Is the Drum Half Full or Half Empty?

PwC Indonesia publishes eighth edition of oil and gas industry survey on companies operating in Indonesia and the issues they face

Wednesday, June 15, 2016

Indonesia has a long history in the oil and gas industry with a diversity of geological basins that continue to offer sizeable oil and gas potential. However, Indonesia’s crude oil production has continued to decline over the last decade due to the natural maturing of producing oil fields, a slower reserve replacement rate and arguably, insufficient exploration and investment.

PwC Indonesia has released its 8th annual survey of companies currently operating in the Indonesian oil and gas sector as it analyzes the problems and possibilities in the sector.

PwC Indonesia Lead Advisor for Energy, Utilities & Mining, Sacha Winzenried noted that the Government of Indonesia has made efforts to increase Indonesia’s oil and gas production and attract investment from new and existing players, but in practice this has proven to be challenging.

“Responses to the survey show that investors are looking for further harmonization of Government policy for the oil & gas sector across all relevant ministries, including the Ministry of Finance, Ministry of Energy and Mineral Resources and Ministry of Environment,” said Winzenried.

“Providing a positive investment regime, with certainty around rules and regulations and return on investment, is even more important in the current low oil price environment. Funds for investment in oil and gas are scarce, and Indonesia must compete for those investment dollars if oil and gas production is to increase,” he added.

Survey respondents indicated that there are several key challenges facing the oil and gas industry in Indonesia, with the top five being:

  • Contract sanctity and certainty around PSC extensions;
  • Lack of consistent policies and vision between different arms of government;
  • New tax or cost recovery regulations issued affecting PSC terms;
  • Uncertainty over cost recovery and government audits; and
  • Absence of a single authority to objectively resolve disputes across various departments and agencies.

Survey respondents believe that focus on these areas would significantly improve the attractiveness of the Indonesian investment environment for oil and gas, consistent with Indonesia’s strong geological opportunities.

Other points of note from the survey are:

Supply and demand for oil and gas: The fall in oil prices has had a marked effect on exploration activities, with only half of those surveyed expecting that their company will increase its exploration activities globally or in Indonesia in the next three years. Respondents expect the increase in demand for natural gas in Indonesia to outpace that for oil.

Employment: An overwhelming majority (91 percent) of respondents believe that employment in the oil and gas industry will decrease this year, highlighting the continuing effect of the slide in the oil price. Almost 75 percent of the respondents expect their company to reduce their expatriate workforce with 53 percent expecting a decline in the number of local hires.

Capital Expenditure: Future capital spending is expected to slow, particularly for exploration, compared to previous years. Respondents broadly fall into three similarly sized groups – one-third will decrease capital expenditure, one-third will increase spending and one-third will maintain it as it is.

Competitiveness: From this survey, the five most competitive features of the Indonesian oil and gas industry are: 1) Geological opportunities; 2) Trained workforce; 3) Ease of foreign ownership; 4) The existing fiscal framework; and 5) Contract and project approval process.

Survey participants were also optimistic about the likely improvements in Indonesia’s competitiveness which is expected to flow from greater investment in infrastructure that has been spurred by the current government’s policies.

Based on the survey results, Indonesia faces a key challenge in the development of the oil and gas sector due to what may be a prolonged downturn in oil prices. At the same time this provides an opportunity to improve the regulatory environment for oil and gas investment as a way to get ready for the next uptick in the commodities cycle. So we may ask – is the drum half full or half empty?

Download the full report here:


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