One of Mahakam Block processing facilities in East Kalimantan (Photo source: SKK Migas)

JAKARTA (TheInsiderStories) – The U. S. success in producing natural gas from unconventional resources has disrupted the global supply structure. Technology advances in U.S. shale gas operations bring out economic competitive advantage compared to conventional assets. Unconventional gas has become a global phenomenon in the production of fossil fuel. Indonesia wants to be a part of it.

Conventional and unconventional fossil fuels are different from its geologic locations and accessibility. Conventional fuels are more easy to find, while unconventional ones demanding advanced extraction technologies. It is predicted that the global oil reservoirs quadrupled its current conventional reserves if unconventional oil resources (oil shale, oil sands, extra heavy oil, and natural bitumen) are taken into account.

The U.S. has encouraged oil sands, oil shale, and unconventional natural gas development with the Energy Policy Act of 2005. During 2008-2015, prices of gas in the country were distressed because of build-up domestic supplies from the shale production and natural gas imports that reached its peak in 2007 at 129 billion cubic meters (bcm) of pipeline gas and 21.6 bcm of liquefied natural gas imports. The landscape changed when first cargoes of shale in the form of liquefied natural gas, or LNG, being shipped into the world market in 2016. It turned the U.S. into a net exporter of natural gas a year later.

The success triggered national oil companies to compete in growing unconventional gas. Exploration and production operators in Australia, China, and Argentina have made progress in developing unconventional gas supplies outside of North America, the World Energy Council noted.

In Indonesia, the government has started similar movements in 2008. It handed over Sekayu working area in Musi Banyuasin, South Sumatra, as the first unconventional fossil fuel development. Up until 2016, the government has signed 60 contracts, consist of 54 coal bed methane and sixth shale gas blocks. However, the progress of these projects is stagnant. Some even being terminated after operators failed to provide definite commitment, according to the Ministry of Energy and Mineral Resources.

In its latest attempt, the Energy Ministry has opened another auction of oil and gas working areas. As much as 26 working areas being offered in February, including two unconventional fossil fuel sites in Sumatra. The latter will be auction through a direct bidding mechanism. The government projected fuel production from these two unconventional blocks could reach 1.14 trillion cubic feet (Tcf) coal methane gas and 75.44 million barrels of oil (MMbo) and 10.88 Tcf shale gas.

A similar auction held late last year failed to attract companies to explore the unconventional working areas. Five companies attracted only to those of conventional, out of 10 conventional and five unconventional blocks being offered.

Arcandra Tahar, deputy energy minister, optimistic that this year operators would take the opportunity to develop the areas. The ministry promised to easily provide the data needed by oil and gas companies interested in the auction. It also lured companies with more incentives—not yet detailed but will be revealed after the bidding document evaluated.

In general, the government continues to offer more incentives in a bid to lure investment in the upstream sector and stimulate exploration for the discovery of new fuel reserves. With the Government Regulation No. 27 of 2017 on refundable operating cost and income tax in oil and gas businesses, Jakarta has cut down potential costs for oil and gas operators. It also changed its approach in amending the gross split scheme launched in January 2017, by consulting the matter with industry association and petroleum economists.

However, those don’t seem enough. Andrew Harwood, director of Asia Pacific upstream oil and gas research at WoodMackenzie, as quoted by Reuters said that the investment returns in Indonesia are difficult. It takes too long to get a return and the risk of political involvement is quite high. Even the current gross split scheme still unattractive compared to other opportunities offers in Gulf of Mexico, Africa, Europe and Australia.

Other inputs from the market said that Indonesia still has issues with poor local governance, lack of incentives for investors, and insufficient infrastructure to support the development these unconventional reserves. The government need to carefully listen and considered these inputs to revive the industry.

Written by Pudji Lestari, email: pudji.lestari@gmail.com 

 

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