The Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) will ask oil and gas contractors to cut costs amid ongoing oil-price declines, by renegotiating costs with their service providers.
SKKMigas chief Amien Sunaryadi said his office was preparing a letter to give contractors a legal basis to renegotiate service costs with providers. “Low oil prices have an impact on vendors’ contracts and there is equipment that has been idle. We expect contractors to negotiate the price [with service providers] and then costs can be reduced without there being an effect on production,” Amien said during a hearing with House of Representatives Commission VII overseeing the energy sector.
Oil and gas companies have been facing pressure on the back of plunging oil prices, which have decreased by around 50 percent compared to last year on the rise of shale oil production in the US, while other oil producers in the Organization of the Petroleum Exporting Countries (OPEC) declined to cut output.
The benchmark West Texas Intermediate for March delivery stood at US$52.78 per barrel on Friday, according to figures from Bloomberg. Meanwhile, another benchmark, Brent crude oil, was at $57.05 per barrel. The Indonesian Crude Price (ICP) stood at $45.3 per barrel last January, raising concerns about the impact of the low price on state revenue, as the revised 2015 state budget assumed the ICP at $60 per barrel this year.
With a targeted national oil output of 825,000 barrel of oil per day (bpd), SKKMigas projected the oil and gas sector would contribute $14.9 billion to state revenue. The amount is also based on the assumption that oil and gas contractors will be able to cut costs so the government will also pay lower cost recovery to them.
Indonesia, a former member of OPEC, implements a production-sharing contract (PSC) system to manage the oil and gas sector, in which the government reimburses oil and gas firms’ spending if their projects contribute output to the country.
The House of Representatives’ budget commission had once asked SKKMigas to push down the amount of cost recovery to be paid by the government to boost state revenue. As fields have been depleted due to exploitation, the country has reported failures in achieving oil production targets in past years. Declining production has also forced the country to import a significant amount of oil and its products to meet growing demand.
Despite asking contractors to renegotiate their contract values with service providers, SKKMigas would ensure that contractors did not reduce activities, particularly well drilling and exploration, SKKMigas secretary Gde Pradnyana said. “Although no official announcement has been made, some companies have said they would review their activities on plunging oil prices. What we want is a reduction in the value of activities, not the number of activities,” he said.
Amid weakening oil prices, the appetite to invest in the sector has decreased, as indicated by the Indonesian Petroleum Association’s (IPA) estimate that oil and gas firms operating in Indonesia might need to cut capital expenditure (capex) by around 20 percent. Oil and gas contractors’ work plan and budget this year also turned to be 13 percent lower this year to $22.2 billion, SKKMigas data shows.
Source: The Jakarta Post, 16 February 2015.