OIL AND GAS INDUSTRY MULTIPLIER EFFECT

(1)

OIL AND GAS INDUSTRY

MULTIPLIER EFFECT

Upstream oil and gas sector has a multiplier effect on the growth of the

national economy, ranging from the use of local products to transactions

through national banking. This sector is one of the major contributors to the

national economic growth reaching US$ 23.7 billion in 2016.

SOURCE: SKK MIGAS, BANK INDONESIA

Local Procurement (US$ billion)

Transactions through the National Banking System (US$ billion)

9.3 8.2 12.4 3 9.7

2014

2012 2013 2015 2016

n Goods Services

The ratio of local content to the expenditure

CONTRIBUTION OF UPSTREAM OIL AND GAS SECTOR TO GDP

US$

1

MILLION

Every investment of

Creating added value of

US$ 1.6 MILLION

Additional GDP of

US$ 0.7 MILLION

Creation of job opportunity of

± 100 PEOPLE

US$

23.7 BILLION

Upstream oil and gas GDP in 2016

contributing

3.3

% to GDP

2014

2012 2013 2015 2016

5.1

11.5

4.6

9.3

5.5

11.8

2.6

5.3

2.5

3.1

(2)

OIL AND GAS INVESTMENT DECREASES

REGIONAL ECONOMIES SLOW DOWN

SOURCE: BPS, MINISTRY OF FINANCE

2014: 4.1%

2014: 5.8

2014: -1.5

2014: 4.4

2014: 4.7

2014: -1.0

2014: -3.9

2014: 3.4

2014: 3.5

2014: 3.1

2015:

1.0 %

2015:

1.9 2015:

-7.6

2015:

0.2 2015:

2.3 2015:

-0.2

2015:

-2.7

2015:

1.1 2015:

3.3 2015:

2.3

Economic growth

Rokan Hilir, Riau Bengkalis, Riau

Siak, Riau

Kampar, Riau

Kutai Kartanegara,

East Kalimantan

Penajam Paser Utara,

East Kalimantan

Sorong, West Papua

Natuna, Riau Island Musi Banyuasin,

South Sumatra

Tanjung Jabung Timur, Jambi

(3)

OIL AND GAS EXPLORATION

SHIFTS TO DEEPWATER AREAS

Upstream oil and gas activities in Indonesia have begun to shift from old onshore fields to offshore and deepwater areas. Most oil and gas reserves potential is still largely unexplored, although over the last three years, offshore oil and gas working areas (WK) have always dominated the Government auction.

SOURCE: MEMR, WOOD MACKENZIE, REUTERS, KATADATA

INDONESIA’S HYDROCARBON POTENTIAL

Basins already in production (16 areas)

Basins with hydrocarbons found, not yet in production (7)

Drilled basins, hydrocarbon not yet found (15)

Basins not yet explored (22)

Conventional Work Areas Offered

of oil and gas

reserves are

located in offshore

areas

70 %

Expensive investment cost Drilling of one well costs US$ 80-100 million

Low investment rate of return (IRR) IRR projects in Indonesia are 55% lower than the average IRR of 30 global deepwater gas projects Long exploration period 10 years

Deep Sea Exploration Challenges

3 4 5

9 4 7

1 0 2

2014 2015 2016

(4)

Licensing is one of the major barriers to investment in the upstream oil and gas sector. In addition to the large number of licences required, the procedures to obtain them take a long time. Data from The Coordinating Ministry for The Economy, as of February

2017, indicates 373 types of licences needed from 19 central and regional institutions.

SOURCE: THE COORDINATING MINISTRY FOR THE ECONOMY, SKK MIGAS

LICENSING ISSUES HAMPER

OIL AND GAS INVESTMENT

LICENCE COMPLEXITY

Survey and Exploration

117

Post-Operation Activities

10

Production

109

Developments and Constructions

137

FROM MINISTRIES/AGENCIES

MEMR

74

(52)

16

(14)

Finance Min.

76

(58) Transportation

Min.

Labour Min. Defense Min.

4

(3)

Public Works Min.

2

(-)

MMAF

• Increased

3

Nuclear

Agency

2

Private Land

Owner Information Min.

11

19

Police

3

Industry Min.

3

Land Min.

Navy

Law Min.

4

• Stayed the Same

11

(12)

Trade Min.

36

(40)

Environment Min.

29

(35)

Province • Reduced

53

(66)

Regency/City

373 LICENCE TYPES

Increasing from 341 (2015)

Prolonged production activities

Increase of Cost recovery

Impacts of Complex Licensing

(5)

INVESTMENT DECREASES,

OIL AND GAS RESERVES SHRINK

The fall in crude oil prices occurring since mid-2014 caused oil

and gas contractors to improve efficiency, including by reducing

investment spending. As a result, the national oil and gas reserves

decreased due to the lack of exploration activities.

SOURCE: SKK MIGAS. MEMR

Exploration Investment Decreases

(US$ Billion)

2012 2013 2014 2015 2016*

1,3 1,4 1,1 0,5 0,1

*) Data as of November 2016

Constraints in extension of the working areas and legal certainty

Low ratio between reserve replacement and successful exploration.

Oil price decline

Period of discovery to production takes 15 years

Land acquisition constraints and

lengthy licensing bureaucracy

Low in return Causes of Investment Decline

EXPLORATION AREA AND RESERVES DECREASE

Oil Reserves

(million barrels)

Gas reserves

(TSCF)

Exploration

Areas

2012

3.741,3

103,3

2013

3.692,5

101,5

2014

3.624,5

100,3

2015

3.602,5

98,0

2016

3.306,9

101,2

110

Active Work Areas of oil and gas

Unconventional Work Areas of oil and gas

52

Work Areas

in termination process

37

(6)

The 2016 Policy Perception Index Survey released by the Fraser Institute shows the oil and gas investment climate in the country is less competitive compared to neighbouring countries. The declining attractiveness of the investment climate can be seen from the reducing number of parties

interested in the auction of oil and gas working areas (WK) in the last two years.

SOURCE: MEMR, WOOD MACKENZIE, FRASER INSTITUTE, SKK MIGAS, MEDIA COVERAGE

Factors that are being evaluated among others include high taxes; the burden of regulatory obligations;

uncertainty of environmental regulations and upstream oil and gas industry regulations; and also concerns

about political and security stability.

Philippines

Brunei Darussalam Cambodia

Myanmar

Rank*

WK Auction Lacks Enthusiasts*

*) of 96 jurisdictions

**) Reserves Replacement Ratio: The amount of proved reserves added to the reserves base compared to the amount of production

n Total number of areas offered

n Total number of winners

*) Conventional and unconventional

INDONESIAN OIL AND GAS INVESTMENT CLIMATE

RANKS THE LOWEST IN ASEAN

2012

2013 2014 2015 2016

(7)

LARGE FUNDS NEEDED

TO MAINTAIN PRODUCTION

SOURCE: MEMR, WOOD MACKENZIE, KATADATA 5. South East Sumatra

CNOOC SES Ltd

September 5th_{, 2018}

US$229,5 million

30,9thousand bpd

70,9 mmscfd

1. Attaka

March 31st_{, 2017}

US$4,9 million

6,6thousand bpd

n/a

INPEX Corporation

3. Tuban

February 28th_{, 2018}

US$1,7 million

3,4thousand bpd

2,3 mmscfd JOB

Pertamina-Petrochina East Java Ltd

4. Sanga-Sanga

August 7th_{, 2018}

200,2 mmscfd

Virginia Indonesia Company (VICO) 7. North Sumatra Offshore

PHE NSO

October 15th_{, 2018}

0,1 thousand bpd

20,2mmscfd

bpd : barrel per day

mmscfd : million standard cubic feet per day

Operator

End of Contract Gas

Oil Estimated operating

expenses in a year

Note: October 4th, 2018

n/a

Total E&P Indonesie 6. Tengah

JOB Pertamina -

Talisman Ogan Komering

February 28th_{, 2018}

US$1,1 million

2,1thousand bpd

6,3 mmscfd 2. Ogan Komering

October 25th_{, 2018}

US$56,4 million

68,1 mmscfd

Chevron Indonesia Company

8. East Kalimantan

The Ministry of Energy and Mineral Resources has handed over to Pertamina the management of eight oil and gas Blocks of which contract period expires in 2017-2018 and these eight Blocks require a lot of funds. Up until 2021, there are

17 other Blocks that will be terminated.

Funds Needed (US$ MILLION)

(8)

SOURCE: MEMR, SKK MIGAS

OIL AND GAS LIFTING

THREATENED BY FURTHER DECLINE

In the next 5 years, as many as 25 oil and gas blocks will end their contract period. If the transfer process for the Blocks is not prepared now, this situation

has the potential to decrease the national oil and gas daily lifting rates.

• Offshore North West Java • Mahakam

• Lematang • Attaka

4 oil and gas blocks

• Tuban

• Ogan Komering • Sanga-Sanga

• South East Sumatra

• B Block • Tengah

• NSO/NSO Ext • East Kalimantan

• Makassar Strait –

Offshore Area A

• South Jambi Block B • Brantas

• Salawati

• Kepala Burung • Malacca Strait • Jambi-Merang

• Pendopo & Raja • Bula

• Seram-Non Bula

• Bentu Segat • Rokan

• Selat Panjang

Oil

(thousand barrels per day)

Gas

(million cubic feet per day)

Note:

POTENTIAL DECLINE IN OIL & GAS LIFTING

1756

LIFTING PORTION OF 25 TERMINATED OIL AND GAS BLOCKS

(9)

OIL AND GAS JOB

OPPORTUNITIES ARE SCARCE

SOURCE: MINISTRY OF TECHNOLOGY RESEARCH AND HIGHER EDUCATION, SKK MIGAS, BAKER HUGHES

The declining interest in oil and gas investment in Indonesia has resulted in a decrease in the recruitment of new workers in the sector. As a result, graduates with technical

qualifications in the field of oil and gas have slim chance to work and fulfill their potential. The same situation has also occurred overseas as many global oil and gas

companies have been carrying out efficiency measures.

INDONESIA’S MINING STUDENTS 2016

GLOBAL DRILLING

ACTIVITIES DROP

30,357

5,469

3,657

rig

2,644

8,074

14,170

Students

students

in

9

universities

(October 2014)

1,620

rig

(October 2016) students

in

16

universities

students in

31

universities

students in

37

universities Petroleum

Engineering Geophysical Engineering EngineeringGeological EngineeringMining

Efficiency Low oil prices

Less attractive investment

climate

Selective investing Causes of Investment Reduction

Reduced Investment, Limited Employment

2014 2015 2016

32.292 31.745 ?

20,4 15,6 10,4

(10)

INDONESIA’S FISCAL INCENTIVES

LESS COMPETITIVE

SOURCE: WOOD MACKENZIE

Oil and gas exploration targets in Indonesia have been shifting from onshore to deepwater offshore locations which are much more expensive. Oil and gas producing countries must offer

fiscal incentives to attract investment in a low oil price environment. From a global investors perspective, Indonesian deepwater prospects are less attractive compared to other countries.

INDONESIA LESS ATTRACTIVE

Investor Investment Rate of Return (IRR)

post FID (Final Investment Decision)

Government share pre-NPV

Government Share pre-NPV (%)

40.1

Indonesia PSC

78.7

22.3

Indonesia gross split PSC

58.7 32.8

Mauritania

Top 10 Deepwater Destinations*

Canada 27,778

Country

Deepwater acreage awarded (000 km2₎

Papua New Guinea 14,750

Cyprus 11,665

Cote d’ Ivoire 9,300

Ireland 8,963

Australia 8,248

Norway 7,218

Mozambique 5,288 Mauritania 4,300 UK

... ...

3,527

Indonesia

0

* Since 2016, only BP, Chevron, Eni, ExxonMobil, Shell, Statoil, Total

40