ASEAN KEY DESTINATIONS
Oil and gas losing ground to renewables
Oil and gas may have been king of the jungle for decades, but investors are being reminded of the increased competition from renewable energy sources as the government emphasizes the need for efficiency in the upstream sector.
Over the past three years, investment in the upstream oil and gas sector has plunged to almost half of the usual figure of more than US$20 billion, partially due to continuously low oil prices and the government’s frequent policy changes leading to uncertainty.
The current situation is not much better, with the government predicting a $13.8 billion total investment by year-end. While this year’s estimate is higher than the $12.01 billion invested in 2016, it is still a significant drop from $15.9 billion in 2015.
Energy and Mineral Resources Minister Ignasius Jonan reminded investors that it was unlikely to get any easier in the future, with global crude prices still hovering around $50 per barrel.
Furthermore, renewable energy sources have continued to become cheaper as a result of more readily available technologies that are regarded as much cleaner alternatives to fossil fuels.
“New and renewable energy is a sector that we have to consider seriously. I feel that perhaps in the future, the competition between fossil or traditional energy and renewable energy will mount from time to time […] they might compete in the future, whether we use oil or gas or renewable energy,” he said during the 41st Indonesian Petroleum Association (IPA) exhibition and conference on Wednesday.
While fossil fuel-based power remains much cheaper than renewable-source power, the gap is getting narrower. For example, electricity procured from gas can cost from around 7 US cents per kilowatt hour (kWh) to 14 kWh depending on the country.
On the other hand, the International Renewable Energy Agency (IRENA) states that electricity from utility-scale solar photovoltaic systems can now cost as little as 8 cents per kWh.
The emphasis on efficiency and cost-cutting measures has been a recurring theme in the energy sector under President Joko “Jokowi” Widodo’s administration.
The most drastic measure taken by the government is its recent decision to issue a new production-sharing, or gross-split, scheme, in which it will no longer be responsible for reimbursing contractors for exploration and exploitation activities.
Many investors have been accused of depriving the state budget of revenue while providing little in return as oil production continues to go downhill.
The government claims the new scheme is actually more enticing for investors and will revitalize the industry, because contractors no longer have to gain approval from the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) for every aspect of their upstream projects, which theoretically translates to faster business processes.
However, there are always two sides to a story and companies argue that the gross-split mechanism means they risk losing a lot of money for exploration and exploitation in Indonesian areas that are mostly considered as frontier, with difficult terrains and where most of the reserves are in deepwater locations.
IPA president Christina Verchere emphasized that investors took the issue of efficiency as seriously as the government.
“I think it’s important to clarify that it’s in the investors’ interest for costs to be low. It impacts our profit lines too, so we want to be efficient,” she said.
Wood Mackenzie’s Asia Pacific research director for upstream oil and gas, Andrew Harwood, said there had been huge exploration budget cuts since 2014 caused by low oil prices, with many companies opting to invest in exploration opportunities that are more easily commercialized than Indonesia’s deepwater reserves.
Even so, Wood Mackenzie notes that countries like Mexico and Canada are attracting more investment for deepwater reserves despite Indonesia’s equal potential. One of the biggest problems, Harwood added, was the lack of transparency and cooperation between ministries.
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