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Indonesia Oil & Gas Key View
- 17 Nov 2021
- Oil & Gas
Key View: In spite of ambitious state-set targets for oil and gas production over the coming decade, the outlook for output growth in the Indonesian upstream continues to be bearish amid natural declines, slowing FDI inflows and elevated above-ground risks. The forecast decline in gas production in particular is set to see Indonesia's current surplus in gas flip into a net deficit in 2030, as LNG imports are expected to be raised to compensate for lower output and rising demand. The demand for both oil and gas is forecast to see a larger rebound in 2022, after recoveries were derailed in 2021 amidst elevated new infections, strict Covid-19 curbs and slow progress in vaccinations. In the long term, the domestic energy mix is expected to make a stronger transition towards cleaner, lower-carbon energy sources in line with Indonesia’s pledge to be carbon neutral by or before 2060.
Headline Forecasts (Indonesia 2019-2025)
|Indicator ||2019 ||2020 ||2021f ||2022f ||2023f ||2024f ||2025f |
|Crude, NGPL & other liquids prod, 000b/d ||902.0 ||871.0 ||804.2 ||788.8 ||765.3 ||746.9 ||730.8 |
|Refined products production, 000b/d ||1,088.0 ||1,103.0 ||904.5 ||1,008.5 ||1,038.7 ||1,028.3 ||1,069.5 |
|Refined products consumption & ethanol, 000b/d ||1,862.4 ||1,636.2 ||1,589.3 ||1,711.6 ||1,794.2 ||1,855.1 ||1,902.1 |
|Dry natural gas production, bcm ||65.8 ||58.7 ||55.2 ||54.4 ||52.7 ||51.1 ||49.6 |
|Dry natural gas consumption, bcm ||35.5 ||32.8 ||33.5 ||34.6 ||35.7 ||36.9 ||38.3 |
|Brent, USD/bbl ||64.16 ||43.21 ||71.50 ||72.00 ||73.00 ||75.00 ||78.00 |
|f = Fitch Solutions forecast. Source: EIA, SKK Migas, JODI, Fitch Solutions |
Latest Updates And Key Forecasts
- The outlook for hydrocarbon reserves growth in Indonesia continues to be downbeat as new exploration slows and upstream assets mature.
- In the face of a general decline in FDI inflows the onus will fall on state-owned Pertamina and its subsidiaries to maintain investments into the sector, further stretching finances against multitude of spending commitments across the value chain.
- The state-set upstream investment target for 2021 is set to miss the annual target for the sixth consecutive year. SKK Migas confirmed that total upstream investment through September 2021 totaled USD7.9bn, equivalent to 64% of 2021’s target of USD12.4bn.
- The regulator has offered an optimistic forecast for end-year investment to reach USD11.2bn, although barring a significant rebound in capital inflows in Q421, the target could be missed by a wider margin than anticipated.
- The outcome from the ‘Indonesia Petroleum Bid Round 2021’ launched in June 2021 and offered six exploration blocks to investors under stronger, more flexible licensing terms, has yet to be revealed, providing modest upside risk to reserves growth down the line.
- There are offshore uncertainties forming as China expands its assertiveness in the South China Sea. Indonesia has had to increase naval and air petrol in the North Natuna sea, after a Chinese vessel entered its exclusive economic zone for undisclosed reasons.
- Upstream regulator SKK Migas in response has lowered the crude oil output target to 665,000b/d from the previous target of 705,000b/d, representing a reduction of more than 8%, to account for the sector’s underwhelming performance.
- The same target for natural gas has also been revised down by about 2% to 5,529mmscfd (57.2bcm) from 5,638mmscfd (58.3bcm), although actual production is set to come in lower due to disruptions across feed gas fields to major liquefaction projects.
- An ongoing trend of Pertamina and its subsidiaries taking on more responsibilities in the sector, particularly in taking over mature assets from foreign operators, remains a concern, as spending requirements continue to pile up on the SOE.
- For instance, Pertamina has taken over the Rokan oil block from Chevron in August 2021, and revealed plans to drill more than 600 new wells in the mature block over the remainder of 2021 and 2022.
- The SOE has also revised up its planned investment into the block to USD3bn (from USD2bn) through to 2025, equivalent to about USD750mn per annum, although whether this will be realised in full remains to be seen, given that the amount represents some 28% of its 2021 capex, which itself was more than double its typical annual capex spend averaged during the past five years.
- Indonesia’s upstream projects pipeline as per state regulator SKK Migas includes four ‘national strategic’ projects that could add 65,000b/d of liquids and more than 36bcm of gas production at peak rates, although project risks remain elevated with all four having seen deadlines adjusted further back due to Covid-19-related disruptions.
- The low base set for Indonesia’s refining output in 2021 should see refining output stage a solid recovery in 2022 as normal runs are restored, although this is contingent on concurrent easing of restrictions and upturn in domestic, external demand.
- The number of new Covid-19 cases in Indonesia remains on a rapid decline since suffering major relapses in July and August 2021, and this provides some optimism heading into 2022, but risks remain as vaccination rate remains rather low at 30% and the year-end holiday season approaches.
- The long-term plan for the sector continues to be ambitious with multiple expansions and construction of newbuilds planned down the line.
- The state-led expansion for the sector remains ambitious with more than 1mn b/d of new projects lined to be brought online in the next seven years (2021-2027).
- The full iteration of the plan would go some way to addressing the large and expanding fuel deficit and import bill, which has been among President Joko Widodo’s top priorities every year since assuming office in 2014.
- Both Pertamina and the Indonesian government appear aligned in the want for more refining capacity, although face persistent risks from funding constraints, complex regulations and chequered history of working with foreign partners.
- By Pertamina’s own estimation, its refineries pipeline, which comprises two newbuilds and five expansions, is expected to cost north of USD60bn, or average annual spend of about USD8.5bn stretched out over a seven-year period, far higher than the USD3.9bn that is expected to be allocated for downstream activities in 2021.
- Of the seven, only three projects – the planned expansions across Balikpapan, Balongan and Cilacap refineries, are factored in our forecasts based on progress of contract awards and available funding, although there are heightened risks of delays and cancellations for the overall pipeline.
- 2022 is also likely to feature a strong rebound in Indonesia’s fuel demand from the low bases set in pandemic-hit 2020 and 2021, as improving vaccine rate allows for rules easing.
- However, short-term risks cannot be ruled out including rising inflation fears, owing to tax hikes and high global energy input prices, and potential for another relapse in outbreaks.
- The long-term outlook has become more uncertain for fuel demand, as Indonesia works towards reaching carbon neutrality by 2060.
- As part of the plan to eliminate emissions from key pollutive sectors, Indonesia is expected to pursue a dramatic transformation of its transport fuels mix in favor of biofuels and electric vehicles, at the expense of oil-based fuels and natural gas
- Indonesia has committed to stringent climate targets at COP21 including the pledge to reach carbon neutrality by 2060 albeit the bulk of set targets are conditional on there being sufficient foreign funding available.
- At the centerpiece of the long-term plan is to transition away from coal-fired generation, into renewables, which as per the government’s decarbonisation scenario estimated to require some USD48bn to retire coal plants, and another USD23bn, to help subsidise oncoming new renewables capacities.
- There is still room for natural gas-based power projects to thrive at least in the initial stages in the place of other renewables such as phasing out coal proves challenging, due to cost concerns and solar and wind as investors await clearer and more favorable policies.
- In addition, the government is carving out a place for gas to continue to play a role in moving away from coal, by introducing incentives to convert old coal and diesel plants to run on gas, and encourage coal gasification.
- The resumption of normal production activities at offshore feed gas fields could see a near-term boost in disrupted pipeline flows to Singapore, although outlook for the longer term is bearish as existing contracts are due to roll off from 2023 and Singapore makes the transition to using LNG.
- Indonesia’s LNG export volumes are also due to come in lower in 2021 and remain under pressure heading into 2022 due to multitude of disruptions across feed gas fields. The Merakes field has been shut in from October 2021 due to sanding issues affecting outflows from Bontang LNG.
- Tangguh LNG is also producing below optimal rate after a boiler leak in May 2021, and has seen the start-up of its new third production train delayed to Q222 from the initial deadline of 2021. Donggi Senoro LNG also only returned to normal production in October 2021, after undergoing a major maintenance programme from September.
- An expanding biofuels mandates poses a risk to future diesel imports. Indonesia is mulling the implementation of a higher B40 mandate, which would require more palm-oil based fuel to be blended into diesel consumed at home, but plan to rollout the plan in 2021 or 2022 appears to have been put on hold in response to soaring palm oil prices.
- The current deficit in refined fuels is forecast to increase steadily over the next decade as refining output proves insufficient to meet rising demand.
- This will provide added impetus for the government and Pertamina to deliver on the ambitious refining capacity expansion plans, more so due to the lofty aim to stop importing fuels by 2030, although with domestic crude oil production in a perpetual struggle this risk exacerbating the deficit in crude oil.
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