OREANDA-NEWS. November 12, 2015. Indonesia’s continuing attempts to sort out fuel subsidies and how to best reform various parts of the energy industry is now having an effect on upstream business, Mriganka Jaipuriyar explains in this week’s Oilgram News column, Fuel for Thought.

Indonesia’s president Joko Widodo came with a lot of promise and Indonesia’s embattled oil industry was filled with hope. But one year on, progress has been erratic to say the least.

The retail fuel price reform has slipped off course, policies to kickstart exploration and production have been sporadic, and the country is yet to get an oil and gas law.

Jokowi, as the president is commonly known, earlier this year took an unprecedented decision when he announced the removal of subsidies on gasoline and a fixed subsidy for gasoil. The move was worthy of the applause it got given that the country had spent close to \\$16 billion on fuel subsidies in the previous year — three-and-a-half times more than what it had spent on healthcare.

It also showcased Jokowi’s resolve to bite the bullet and tackle the tough issues. But politics eventually played a heavier hand.

The president in mid-2015 succumbed to pressure and agreed that fuel prices be adjusted every three to six months and not on a monthly basis as had been originally decided.

Despite volatility in the global oil markets, Indonesia has adjusted pump prices only twice so far this year.

According to a senior minister in the energy ministry, the government realizes that prices have not been adjusted often enough but Jakarta “does not want to hike the price to maintain economic stability.”

This backtracking on policy has left state-owned company Pertamina saddled with losses on fuel sales. Pertamina is getting squeezed as it is not allowed to adjust pump prices in line with market movements, but is also not eligible for subsidy payouts since subsidies have officially been removed.

A senior Pertamina official told Platts in September that the company has suffered losses to the tune of Rupiah 15 trillion (\\$1.1 billion) on fuel sales over January-August this year — money that could have otherwise gone towards boosting oil and gas production. Pertamina also posted a 50% drop in net profit to \\$570 million in the first half of 2015 due to losses suffered on fuel sales.

Jokowi also came with the promise of massive reforms to spur exploration and production work. Some measures have been taken, but the overall pace of reforms has been slow and with no sign of a new oil and gas law getting passed soon, the country is unlikely to see an uptick in investment anytime soon.

Upstream activity hindered by permit paralysis

This is underscored by the level of upstream activity, or lack thereof, in the first half of 2015.

According to data from upstream regulator SKK Migas, only 26 wells were drilled in the first half of 2015, representing 17% of the original target of 157. There were only 12 new seismic surveys carried out, down from a plan of 46.

This could partly be due to low oil prices, but SKK Migas communications chief Elan Biantoro attributes it to permits and land acquisition problems — issues that have long plagued the upstream industry.

“The government’s efforts to simplify the permit process has not been effective yet. Oil companies are still finding it difficult to carry out exploration work,” he said in July.

The Jokowi government in mid-2015 announced that it had cut the number of permits needed from the Ministry of Energy and Mines from 52 to 42. But that still leaves 289 more permits that need to be taken from other ministries such as transport, forestry, environment and from regional governments where the asset is located. Progress on streamlining these has been close to nil.

Biantoro warned that if the situation does not improve, Indonesia will soon run out of oil.

The failure of the government to speed up passing the oil and gas law — the last one was annulled in November 2012 — has been another drag on upstream investment in the country.

Other initiatives to spur E&P have been taken such as bringing oil and gas investments under the purview of the investment coordinating board to remove unnecessary delays and setting up a national exploration team with the sole purpose of identifying the problems plaguing the upstream industry and tackling them.

But according to Lukman Mahfoedz, the chairman of Indonesia’s largest private upstream firm Medco Energi Internasional, these initiatives are not enough.

“The main problem is how to make the energy and mines ministry the focal point of the industry,” he said. “We [would like] the energy and mines ministry to be the focal point. Currently energy and mines sectors are every ministries’ business including finance, forestry, transportation and trade … It’s complicated.” — Mriganka Jaipuriyar