewards
C. Do you foresee Indonesia being a net exporter ofhydrocarbons in the future?
Chart 10.3Yes, within 5 years
10%
Yes, within 10 years12%
Yes, within 15 years10%
Yes, within 20 years12%
No, never56%
Declining oil production andincreased consumption resultedin Indonesia becoming a net oilimporter in late 2004. This factor,along with high oil prices in 2004-2008, led the Government tosubstantially scale back the domesticfuel subsidy in 2008 and to decide
to temporarily withdraw from theOrganisation of Petroleum ExportingCountries (OPEC) an organisationrepresenting approximately 45%of world oil production. As theonly Asian member of OPEC since1962, the Government indicated
at the time that it will considerrejoining OPEC if the countrysoil production can be increasedand it can become a net exporteragain. We asked the surveyparticipants whether theyforesee Indonesia becoming a netexporter of hydrocarbons again in
the future. More than half (56%)indicated that they didnt thinkthat Indonesia would ever becomea net exporter of hydrocarbonsagain.
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Other challenges
4 PwC
D. Do you think Indonesia is ready forunconventional gas (eg. CBM/CSG, shale gas)?
Chart 10.4
Dont know10%
Yes33%
No57%
E. Do you think Indonesia has the knowledge and expertise toextract and produce unconventional gas?
Chart 10.5Dont know
10%
Yes25%
No65%
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Other challenges
45Opportunities, Risks and Rewards
F. Should the government provide more incentives forunconventional gas?
Chart 10.6
Dont know
7%
Yes90%
No3%
Survey participants clearly seethat unconventional gas is a viablealternative for conventional oiland gas. In order to stimulate thedevelopment of unconventionalresources, they indicated that theGoI should provide more incentives.
As can be seen in Chart 10.6,90% of the survey participantsindicated that they believe thatmore incentives for unconventionalgas should be given. Notingthat 65% of survey participantsindicated that they dont think thatIndonesia has the knowledge and/or
expertise to extract and produceunconventional gas(as illustratedin Chart 10.5) one queries
whether the recent changes inthe 2014 Negative Investment Listunder the Investment Law willhave an impact. The amendments
close a number of oileld servicesectors to new foreign investment(eg. onshore drilling) and mayimpede the accessibility ofunconventional drilling and wellexpertise if not available locally.
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Other challenges
6 PwC
G. Has your company ever considered leaving Indonesiabecause of the issues described earlier?
Chart 10.7
Ever considered leaving Indonesia?
H. Are you satised with the current return on investmentyou are getting from your operations in Indonesia?
Chart 10.8
Satisfaction with return on investment
Dontknow33%
Yes15%
No52%
2010 survey2012 survey2014 survey
2014 survey 2012 survey 2010 survey
Dontknow33%
Yes27%
No40%
Dontknow37%
Yes30%
No33%
Dontknow17%
Yes53%
No30%
Dontknow20%
Dontknow16%
Yes
24%
Yes32%
No56%
No52%
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Other challenges
47Opportunities, Risks and Rewards
I. Do you think that potential new investors are aware of
the issues the industry is facing?Chart 10.9
J. Do you think that the Open Access Policy on oil and gaspipelines will have any impact on your current productionplans?
Chart 10.11
K. Do you think that the Open Access Policy on oil andgas pipelines will have any impact on your decision to
invest in the Indonesian oil and gas industry?Chart 10.12
Dont know23%
Yes52%
No
25%
Dont know34%
Yes41%
No25%
Dont know31%
Yes49%
No20%
All stakeholdersneed to support anyeffort to combatthe decline of
mature elds andgovernment needs togive competitive scalterms and supportfor developmentof stranded eldsand for explorationactivities.Survey participant comment
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Other challenges
8 PwC
Dont know27% Yes
27%
No46%
2010 survey
L. Do you anticipate a signicant improvement in the oiland gas industry investment environment over the next 5to 10 years?
Chart 10.13Improvement in returns expected?
2012 survey2014 survey
Despite the problems and issuesnoted in the earlier sections ofthe survey, investors are notcurrently considering leavingIndonesia even though a growing
percentage of respondents werenot satised with their return oninvestment (52%, Chart 10.8).We assume investors choose tostay mainly due to Indonesiaspolitical stability and its remaininggood geological prospects. Notehowever on an optimistic note,and consistent with a desire to
Dont know28% Yes
41%
No31%
stay in Indonesia, 45 % of theparticipants indicated anticipatedimprovements in the returnfrom the oil and gas industry inIndonesia. In 2012 this percentage
was only 41%. In addition, theparticipants who indicateddont know have decreasedfrom 28% in 2012 to only 17% in2014 suggesting again a mood ofcautious optimism.
Dont know17%
Yes45%
No38%
The problem island access andcoordination
with the regionalgovernments. Whenit takes a year or so topermit a well, it is notpossible to executean unconventionalprogram.Survey participant comment
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Other challenges
49Opportunities, Risks and Rewards
Photosource:PwC
49Opportunities, Risks and Rewards
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0 PwC
About PwC11
Why PwC?
As the worlds largest professionalservices network and one of the bigfour accountancy rms, PwC rmsprovide Industry-focused assurance,tax and advisory services for public andprivate companies. Close to 184,000people in 157 countries connect theirthinking, experience and solutions
to build trust and enhance value forclients and their stakeholders.
A globally integrated rm
Being part of a global network meanswe can invest in priority clients, sectorsand markets and deliver leadingedge ideas, products and servicesmore quickly and effectively thanour competitors. We work acrossborders without the constraints ofgeographic considerations and we
work to a global standard and quality.Our global network structure enablesquick decision-making and worldwidedelivery of the best resources.
About the PwC network
We are organised into industry groups,of which the oil and gas industry groupis one of the largest. Our industry focusensures our people have both a broadoverview of the marketplace and a deepunderstanding of the industries andmarkets in which they specialise.
Our oil and gas industry group haspriority status in terms of investment
and resources in all key marketsincluding Indonesia, reecting our
worldwide dominance in this market.
Our strength in the oil and gas industryis one of which we are proud. Thismeans we are the most committed rmto achieving oil and gas clients needsand actively participate in the industryin all countries in which the industry isactive. We work closely with our oil andgas clients, offering the benets of ourexperience, to help achieve their goals.
Photo source : PwC
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51
About PwC
Opportunities, Risks and Rewards
PwC Indonesia
PwC Indonesias (PwC or we) oiland gas team brings together localknowledge and experience withinternational oil and gas expertise.Our strength in serving the oil andgas industry comes from our skills,our experience and our network ofpartners and managers who focus100% of their time on understandingthe oil and gas industry and
working on solutions to oil and gas
industry issues. Detailed oil and gasknowledge and experience ensuresthat we have the background andunderstanding of industry issuesand can provide sharper, moresophisticated solutions.
PwC is organised into four Linesof Services, each staffed by highlyqualied experienced professionals
who are leaders in their elds. Thelines of service are:
Assurance Services whichprovide innovative, highquality, and cost-effectiveservices related to anorganisations nancialcontrols, regulatoryreporting, shareholder valueand technology needs.
Tax Services which providea range of specialist taxservices in three main areas:tax consulting, tax disputeresolution, and compliance.Some of our value-driventax services include:
- International taxrestructuring
- Mergers andacquisitions
- Compliance services
- Dispute resolution
- Indirect taxes
- Transfer pricing; and
- Tax process reviews
Advisory services which
provide comprehensiveadvice and assistancerelating to transactions,performance improvement
and crisis management,based on long-termrelationships with clientsand our nancial analysisand business process skills.
Consulting Services helpyou to improve yournancial and operationalprocedures and internalcontrols in a wide
variety of areas withinyour organisation. OurConsulting practice has thefollowing sub-divisions:
- Financial Effectiveness- Forensics
- Operations
- People & Change
- Sustainability
- Technology
For companies operating in theIndonesian oil and gas sector, thereare some compelling reasons tochoose PwC as your professionalservices rm:
We are the leading advisorin the industry, bothglobally and in Indonesia,
working with moreexplorers, producers andrelated service providersthan any other professionalservices rm. In particular,PwC audits over 60% (interms of production) of theoil and gas producers inIndonesia under ProductionSharing Contract
agreements, and providesother professional servicessuch as taxation andadvisory services to oil andgas producers in all stages oftheir development.
We have operated inIndonesia since 1971and have over 1,600professional staff, including51 Indonesian nationalpartners and expatriate
technical advisors, trainedin providing assurance,advisory, consulting and taxservices to Indonesian andinternational companies.
Our Energy, Utilities andMining (EU&M) practicein Indonesia comprisesover 300 dedicatedprofessionals across ourfour Lines of Service. Thisbody of professionalsbrings deep local industryknowledge and experience
with international miningexpertise and provides us
with the largest group ofindustry specialists in theIndonesian professional
market. We also draw on thePwC global EU&M network
which includes some 3,400qualied industry experts.
Our commitment tothe oil and gas industryis unmatched anddemonstrated by our activeparticipation in industryassociations in Indonesia andaround the world, and ourthought leadership on the
issues affecting the industry.Through our involvementwith the IndonesianPetroleum Association (IPA)
we help shape the future ofthe industry.
Our client service approachinvolves learning aboutthe companys issuesand seeking ways to add
value to every task weperform. Detailed oiland gas knowledge and
experience ensures that wehave the background andunderstanding of industryissues and can providesharper, more sophisticatedsolutions that help clientsaccomplish their strategicobjectives.
PwC Indonesia (www.pwc.com/id)
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About PwC
2 PwC
For further information, please do not hesitate to contact any of the following specialists from our IndonesianEnergy, Utility and Mining (EU&M) practice:
T: +62 21 528 90370
Anthony J [email protected]
T: +62 21 528 90642
Gadis [email protected]: +62 21 528 90765
Suyanti [email protected]
T: +62 21 528 76004
Assurance
Tax
Advisory
Consulting
Yanto [email protected]: +62 21 528 91053
Daniel [email protected]: +62 21 528 90962
Joshua [email protected]: +62 21 528 90833
Yusron [email protected]: +62 21 528 91072
Christina [email protected]: +62 21 528 75433
Toto [email protected]: +62 21 528 91205
Firman [email protected]: +62 21 528 90785
Yudhanto [email protected]: +62 21 528 91059
Paul van der [email protected]: +62 21 528 91091
Anthony [email protected]: +62 21 528 90687
Gabriel [email protected]: +62 21 528 90857
Dwi [email protected]: +62 21 528 91050
Fandy [email protected]: +62 21 528 90749
Antonius [email protected]: +62 21 528 90972
Michelle [email protected]: +62 21 528 75919
Tjen She [email protected]: +62 21 528 90520
Sacha [email protected]: +62 21 528 90968
Mirza [email protected]: +62 21 521 2901
Charles [email protected]: +62 21 528 75872
Gopinath [email protected]: +62 21 528 75772
Hadsyah [email protected]: +62 21 528 90774
Michael [email protected]: +62 21 528 90340
Agung [email protected]: +62 21 528 90666
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Opportunities, Risks and Rewards
Acknowledgements
53
PwC Indonesia appreciates the involvement of those companies whichtook the time to participate in this survey and share their thoughts andopinions with us.
Photographic contributions
We would like to acknowledge and thank the following companieswhich provided photographs for inclusion in this report (inalphabetical order):
Chevron IndoAsia Business Unit. ExxonMobil Oil Indonesia Inc. Talisman Energy Inc.
Editors
Anthony J Anderson
Paul van der Aa Kathy Lindsay
Other contributions
We would also like to acknowledge and thank the followingindividuals which assisted in the compilation of this report:
Ade Marni Aranti Syamsuddin Indah Setiawati Kertawira Dhany Nicolas Saputra
Acknowledgements12
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PwC
Glossary
4
BOPD Barrels of Oil per Day
BPH Migas Badan Pengatur Hilir Minyak dan Gas Bumi (Oil and GasDownstream Regulatory Agency)
BPKP Badan Pengawasan Keuangan dan Pembangunan(Government Audit Body)
CFO Chief Financial Ofcer
COO Chief Operating Ofcer
EU&M Energy, Utilites, and Mining
GoI Government of Indonesia
IPA Indonesian Petroleum Association
KKN Corruption, Collusion and Nepotism
LPG Liquied Petroleum Gas
MoEMR Ministry of Energy and Mineral Resources
Pertamina Perusahaan Pertambangan Minyak dan Gas Bumi Negara(The Indonesian State Oil Company)
PSC Production Sharing Contract
SKK Migas Satuan Kerja Khusus Pelaksana Kegiatan Usaha HuluMinyak(Government Executive Agency for Upstream Oiland Gas Business Activities)
US$ United States Dollar
VAT Value Added Tax
Glossary13
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