By Darshini Shah | Tue, 04/06/2013 - 17:02Recent changes to the...

By Darshini Shah | Tue, 04/06/2013 - 17:02

Recent changes to the oil and gas procurement regulations in Indonesia have placed foreign investors on the back foot, potentially affecting the likes of Premier Oil (PMO) and Salamander Energy (SMDR).

Under the new rules, if a domestic company participates solely or as a leader of a consortium in a tender for an oil and gas project, its bid will be entitled to a pricing preference of 5%. This means if its bid is within 5% of the lowest bid, it will automatically be awarded the tender.

A company is considered "domestic" if it is 51% owned, either directly or indirectly, by Indonesian shareholders. The minimum 51% Indonesian shareholding must consist of voting shares with dividend rights and two-thirds of its board of directors must be Indonesian nationals, one of whom must be the president director and one of whom must be the finance and business development director.

These rules will apply immediately to all tenders unless the tender offer documents have already been submitted under the one or two-envelope procurement method; or a price offer has been submitted under the two-phase system. This latter exception means if a bidder has already submitted the technical data for phase one, it must nonetheless conform to the new requirements if it has not yet filed its financial bid.

In addition, minimum local content requirements for oil and gas services have, in many cases, jumped significantly from 35%, rising to 70% for drilling on land and 90% for surveys and studies on land by foreign investors. Local content refers to the level of use of local (i.e. Indonesian) expertise, goods and services, people, businesses and financing in oil and gas activities.

"Clearly these new regulations are not conducive to foreign investment, and reinforce a view that Indonesia's regulatory framework is increasingly nationalistic and poses too many risks from a foreign investment perspective," warns Marius Toime, partner at international law firm Berwin Leighton Paisner. He points out concerns that the domestic services industry has "insufficient depth of expertise and capacity to realistically allow compliance with these requirements".

Surprising regulations

The regulations have certainly raised some eyebrows given that Indonesia is struggling to reverse declining oil and gas output to meet expanding energy needs amid uncertainty over regulatory and other issues that have deterred investors in the sector.

The state's oil production, for example, has fallen to around 830,000 barrels a day, nearly half the level seen in the 1990s. Its gas output dropped to about 8.2 billion cubic feet a day in 2012, down 12% from 2010.

The move comes ahead of a rights tender for 21 oil and gas exploration blocks, two of which are for unconventional gas concessions on the islands of Borneo and Sumatra. Besides two shale gas blocks, the tender includes 17 offshore blocks that are mostly in the eastern half of the archipelago, according to a release from the Energy and Mineral Resources Ministry.

The areas being offered are estimated to contain up to 3.1 billion barrels of oil and 57.6 trillion cubic feet of gas, according to Edy Hermantoro, the ministry's director general of oil and gas.

Requirements criticised

The requirements have recently been criticised by Brazilian energy giant Petrobras, which says the requirements could be met by the national supply chain, and has requested their relaxation by regulators.

"It has been argued that these high local content requirements are stifling supply and create inefficiencies," Toime adds. "However, regulators typically permit a relaxation of these local content requirements where companies holding the concession rights can successfully argue that it is not possible to find competitive national offers."

Domino effect?

Indonesia is not the first country to implement these regulations.

There have been similar moves in Brazil, where activities in a project's exploration phase must use between 37% and 85% local goods and services and those in the development phase must use between 55% and 80%.

And Toime notes there could be a domino effect, with other resource-rich countries possibly trying to impose similar rules.

"Undoubtedly regulators in different emerging countries where natural resources plays a pivotal role in economic growth are talking to each other and are aware of the regulatory developments in the other countries," he states. "For example, Indonesia regularly sends delegations to Mongolia and it is interesting to see the regulatory similarities between the two countries.

"Also, given that the aim of the new regulations is to keep revenue and cash flow created by the exploitation of oil and gas reserves within the country, other resource-rich nations may be tempted to introduce similar regulations."

However, he comments: "We hope that at least some of these countries have a clearer position on the importance on the encouragement of foreign investors, and view the Indonesian government's appetite [for] these regulations as a nationalistic manoeuvre in advance of the country's 2014 elections."

Impact on UK-listed firms

Premier Oil acquired its first operated acreage in Indonesia - Natuna Sea Block A - which included the Anoa oil field in 1996. The explorer and producer also holds interests in Kakap, a producing offshore asset; Block A Aceh, a future onshore gas development project which also contains around 20 exploration prospects; and two exploration licences, Tuna and Buton.

Salamander's position in Greater Kerendan, Indonesia, is centred round the Kerendan gas field development, with the company targeting over one trillion cubic feet (tcf) of gas. And North Kutei, which Salamander calls "one of the most prolific basins in Indonesia", is estimated to hold original reserves of 40 tcf of gas and three billion barrels of oil.

Both Premier Oil and Salamander Energy declined to comment.

http://www.iii.co.uk/articles/96410/indonesian-storm-brewing-uk-listed-oilers