By George Barber
This is an article that I wrote recently that was published in the Jakarta Post on 31 July 2017.
There can be no doubt about the potential of Indonesia’s Energy Potential, although potential is exactly what it is. There can also be no doubt that there is a lot happening outside of the main energy sectors that are well known, i.e., oil, gas, geothermal, hydropower, some companies are going quietly about their business and trying to develop extremely complicated fields, not so much in the resource aspects, but in the geological and environmental aspects as well as the community and battling away at the regulations.
All resource developments have their own unique challenges, especially resources that are located offshore or in onshore remote parts of this divest archipelago, most people in the resource industry accepts these challenges, these challenges can and must be met head on as part of the stages to reach the end goal, which is delivery of a resource to the end user which is commercially viable as well as ensuring that the local community’s and the county benefits.
There have been three articles published in the Jakarta Post recently that have caught my eye as follows: “Rising fuel imports stifle Pertamina”, “RI lags behind peers in renewable energy”, “ExxonMobil exit warning of waning oil, gas industry”. Surely these three headlines alone say something? Another headline stated, “Geothermal power requires incentives”. There was a publication from the Indonesian Petroleum Association (IPA) for the 41st IPA that indicated that the number of licenses required for oil and gas development had increased from 341 in 2015 to 373 in 2017 with the main increases coming from MEMR 74 (52), Transportation Ministry 76 (58), Navy 9 (2), only 4 ministries/agencies from 19 had decreased their requirements, some remained the same.
We have seen recently several companies’ that have decided enough is enough, company’s such as Marathon, Andarko, Hess and now ExxonMobile, all of these companies and more have worked in what is considered far more difficult countries to develop a business, such as Nigeria which appears to be coming more attractive than Indonesia. Every country has its ups and downs, although in Indonesia we have been seeing a steady decline of the oil & gas industry in Indonesia for many years, we can also argue the same for the mineral resource sector, the geothermal sector is struggling to gain momentum. Why is this when a country has such potential, not just with its abundance of natural resources, but also human resources?
I was making a presentation the other week to an Indonesian oil company where I was asked what is delaying you getting projects in Indonesia, my answer was, “Do you really want to know”, he said yes, I mentioned several points which included acceptance of new technology, regulations, afraid to make decisions, other comments I cannot mention in the media, they returned my reply with agreement and also added a few other comments which were not complimentary to the regulators. It appears that Indonesian companies also have difficulties working in their own country.
Therefore, the question that has to be asked is: does Indonesia want to develop its own resources? We can see in some areas they do, such as wind and tidal power, solar power not so much, in other areas such as oil & gas it appears that the easy way is to import, which appeared to be the scenario given at the opening ceremony of the 41st IPA conference in May, hence the headline “Rising fuel imports stifle Pertamina”.
A recent study by The Habibie – Center said that the region lacks experience and expertise in capital-intensive renewable energy projects; maybe this is true, although you only gain experience by doing. Believe it or not, there are a lot of companies and people that want to help Indonesia, (not all for financial gain only), with the intent of doing business professionally and fairly, which also involves helping to solve the problem of expertise. All projects have to have local content, training must be given and allowed for in the cost of a project, not driving the price down so much that this area is reduced where the first thing that is cut when something goes wrong is training. Indonesia is extremely blessed with human resources, which in my experience, they are very efficient and in many cases can stand side-by-side with s other countries who claim to be experts at everything. So what is the problem, is it regulations?, partly yes, if we look at the intended Production Sharing Contract (PSC), it appears that very few investors and people in the industry are jumping over the moon about this, we all know that industries do not like change, but what is known, if the change is outstanding, the vast majority of industry leaders would accept this as a good idea, which makes one wonder if the PSC is a good idea in its current form, does it need more work on this to make it attractive?
The following statements were made by Pak Arie Rahmadi (BPPT), “Inconsistent regulations combined with long payback periods”; and “we change regulations on renewable energy quite often”. Why are regulations inconsistent and changed quite often? If they are good regulations, they only need fine tuning, not re-writing. Regulations should move with the times, we should not be making regulations for change sake, although this appears to be a worldwide problem with people in power at this time. If it is not broken, why fix it, preventive maintenance is needed only.
A headline in the Jakarta Post 25 July, “The President tells ministers to support business”, this article was prepared before this date. What the President stated is what is being stated in this article He also stated that the gross-spilt scheme lacks incentives, companies have said it does not have clear tax calculations.
Decision makers need to make decisions that are beneficial for the country and the investors, not be afraid to make decisions that may make them unpopular, after all, life is not a beauty contest.
*This article was first published by George Barber and is reprinted here with full permission from the writer.
**About the Writer:
George, Director at PT Indonesia, has lived and worked in South East - Indonesia for the past 24 years, and is presently involved with innovative exploration for natural resources throughout South East Asia.
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On Saturday, September 14, 2019, an attack damaged the Saudi Aramco Abqaiq oil processing facility and the Khurais oil field in eastern Saudi Arabia. The Abqaiq oil processing facility is the world’s largest crude oil processing and stabilization plant with a capacity of 7 million barrels per day (b/d), equivalent to about 7% of global crude oil production capacity. On Monday, September 16, 2019, the first full day of trading after the attack, Brent and West Texas Intermediate (WTI) crude oil prices experienced the largest single-day price increase since August 21, 2008 and June 29, 2012, respectively.
On Tuesday, September 17, Saudi Aramco reported that Abqaiq was producing 2 million b/d and that its entire output capacity was expected to be fully restored by the end of September. Additionally, Saudi Aramco stated that crude oil exports to customers will continue by drawing on existing inventories and offering additional crude oil production from other fields. Tanker loading estimates from third-party data sources indicate that loadings at two Saudi Arabian export facilities were restored to the pre-attack levels. Likely driven by news of the expected return of the lost production capacity both Brent and WTI crude oil prices fell on Tuesday, September 17.
Crude oil markets will certainly continue to react to new information as it becomes available in the days and weeks ahead, but this disruption and the resulting changes in global crude oil prices will influence U.S. retail gasoline prices.
The U.S. Energy Information Administration (EIA) estimates that Saudi Arabia was producing 9.9 million b/d of crude oil in August, and estimates from the Joint Organizations Data Initiative (JODI) indicate the country exported 6.9 million b/d during July, the latest month for which data are available (Figure 1). Estimates from a third-party tanker tracking data service, ClipperData, indicate Saudi Arabian crude oil exports in August remained at 6.7 million b/d. These crude oil production and export levels are each 0.5 million b/d lower than their respective 2018 annual averages. JODI data indicate that Saudi Arabia held nearly 180 million barrels of crude oil in inventory at the end of July 2019. Saudi Arabia can use these inventories to maintain a similar level of crude oil exports as before the strike, assuming the production outage is short in duration, as indicated by Saudi Aramco’s update on September 17.
Saudi Arabia is rare among oil producing countries, in that it regularly maintains spare crude oil production capacity as a matter of its oil production policy. EIA defines spare capacity as the volume of production that can be brought online within 30 days and sustained for at least 90 days using sound business practices. In the September Short-Term Energy Outlook (STEO) EIA estimated that the Organization of the Petroleum Exporting Countries (OPEC) spare capacity was 2.2 million b/d in August 2019, nearly all of which was in Saudi Arabia. Outside of OPEC, EIA does not include any unused capacity in its spare capacity total, even when countries periodically hold such capacity (as is the case with Russia). During previous periods of significant oil supply disruptions, Saudi Arabia generally increased production to offset the loss of supplies and stabilize markets (Figure 2).
Following the September 14 attack and an ensuing outage at the Abqaiq facility, the amount of available spare capacity that can be brought online within 30 days in Saudi Arabia is unknown. In addition, because Saudi Arabia holds most of OPEC’s spare capacity, there is likely little spare production capacity elsewhere to offset the loss. Russia may be able to increase production in response to disruption and higher prices, but the amount of time needed for these volumes to become available is uncertain. The United States would also likely be able to increase production, but it would take longer than 30 days. Therefore, without Saudi Arabian spare capacity, the global crude oil market is vulnerable to production outages, as events would be more disruptive than normal.
The most readily available alternative source of supply during a supply outage is stocks of crude oil. As of September 1, commercial inventories of crude oil and other liquids for Organization for Economic Cooperation and Development (OECD) members were estimated at 2.9 billion barrels, enough to cover 61 days of its members’ liquid fuels consumption. On a days-of-supply basis, OECD commercial inventories are 2% lower than the five-year (2014-18) average (Figure 3).
The United States has two types of crude oil inventories: those that private firms hold for commercial purposes, and those the federal government holds in the Strategic Petroleum Reserve (SPR) for use during periods of major supply interruption. Weekly data for September 13 indicate total U.S. commercial inventories were equivalent to 24 days of current U.S. refinery crude oil inputs, with the SPR holding additional volumes equal to slightly more than 37 additional days of current refinery inputs, for a total of 62 days. The supply coverage provided by oil inventories can also be measured by days of net crude oil imports (imports minus exports). By this metric, as of June 2019 the United States could meet its net import needs by drawing down the SPR for 162 days. The Energy Policy and Conservation Act states the President may make the decision to withdraw crude oil from the SPR should they find that there is a severe petroleum supply disruption. The SPR has been used in this capacity three times since its creation: first, in 1991 at the beginning of Operation Desert Storm; second, in the wake of Hurricane Katrina in September 2005; and third, in June 2011 to help offset crude oil supply disruptions in Libya.
Although U.S. imports of crude oil from Saudi Arabia have declined during the past three years—and recently hit a four-week average record low of 380,000 b/d in the week ending September 6—the United States still imports about 7 million b/d of crude oil (Figure 4). As a result, a tighter global crude oil market and increased global crude oil prices will ultimately increase the price of crude oil and transportation fuels in the United States.
Crude oil prices are the largest determinant of the retail price for gasoline, the most widely consumed transportation fuel in the United States. In general, because gasoline taxes and retail distribution costs are generally stable, movements in U.S. gasoline prices are primarily the result of changes in crude oil prices and wholesale margins. Each dollar per barrel of sustained price change in crude oil translates to an average change of about 2.4 cents/gal in petroleum product prices. About 50% of a crude oil price change passes through to retail gasoline prices within two weeks and 80% within four weeks. However, this price pass-through tends to be more rapid when crude oil prices increase than when they decrease. Brent crude oil prices are more relevant than WTI prices in determining U.S. retail gasoline prices.
EIA is closely monitoring the developments related to the oil supply disruption in Saudi Arabia and the effects that they have on oil markets. EIA’s findings will be reflected in the October STEO, which is scheduled for release on October 8.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose less than 1 cent from the previous week to remain at $2.55 per gallon on September 16, 29 cents lower than the same time last year. The Rocky Mountain and Midwest prices each rose 2 cents to $2.65 per gallon and $2.46 per gallon, respectively. The East Coast price fell nearly 1 cent to $2.45 per gallon, and the Gulf Coast price fell less than 1 cent to $2.23 per gallon. The West Coast price remained unchanged at $3.25 per gallon.
The U.S. average diesel fuel price rose nearly 2 cents to $2.99 per gallon on September 16, 28 cents lower than a year ago. The West Coast and Rocky Mountain prices each rose nearly 3 cents to $3.57 per gallon and $2.96 per gallon respectively, the Midwest and Gulf Coast prices each rose nearly 2 cents to $2.88 per gallon and $2.76 per gallon, respectively, and the East Coast price rose nearly 1 cent to $3.00 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 2.9 million barrels last week to 100.7 million barrels as of September 13, 2019, 14.3 million barrels (16.6%) greater than the five-year (2014-18) average inventory levels for this time of year. Gulf Coast inventories increased by 1.2 million barrels, and East Coast and Midwest inventories each increased by 0.9 million barrels. Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 4.1% of total propane/propylene inventories.
Crude oil prices have been on a rollercoaster ride as tensions heat up in the Middle East. Drone strikes on the heart of the Saudi Arabian production complex – the Abqaiq processing plant (called the most important crude site in the world) and the 1.5 mmb/d Khurais oil field – took out 5.7 mmb/d of crude output. That’s the single largest outage of crude output ever – more than 1973 Middle East oil embargo, more than the Iraqi invasion of Kuwait, more than the 1978 Iranian Revolution. The fires it caused affected more than half of Saudi Arabia’s current crude production output and essentially wipes a large part of the country’s spare capacity. Fortunately, I have not read of any casualty reports from this massive incident.
Yemeni Houthi rebels have claimed responsibility for the attacks. There is some logic to this, given that the Houthi rebel have waged an extended campaign on Saudi oil facilities over the past few years, including a recent attack on the East-West Pipeline – part of a proxy war between Saudi Arabia and Iran backing different factions in Yemen’s civil war. But this incident is different. The Abqaiq crude facilities are near Bahrain, over 700km from closest Yemeni border, and over 400km further than the farthest attack into Saudi territory by the Houthis. For the Houthis to suddenly gain a tremendous amount of range in their attacks – especially given that the suspected drones involved in the attack only have a range of up to about 200km – seems implausible. Which is why the US has publicly blamed Iran for the attacks, releasing data and photos that claim the attacks came from a north-westerly direction. Iran, predictably, has claimed that it is not responsible. Other countries, including Saudi Arabia and the UK, have struck a more cautious approach, promising ‘investigations’.
Because the attacks occurred over the weekend, there was no immediate effect on traded prices. But when markets opened in Asia on Monday, crude oil prices soared by up to 20% at the highest point – with Brent jumping past the US$70/b mark – before settling back to a daily gain of 15%. Because the attacks were on such an important processing plant, market players worried about global supply disruptions that could last for months. President Donald Trump’s move to release US strategic petroleum reserves calmed the market slightly, while subsequent reports from Saudi Aramco that up to 70% of the affected 5.7 mmb/d capacity at Abqaiq had been brought back online provided even more reassurance. Initial fears that the attack would take months to fully restore Saudi Arabian output were downgraded to weeks; still a severe shock, but nowhere near the catastrophe that was suspected.
What is chilling, though, is where this will lead us next. This is the single largest attack in the simmering tensions of the Persian Gulf. With the US so eager to blame Iran, claiming that it was ‘locked and loaded’ for any possible conflict, the risk of military conflict in the region has risen to new heights. Iran has replied that it is also ‘always been ready for a full-fledged war’. We live in chilling times because of this. The supply disruption caused by the drone attack may have already be mitigated by quick action by Saudi Aramco, but the long-term implications are dangerous. War is always triggered by a series of escalating actions, and fears are that the attack on Abqaiq might be the straw that broke the camel’s back. And if that happens, the supply disruptions that will be spinning out of this war will be considerably more severe.
Recent attacks on Saudi Arabian oil infrastructure:
Fossil fuels continue to account for the largest share of energy consumption in the United States. In 2018, about 79% of domestic energy production was from fossil fuels, and 80% of domestic energy consumption originated from fossil fuels.
The U.S. Energy Information Administration (EIA) publishes the U.S. total energy flow diagram to visualize U.S. energy from primary energy supply (production, imports, and stock withdrawals) to disposition (consumption and exports). In this diagram, losses that take place when energy is converted to the secondary forms that are delivered to customers—primarily electricity and gasoline—are allocated to those customers. The result is a visualization that associates the primary energy with customers, even though the amount of energy they purchase is much less.
Source: U.S. Energy Information Administration, Monthly Energy Review
Note: Natural gas plant liquids (NGPL) denoted at top of left panel in brown.
The share of U.S. total energy production from fossil fuels peaked in 1966 at 93%. Total fossil fuel production has continued to rise, but so have non-fossil fuel sources, mainly renewables like wind and solar energy. As a result, fossil fuels have accounted for close to 80% of U.S. energy production over the past decade. Since 2008, production of crude oil, dry natural gas, and natural gas plant liquids (NGPL) has increased by 12 quadrillion British thermal units (quads), 11 quads, and 3 quads, respectively. These increases have more than offset decreasing coal production, which has fallen 9 quads since its peak in 2008.
Source: U.S. Energy Information Administration, Monthly Energy Review
Petroleum has the largest share of U.S. energy trade, accounting for 67% of energy exports and 86% of energy imports in 2018. Much of the imported crude oil goes to U.S. refineries and is then exported as petroleum products. Petroleum products accounted for 71% of total U.S. energy exports in 2018.
In 2018, net energy imports reached the lowest level since 1963. U.S. net energy imports as a share of consumption peaked in 2005 when it reached 30%; in 2018, energy net imports fell to only 4% of consumption.
Source: U.S. Energy Information Administration, Monthly Energy Review
The share of U.S. total energy consumption that originated from fossil fuels has fallen from its peak of 94% in 1966 to 80% in 2018. The total amount of fossil fuels consumed in the United States has also fallen from its peak of 86 quads in 2007. Since then, coal consumption decreased by 10 quads and petroleum by 2 quads, more than offsetting a 7 quad increase in natural gas consumption.
EIA previously published articles detailing the energy flows of petroleum, natural gas, coal, and electricity. More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.