Oil and gas exports form one of the key pillars of the Indonesian economy, although the outlook for the sector is becoming increasingly uncertain given dwindling oil reserves in the country's maturing fields. We forecast a long-term decline in total liquids production and a stagnation of gas production. This is mainly a result of the slow pace of exploration and development, which could be exacerbated by an increasingly uncertain regulatory environment as resource nationalism creeps into the government's policy towards the sector. Opportunities for exports will be further compromised by the domestic market's increasing energy demand. Hence, falling oil and gas exports is another key trend we identify for Indonesian oil and gas.

The main trends and developments we highlight for Indonesia's oil and gas sector are:

• We forecast that oil and gas reserves will most likely be on a downward trend in the coming decade: oil reserves are expected to decrease from an estimate of 4.1bn barrels (bbl) of oil at the beginning of 2013 to 3.8bn bbl in 2017, falling further still to 3.6bn bbl by 2022. For gas, we expect reserves levels to be stagnant as additions from exploration successes in East Kalimantan cancel out natural depletion from existing fields. Reserves are forecast to stay flat at about 3.0-3.1trn cubic metres (tcm) through to 2017, following which it will decline slightly to 2.9tcm unless the pace of drilling activity picks up.
• Despite this outlook, we highlight that Indonesia is a country where much potential continues to exist. If the country relaxes its nationalist stance on resources, there is considerable upside potential for both oil and gas reserves - greater drilling of its unexplored deepwater areas and its unconventional resources - coal-bed methane and shale gas.
• We expect total liquids production to rise to 914,970b/d in 2014 and 921,690b/d in 2015, owing to major fields finally coming online or ramping up to their full production capacity. Thereafter, in the longer term we see oil output trending downwards to 870,540b/d in 2017 and hitting a low of 788,100b/d by 2022.
• Supported by strong economic growth and artificially propped by fuel subsidies in the short-term, demand is set to increase from an estimate of 1.41mn b/d in 2012 to 1.60mn b/d in 2017, rising further still to 1.81mn b/d by 2021. With demand outstripping supply, the country's import requirement will continue to rise, from 455,200b/din 2012 to 731,610b/d to 2017 and could further soar to 1.02mn b/d in 2021.
• Owing to production problems, we expect total gas production to have fallen to 71.3bn cubic metres (bcm) in 2012. However, with major gas projects expected onstream in the next five years, we project a rise in production to 77.0bcm in 2017. Declining production rates will be cancelled out by new gas developments, namely Total's South Mahakam project, Chevron's Gendalo-Gehem development, Royal Dutch Shell's Abadi field and Eni's Jangkrik projects. Thus we expect production levels to stay relative stagnant at 76.7bcm by 2022.
• The country's gas consumption is estimated at 39.1bcm in 2012. With an increasing amount of new gas from projects reserved for the domestic market, this allows room for domestic gas demand to grow to about 48.0bcm in 2017 and hit 55.7bcm by 2022.
• The faster rate of growth in consumption to production means that gas exports could initially increase from an estimate of 32.2bcm in 2012 to 33.3bcm in 2014, but we expect an increasing application of the 40% domestic gas reservation rule to eventually apply to both existing and future gas projects which will limit export growth. Hence, from 2015, despite an expected increase in LNG production capacity, net exports are likely to fall to 29.0bcm by 2017 and 21.0bcm by 2022.
• Steps are being contemplated to cope with rapidly rising demand for fuel and electricity. Crushed by a growing fiscal burden from fuel subsidies, the government has been toying with the idea of introducing targeted subsidies so as to contain a further ballooning of the country's fuel import bill. The high administrative costs of targeted subsidies and difficulty in enforcement will limit the effectiveness of them if introduced, and we do not expect to see a significant impact of these on oil consumption. Reducing tariffs across the board could have a bigger dent on consumption, though the political unpopularity of such a move makes it doubtful that the government will go through with this before the 2014 presidential elections.
• The government and House of Representatives have agreed that new contracts could limit gas exports to 50% or less of total production. The Energy and Mineral Resource Ministry also implied that contract renegotiations could be in place if they are deemed not to be 'beneficial' for the country. This could challenge industry interest in new gas blocks, and could adversely affect the rate of development of its unconventional resources.
• If interim upstream regulator SKKMigas is turned into a state-owned company with direct interests in upstream projects, as the body proposes, this could further threaten its upstream country rewards as it would confirm the growing strength of resource nationalism in the country. Excessive public involvement, particularly if preferential treatment is accorded to state-owned firms by a no-longer independent regulator, risks squeezing out private investment from profitable projects in particular.

At the time of writing we assumed an OPEC basket oil price for 2013 of US$108 per barrel (bbl), falling to US$104/bbl in 2014. Global GDP in 2013 is forecast at 2.9%, up from an assumed 2.5% in 2012, reflecting some recovery in the US, though uncertainty with regard to the eurozone debt situation will continue to hamper growth. For 2014, growth is estimated at 3.4%.

Click here to open the POPUP