indonesian oil and gas survey 2012

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Staring Down the Barrel An investor survey of the Indonesian oil and gasindustry

May 2012

www.pwc.com/id



DISCLAIMER: This publication has been prepare for general guidance on matters of interest only, and does not condtitute professional

advice. You should not act upon the information contained in this publication without obtaining specic pr ofesional advice. No

representation or warranty (e xpressed or implied) is given as to the accuracy or completeness of the information contained in t his

publication, and, to the extent permitted by law, KAP Tanudiredja, Wibisana & Rekan, PT Prima Wahana Caraka or PT PwC FAS, as

appropriate (PwC), its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or

anyone else acting, or fefraining to act, in reliance on the information contained in this publication or for any decision based on it.

Cover photo courtesy of: ExxonMobil Oil Indonesia Inc.



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ContentsIntroduction

Executive Summary

An overview of the oil and gas industry in Indonesia

Survey approach

Supply and demand for oil and gas

Employment

Capital expenditure

Challenges facing the industry

Competitiveness

Other challenges

Conclusion

About PwC

Acknowledgements

Glossary



Staring Down the Barrel.

Indonesia has a long history in the oil and gas industry with a diversity of geological basins which continue to offer sizeable oil and gas potential.However, Indonesia’s crude oil production has declined over the lastdecade due to the natural maturing of producing oil elds, a slower reservereplacement rate and decreased exploration/investment. The Governmentof Indonesia (“GoI”) continues to put some effort into increasingIndonesia’s oil production and attracting investment from new and existingplayers, but in practice this has proven to be challenging.

This is the fth edition of our survey of the Indonesian oil and gas industry,and where applicable we have analyzed trends in survey participants’responses from prior reports. The survey responses come from 32 differentcompanies currently operating in the Indonesia oil and gas sector andtherefore can be used to draw credible conclusions about the issuespreventing the industry from reaching its full potential. The survey showsthat there have been improvements in some areas, but also indicates thatcontract sanctity, uncertainty over cost recovery and interference fromother government agencies continue to stie investment.

We trust that this report will prove informative and would like to thank all the individuals who took the time and efforts to participate in thisimportant undertaking.

Introduction



Executive Summary

Supply and demand for oil and

gas

Not surprisingly, survey participantsbelieve that the demand for oil andgas will continue to grow, bothglobally and in Indonesia. Similar toour 2008 and 2010 survey results,the demand for gas is expected toincrease at a greater rate than thedemand for oil. Most respondents(64% for oil and 91 % for gas) seemto be of the opinion that there are

still signicant oil and gas reserves tobe discovered in Indonesia, especially in Eastern Indonesia (Papua, Maluku,etc). The majority of the survey respondents indicated that the priceof crude oil would remain in theUS$101 - 120 per barrel range for2012 but either increase to US$ 120-135, or decrease to US$ 81 – US$ 100per barrel in 2013.

Employment

In line with the continued increasein global demand for oil, the demandfor employees working in the oil andgas industry in Indonesia is likely to increase over the coming years,although compared to previoussurvey results, there has been ashift towards “remaining the same”,especially for the expatriates. A largepercentage of survey participantsindicated that they expect to increase

their hiring of local staff, together with a decrease in expatriateemployees. Similar to the 2010 survey results, a large portion of the survey participants expect difculties inattracting sufcient (skilled) humanresources.

One of the reasons behind this isthe fact that a signicant proportionof skilled local employees seek employment abroad (mostly in the

Middle East) in search of highercompensation.



5

PwC Indonesia

Staring Down the BarrelExecutive Summary

PwC Indonesia

5

Capital Expenditure

The participants’ general view seems to be that capitalspending will decline or atbest stay the same over thecoming 5 years. This is asignicant change in sentimentcompared to the 2008 survey results where over 90% of thesurvey participants thoughtcapital expenditures wouldincrease or even signicantly increase. This pessimistic view

is a worrying development,as the GoI is keen to see anincrease in investment inthe Indonesian oil and gasindustry. For the rst time,some survey participantsindicated that they will notspend money in Indonesiagoing forward as no budget hasbeen allocated to Indonesia,but they will spend their fundselsewhere.

Challenges facing theindustry There are a number of scal,legal and bureaucraticchallenges which havehindered the achievement of Indonesia’s full investmentpotential in the upstreamoil and gas industry. Withgeological resources havingbeen extensively exploitedfor more than four decadesit is understandable that thecurrent prospects are not ascompelling as they were in thepast (due to declining nd sizesor the need to move into moredifcult environments such asoffshore deepwater or moreremote areas). It is thereforeof the utmost importance forthe GoI to seriously address

these challenges (which arenot geological in nature) toattract higher investment in theupstream oil and gas industry.

From this survey, the ve most criticalchallenges facing the industry are asfollows:

1. Interference from othergovernment agencies, such asthe tax authorities

2. Uncertainty over cost recovery and BP Migas / BPKP auditndings

3. Contract sanctity 4. Corruption, Collusion and

Nepotism (“KKN”)

5. Confusion over Law No. 22/implementing regulations

The challenges highlighted in boldabove were also included in the topve challenges in our 2008 and 2010surveys.

We noted that survey participants were slightly optimistic on theanticipated developments on anumber of challenges over the

longer term as they expect someimprovements within the comingve years. However, despite this, thesurvey participants also indicatedthat they don’t expect any signicantimprovement for the remainingchallenges (such as interference fromother government agencies, suchas the tax authorities, uncertainty over cost recovery and BP Migas /BPKP audit ndings and contractsanctity). The main reason behind

this somewhat pessimistic viewmay be that many of the challengesconfronting Indonesia, such as KKNand judicial reform, require structuralchanges and it will take a long time toimplement such changes.

Competitiveness

From this survey, the ve mostcompetitive features of theIndonesian oil and gas industry are as follows:

1. Geological opportunities(including access to acreage)2. Political stability 3. Trained workforce4. Ease of foreign ownership5. Risk premium

As in the 2010 survey, industry participants indicated thatgeological prospectivity remainsIndonesia’s most attractivefeature, followed by politicalstability. This is a positive sign andshould enhance levels of foreigninvestment, however, this needsto be tempered with the survey participants’ negative views onGoI coordination. Access to atrained workforce has re-surfaced

in the top ve most competitivefeatures. The oil and gas industry has a long history in Indonesia

which has resulted in a large, welleducated workforce, especially forthe technical professions such asengineers and geologists.

Other challengesIndonesia usually ranks high incorruption listings. The majority (60%) of the survey participantsindicated that recent high prolearrests in relation to corruptionare having a positive impact onthe perception of Indonesia’scommitment to ghtingcorruption. Survey participantsindicated that Indonesia is on theright path, but that it will takeconsiderable efforts from the GoIto maintain this.



An overview of the oil

and gas industry in Indonesia

Introduction

The oil and gas industry, bothin Indonesia and globally, hasexperienced dramatic swings inrecent years. The industry had beenexperiencing a signicant resurgencein investment coinciding with the runup in crude oil prices which peaked atapproximately US$145 per barrel inmid 2008.

This was then tempered with theonset of the global nancial crisis

and ensuing global recession whichgained momentum in the latterhalf of 2008. From its peak in mid-2008, the oil price collapsed by more than 70% and ended 2008 atapproximately US$40 per barrel.

With market condence returningcrude prices recovered somewhat in2009 at approximately US$75 perbarrel, steadily increased in 2010 atapproximately US$90 per barrel and

approximately USD$100 per barrel atthe end of 2011.

Despite the recent industry volatility,investment in the oil and gas industry

and oil and gas revenue has gradually being rising. For instance, investmentin the oil and gas industry in Indonesiareached US$ 12.8 billion in 2011 andcontributed US$ 34.4 billion to StateRevenue. Further, in 2011 more than 30new oil and gas contracts were enteredinto.

Global Context

Indonesia has been active in the oil and

gas sector for more than 125 years afterits rst oil discovery in North Sumatra in1885, and continues to be a signicantplayer in the international oil and gasindustry.

[

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PwC Indonesia

Staring Down the Barrel An overview of the oil and gas industry in Indonesia

1885First oildiscovery in North Sumatera

1921The biggestdiscovery beforeWW II (Talang Akareld)

1961Governmentsignedrst PSC in Aceh

1976PSC 45%Tax Rate

1984PSC 35%Tax Rate

1994PSC 30%Tax Rate

2002Formation of BP Migas andBPH Migas

2008OPECMembershipsuspended

1944Caltex Minas -largest oil eldin Southeast Asia

was discovered

1962Indonesia joinedOPEC

1978First LNG plantentered production& PSC share changesfrom nett to grossproduction

2001New Oil and Gas LawNo. 22 promulgated(revoking Law No. 44and Law No. 8)

2003Pertamina becomes PTPertamina (Persero)

with prot makingintent

1912Standard Oilexploration inSouth Sumatera

Signicant events in the history of Indonesia’s Oil and Gas Sector

Indonesia holds proven oil reserves of 4.0 billion barrels and ranks twentieth

among world oil producers accountingfor approximately 1.2% of world oilproduction. Declining oil productionand increased consumption resulted inIndonesia becoming a net oil importerin late 2004. This factor, along withhigh oil prices in 2004-2008, led theGovernment to substantially scale back the domestic fuel subsidy in 2008 andto decide to temporarily withdraw from

the Organisation of PetroleumExporting Countries (“OPEC”)

– an organization representingapproximately 45% of world oilproduction. As the only Asianmember of OPEC since 1962, theGovernment has indicated it willconsider rejoining OPEC if thecountry’s oil production can beincreased and it can become a netexporter again.

Indonesia Oil Production and Consumption

Source: BP Statistical Review of World Energy June 2011 for data 2000 - 2010BP Migas for 2011 productionBusiness Monitor International Forecast for 2011 consumption

1800

1500

1200

900

600

300

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production Consumption

T h o u s a n d b

a r r e l s d a i l y



PwC Indonesia


Indonesia is ranked eighth in world gas production, withproven reserves of 108 trillioncubic feet in year 2010. Thisprovides Indonesia with theeleventh largest reserves in the

world and the largest in the Asia Pacic region. Gas reservesare equivalent to three timesIndonesia’s oil reserves and cansupply the country for 50 yearsat current production rates.Indonesia’s gas industry is alsobeing transformed by morecompetitive liqueed natural gas(“LNG”) markets, new pipeline

Key Indicators - Indonesia's oil and gas industry

Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Reserves

Oil (Million Barrels) 9,754 9,747 9,094 8,613 8,100 8,680 8,400 8,220 7,993 7,764 7,730

Proven 5,095 4,722 4,437 4,301 4,440 4,370 3,990 3,750 4,303 4,230 4,040

Potential 4,659 5,025 4,657 4,312 3,660 4,310 4,410 4,470 3,690 3,534 3,690

Gas (TCF) 168 176 168 189 180 170 165 170 159 157 No data

Proven 92 90 92 98 97 94 106 112 107 108 104

Potential 76 86 76 91 83 76 59 58 52 49 No data

Production

Crude oil (1000 barrels) 1,387 1,289 1,176 1,130 1,090 996 972 1,003 990 986 903**

Natural Gas (million standard cu m) 66,300 69,700 73,200 70,300 71,200 70,300 67,600 69,700 71,900 82,000 86,600*

LPG (1000 MT) 2,188 2,099 1,922 2,945 2,743 1,774 2,117 2,224 2,181 No data No data

LNG (100 MT) 23,883 26,215 27,392 25,238 23,677 22,400 20,851 19,034 19,933 24,184 No data

New Contract signed 10 1 15 17 23 5 28 34 34 21 31

Source:

- 2011 Gas Proven : BP Migas

- 2011 Oil Proven : ESDM

- 2001 - 2010 Oil and Gas Proven : BP Statistical Review of World Energy June 2011- 2001 - 2011 New Contract Signed : ESDM

* Natural gas : Business Monitor International Forecast

** Crude oil : BP Migas

Resources and Production

exports, and increasing domesticgas demand. Whilst Indonesia’snatural gas production has increasedin recent years (Indonesia supplied2.6% of the world’s marketedproduction of natural gas in 2010),

the country is facing a decliningglobal LNG market share toemerging LNG producers in Qatar,

Australia, Algeria and Malaysia. After announcing its 2006 policy to re-orient natural gas productionto serve domestic needs, Indonesiadropped from its status as world’slargest exporter of LNG in 2005 tothe world’s second largest exporter of

LNG in 2010. It currently exports LNGto Japan, South Korea and Taiwanrepresenting approximately 11% of the world’s LNG exports. Indonesia’sthree existing LNG facilities arebased in Arun in Aceh, Bontang in

East Kalimantan and Tangguh inPapua. The Tangguh Project, whichcommenced rst production mid2009, broadens Indonesia’s LNGcustomer base to China and the westcoast of the United States.



PwC Indonesia


9

Indonesia has a diversity of geologicalbasins which continue to offersizeable oil and gas potential. Of the estimated 128 oil basins, only 38 have been extensively explored.Most oil production and exploration

is currently carried out in the basinsof Western Indonesia (the bulk of Indonesia’s oil reserves being locatedonshore and offshore of centralSumatra and East Kalimantan).

Indonesia Oil and Condensate Production Forecast

New discoveries from exploration

New elds

Production optimisation

Do nothing

Source: Directorate General of Oil & Gas (MoEMR) 2008-2009 (actual) 2010-2014 (forecast)

0

200

400

600

800

1000

1200

1400

1600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

1 0 0 0

b a r r e l s

Year

Indonesia’s crude oil production hasdeclined over the last decade due tothe natural maturing of producing oilelds, a slower reserve replacementrate and decreased exploration/investment. During 2011, Indonesian

total crude oil production was 0.903million barrels per day, a drop of 34percent since 2001.



PwC Indonesia


0

Wells Completed

2003 2004 2005 2006 2007 2008 2009

Oil 558 807 605 566 570 574 568*

Gas 42 88 430 402 420 439 434*

Dry hole 25 80 52 49 55 62 40

Other 288 125 63 58 55 52not

available

Total 913 1,100 1,150 1,075 1,100 1,127 1,042

Average depth (ft) 3,079 3,330 3,350 3,120 3,350 3,597 notavailable

Source: OPEC 2008 Annual Statistical Bulletin for data 2003-2008

Directorate General for Oil & Gas (MoEMR) for 2009 data.

* Pro rata estimate

As Indonesia’s oil productionhas decreased the country hasattempted to shift towards naturalgas (and to a lesser extent,geothermal) especially for power

generation. This can be seen by therelative increase in the number of gas wells drilled for the years 2003 to2009 as displayed in the table below.



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11

Other related sectors

Indonesia’s total geothermal energy potential is equivalent to 29,177MW of electricity – the largestgeothermal energy capacity in the

world. Of these reserves total 12,756MW is conrmed as probable, 823MW as possible and 2,288 MW asproven. The remaining 13,296 MWis still speculative and hypotheticalresources. However, progress in thissector has been slow and presentinstalled capacity is only 4.2 percentof its potential or around 1,226 MW

which compares to a target of 9,500MW set for 2025. Geothermal energy is a special focus of Indonesia’s

US$400 million Clean Technology Fund co-nanced by the World Bank and Asian Development Bank for

which a signicant scale-up of large-scale geothermal power developmenthas been identied as a priority.

Indonesia’s coal bed methane(“CBM”) reserves are estimatedto be 453 Tcf which is largerthan Indonesia’s estimatedconventional natural gas resourceand ranks the sixth in the world.

But utilization is still low. Therst CBM contract was signed in2008 and by the end of April 2012there were fty CBM cooperationcontracts. Recently, CBM wasused to produce electricity,although this only accounted foronly a small amount of capacity.The government has set daily production targets of 500 mmcf by 2015 rising to 1,000 mmcf by the

year 2020 and 1,500 by the year

2025.

In addition, Indonesia is workingat developing unconventionalgas such as shale gas. Indonesianshale gas potential is estimatedaround 574 Tcf, bigger than CBM.In order to support the potentialof this energy the governmentplans to start completing theregulations concerning shale gasby 2012.



Survey approach

2

Survey background

This is the fth edition of theIndonesian oil and gas survey. Thepurpose of the survey is to helpinform the public and private sectorsin Indonesia and abroad aboutIndonesia’s upstream petroleumindustry and to highlight some of the challenges attracting optimalinvestment and achieving its fullpotential. Where possible, we havecompared current results with theresults from prior surveys to highlight

trends and to assess whetherconditions are deteriorating orimproving.

Survey coverage

The 2012 report is based onthe results of a condentialcomprehensive survey circulated by PwC Indonesia to senior management(Country Managers, CFO’s, COO’s,Finance Managers, etc) of a wide

range of companies operating inthe Indonesian oil and gas industry

(E&P, drilling, oil eld services andseismic analysis companies). Refer

to charts 4.1 and 4.2 for backgroundon the survey participants. Thesurvey questionnaire included bothquantiable and qualitative datasections. Because of the incompletenature of certain quantiable dataresponses we have been unable toutilise this data in its entirety in ourreport.

The survey questionnaire wassent to individuals working for 76

different companies active in theIndonesian oil and gas industry. Wereceived 39 responses (representing36 different companies currently active in the Indonesia oil and gassector); Responses from severalcompanies were aggregated andtherefore represent the combined

views of several executives.Completed surveys came fromcompanies representing almost 75%of Indonesia’s petroleum productionin 2011 and several recent entrants tothe Indonesia oil and gas sector that



13

PwC Indonesia

Staring Down the BarrelSurvey approach

are currently in the exploration stage. As such, the views expressed by thesurvey participants can be viewed asrepresentative conclusions on issuesthat may be preventing the industry

Chart 4.1

Survey Participants’ background

Seismic 3%

Other 8%

Drilling 5%

Oil eldservices

20%

E&P 64%

Chart 4.2

Survey participants’ functional role

Finance

49%

Headofce

11%

Operations5%

Senior/

ExececutiveMgt

35%

from reaching its full potential,and to make credible observationsabout investment and spendingtrends.



Supply and demand

for oil and gas

4

As expected, almost all survey respondents are of the opinion

that the demand for oil and gas will continue to (signicantly)increase in the next ve years (seecharts 5.1 and 5.2). Although oilprices have come down from thehistorical highs reached in 2008,the current commodity prices stillallow difcult-to-reach areas andreservoirs to be economically viable.

As was also the case in our 2010survey, none of the participantsexpect the global demand for oil or

gas to decrease. As can be seen onchart 5.2, the survey participants

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indicated that the demand for gas,both globally and in Indonesia, would

signicantly increase in the nextve years. This may be an indicationof a shift towards cleaner energy.It is interesting to note that survey participants expected the globaldemand for oil to increase more thanthe demand for oil in Indonesia. Thismay be due to the continuing increasein demand for oil in countries likeIndia and China.



15

PwC Indonesia

Staring Down the BarrelSupply and demand for oil and gas

Signicantly increase

Moderately increase

No Opinion

Remain stable


Moderately increase

No Opinion

Remain stable

A. Will Indonesian and world oil and gas demand rise or fallover the next ve years?

Chart 5.1Indonesian and world oil demand

56%

10%

25%

36%

0%

0%

8%

64%

Indonesia

World

World

38%

Indonesia

62%

0%

49%

51%

0%

0%

0%

Chart 5.2

Indonesian and world gas demand



PwC Indonesia


6

“Western Indonesia is still attractive for newresources, albeit much smaller eld sizes.

Eastern Indonesia is largely deepwater andexploration will fail unless GoI providesbetter incentives.” Survey participant comment

B. Are there signicant Indonesian oil reserves yet to bediscovered?

Chart 5.3

Signicant oil reserves will be discovered?

Very Unlikely

28%

Mostdenitely not

0%Most

denitely

13%

Very Likely 59%



PwC Indonesia


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C. Are there signicant Indonesian gas reserves yet to bediscovered?

Chart 5.4

Signicant gas reserves will be discovered?

Most respondents (72% for oil and97 % for gas) are of the opinionthat there are still signicant oiland gas reserves to be discoveredin Indonesia. Consistent with our2010 survey, respondents indicatedthat they believed there were

slightly more gas reserves to bediscovered than oil reserves. Almost28% thought it was very unlikely

that there are still signicantoil reserves to be discovered.Whereas, only 3% thought it

was very unlikely that thereare still signicant gas reservesto be discovered. In line withprevious surveys, overall survey

participants still believe thatgeological prospectivity is still oneof Indonesia’s most competitivefeatures.

“The entire country is rich in naturalresources.” Survey participant comment

Very Unlikely

3%

Mostdenitely

33%

Very Likely 64%

Most

denitely not0%



PwC Indonesia


8

D. Which of the following areas offer the greatest potentialfor new discoveries of crude oil and gas reserves?

Chart 5.5

Potential for new reserves

As can be seen in chart 5.5 above,

the majority of oil and gas reservesare believed to be in EasternIndonesia (Papua, East Timor,Maluku, etc), followed by NorthCentral Indonesia (Kalimantan,Sulawesi). Consistent withprior surveys, participants areless optimistic about ndingnew oil reserves in NorthWestern Indonesia (Sumatera),notwithstanding that this basinprovides a large percentageof the country’s current oilproduction. In our 2010 survey,60% of the survey participants

Eastern

Indonesia

(Papua,

East Timor,

Maluku, etc)

North Western

Indonesia

(Sumatera)

South

Western

Indonesia

(Java, Bali,

Lombok)

North Central

Indonesia

(Kalimantan and

Sulawesi)

0%

50%

40%

30%

20%

10%

60%

Oil

Gas13%

21%

5%13%

3%

24%

71%

50%

70%

indicated that new oil discoveries

would be in Eastern Indonesia, thispercentage has now decreased to28%, whereas in 2012 only 8% of survey participants believed new oildiscoveries are expected in NorthWestern Indonesia (2010: 10%).The expectations for South Westernand North Central Indonesia haveremained more or less the same withour 2010 survey results.

The high expectations for gas inEastern Indonesia are a promisingfeature of the industry feedback.

“Furtherexplorationactivities willdepend on theinvestment climatein the Oil & Gasindustry. If theGovernmentcontinues tointroduce newregulations/ decrees thatdiscourage newinvestment,

furtherexploration willlikely decline.” Survey participant comment



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19

E. What will be the focus of your company’s Indonesian

exploration activities for the next three years?

Given the expectations of survey participants that there are still signicantundiscovered oil and gas reserves in Indonesia, it is not surprising that themajority of the participants indicated that they will focus on a combinationof oil and gas exploration for the next three years. This is generally consistent with prior surveys. Participants also indicated that there willbe more focus on gas exploration in the coming years (26% in 2012 versus18% in 2010). This is a trend that started in 2010.

Chart 5.6

Focus of exploration activities

Sumatera

Jawa

Papua

Sulawesi

Kalimantan

Bali

Maluku

Oil Gas

Map of Indonesia

NORTHWESTERN

NORTHCENTRAL

EASTERN

SOUTHWESTERN

Combinationof oil and gas

58%

Oil16%

Gas26%

“Western

Indonesia is stillattractive for newresources, albeitmuch smaller

eld sizes. Eastern Indonesia islargely deepwaterand exploration

will fail unless GoI provides betterincentives.” Survey participant comment



Employment

0

A. Compared to 2010, will the level of employment in the oil andgas industry in Indonesia increase or decrease?

The belief that signicant undiscovered oil and gas reserves exist in Indonesia,undoubtedly gives rise to the high percentage of survey participants who think that employment in the Indonesian oil and gas industry will increase over thecoming years. More than 50% of the participants believe that the employment

will increase however, the percentage (2012: 55%) is roughly the same as the2010 survey (52 %). The remaining half of the participants indicated that they think employment will remain stable (40%) or decrease (5%).

Chart 6.1

Employment in oil and gas industry

“Finding well-trained,

experienced nationalscontinues to be a serious issue. The good ones have movedoverseas. The GOI must stand rm againstthe nationalists whowould continue theirdrive to remove expatsand provide jobs tounder-qualied, less-

experienced nationals.This will create furtherinefciencies andunsafe practices whichwill result in a majorincident. The age limitof 60 for expats isdraconian - these arethe very experienced people the country needs.”

Survey participant comment

Increase

52%


0%

Remain

the same40%

Decrease

5%

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y

]



21

PwC Indonesia

Staring Down the BarrelEmployment

B. Compared to 2010, will the number of employees in yourcompany increase or decrease?

Chart 6.2Employee numbers

Not surprisingly, survey participantssee the number of employees

working in the oil and gas industry in Indonesia increasing over thecoming years, although compared

to previous survey results, there hasbeen a shift towards “remaining thesame”, or even “decrease”, especially for the expatriates. A number of survey participants commented thatthe decrease in expatriate numbersis a worry as they have a wealthof experience. One of the reasonsfor this decrease could be the agelimit imposed by BPMigas. A largepercentage of survey participantsindicated that they expect to increase

their hiring of local staff. However,a recurring theme in the commentsmade by survey participants was that

they consider attracting qualiedand talented staff to be one of themost signicant challenges facingthe industry in Indonesia andacross the globe, both now and

in the future. Consistent with our2010 survey, several respondentscommented on the trend forskilled (national) employees toleave Indonesia to work in otherlocations (mostly the MiddleEast). One possible reason behindthis “brain drain” is the somewhatrestrictive salary guidelines fromthe regulator which result inskilled local employees seekingmore attractive employment

packages outside Indonesia.

Decrease Remain thesame

Increase Signicantly increase

0%

50%

40%

30%

20%

10%

60%

70%

80%

28%

13%19%

44%

69%

3%0% 3%0%

Local 2010 Expatriates 2010 Local 2012 Expatriates 2012

28%

8%

36%

31%

36%

59%

26%

“Pressures onexpatriate costsand difculty

to obtain work permits precludecompanies fromdoing work in

Indonesia.” Survey participant comment



PwC Indonesia


2

C. Do you expect the industry to encounter difculties inhiring and retaining employees in 2012?

Chart 6.3

Difculties in hiring and retaining employees

“Indonesians are now very active in seeking jobs overseas and moving from the service

industry to oil and gas companies. We feel wewill see pressure to attract and retain staff.” Survey participant comment

No21%

Don’t know10%

Yes

69%



PwC Indonesia


23

“Oil and gas should provide openopportunities,internal andoverseas training,and short termemployment for

fresh graduates.” Survey participant comment

D. Does the Indonesian oil and gas industry have a sufcient numberof skilled staff to perform these activities?

Given that a majority of survey participants indicated that they

expect to encounter difcultiesretaining employees in 2012, it is worrying that they also consistently indicated that the Indonesian oil andgas industry currently does not have asufcient number of skilled staff. Ona more positive note, the percentageof survey participants who believethat Indonesia does not have

sufcient skilled Indonesian staff has come down from 67% in 2010

to 59% in 2012 (see Chart 6.4)!However, the fact that two-thirdsof survey participants still believethat the Indonesian oil and gassector lacks a sufcient numberof skilled staff, combined withthe fact that over half also expectdifculties in hiring and retainingemployees is not a good sign forthe industry.

Chart 6.4

Sufcient skilled staff

No59%

Don’t know3%

Yes38%



Capital

expenditure

4

A. Compared to 2010, how will the capital spending for theIndonesian oil and gas industry change over the next ve years?

“We have no capitalbudget for Indonesia

for 2012 andbeyond. Corporate

funding is goingelsewhere.” Survey participant comment

gy

[

(

g

)

]

Decrease No change Increase Signicantly

increase

0%

25%

20%

15%

10%

5%

30%

35%

40%

18%

33%33%

13%

31%33%

3%

8%

15%

12%

2010 2012

Don’t know

As can be seen in the chart below,48% of the participants’ general

view still seems to be that the capitalspending will decline or stay thesame over the coming 5 years. Thisis a worrying trend especially since,in our 2008 survey, over 90% of survey participants thought capitalexpenditure would increase orsignicantly increase. Approximately 33% of survey participants indicatedthat they “don’t know” what capitalexpenditure will do over the next ve

years which we are interpreting as a

negative trend given the long-term

nature of the industry and needto plan far in advance beforeinvestments reap measurablereturns. This pessimistic view isa worrying development as theGoI is keen to see an increase ininvestment in the Indonesian oiland gas industry. For the rsttime, some survey participantsindicated that they will notspend any money in Indonesiagoing forward, as no budget hasbeen allocated to Indonesia andtheir companies had decided to

spend their investment fundselsewhere.Chart 7.1

Capital spending in Indonesia



25

PwC Indonesia

Staring Down the BarrelCapital expenditures

B. What will be the primary source of capital forthe Indonesian oil and gas industry over the nextve years?

As can be seen in Chart 7.2, the primary anticipatedsource of capital seems to be related party debt/

parent company funding, which is consistent with prior year surveys and not surprising as theindustry is dominated by a few large internationalplayers. The use of third party debt seems to haveremained the same as in our 2010 survey. Given thelow interest rates, we would have expected the useof third party debt to play a more substantial role.However, since the global nancial crisis, companiesmay be more careful in taking on additional debt. Itis interesting to see that the use of public equity hasdecreased from 15% in 2010 to only 5% in 2012.

Chart 7.2

Source of capital

Chart 7.3

Need for capital

C. Compared to 2010, how will the Indonesian oiland gas industry’s need for capital change overthe next ve years?

Not surprisingly a majority of the industry participants believe that the need for capital willcontinue to increase over the next ve years. Theanticipated increase in capital spending is likely to bea result of the increased focus on mature elds andmore remote (ie difcult) exploration/deepwateractivities which are more costly to run/operate. Thefact that industry participants expect the need for

capital to (signicantly) increase, but at the sametime expects less desire to allocate additional fundsmay be an early warning sign of problems goingforward.

“If GoI wants to boost the sourceof capital, should considerthe limited bank interest as

part of the cost recovery for

specic areas of development orexploration such as deep water.” Survey participant comment

Public Equity

5%

Related party debt/

Parent Company funding

86%

Third party debt

9%

Signicantly

increase28%

Remain the same0%

Increase72%

Decrease0%



PwC Indonesia


6

D. What do you anticipate to be the average US$ price in per barrel of crude oil in 2012, 2013 and 2014?

Chart 7.4

Average price in US$ per barrel of crude oil

2012 projection from2010 survey

2012 2013 20140%

50%

40%

30%

20%

10%

60%

70%

80%

$50 or less $51 - $65 $66 - $80 $81 - $100 $101 - $120 $121 - $135 $136 or more

20%

63%

17% 17%

71%

38% 38%32%

11%

24%29%

6%

0%0%0%0%

38%

0%0% 0%

Price per barrel

Year

E x p e c t a t i o n o f s u r v e y p a r t i c i p a n t s



PwC Indonesia


27

“Because of the PSC structure project

nancing can be difcult in the Indonesianenvironment.“ Survey participant comment

The majority of the survey respondents indicated that they expected price of crude oil wouldremain in the US$101 – 120 perbarrel range for 2012 but eitherincrease to US$ 120 – 135, or

decrease to US$ 81 – 100 perbarrel in 2013 (the survey wasundertaken in early 2012 whenoil prices ranged between US$101and US$120 per barrel). Notsurprisingly, the further into thefuture the projection is carried, the

wider the range of responses from

participants. Although it shouldbe noted however that none of the participants thought that theprice of oil would go below US$81 – 100 per barrel. 6% of theparticipants indicated that they

though the price of oil wouldexceed US$ 135 per barrel in2014.



Challenges facing

the industry

8

To gain an understanding of the most critical challenges facing theindustry we asked survey participants to rate 15 different challenges

confronting the Indonesian oil and gas industry, as well as indicatingany other challenges they deemed relevant. On a scale of 1 to 5 (1being “Signicantly Important”, 3 being “Moderately Important” and 5being “Not Important at All”) survey participants were asked to rate thefollowing:

Table 8.1

Critical Industry Challenges

Confusion as to the roles of the central,provincial and regional governments

Relations with local government

Interference from other governmentagencies, such as the tax authorities

Confusion as to the role of Pertamina/BP-Migas and the Ministry of Energy and MineralResources (“MEMR”)

Corruption, collusion and nepotism(“KKN”)

Contract sanctity

Relations with the local community Confusion over Law No. 22/ Implementingregulations

Security of assets, people andownership rights

Confusion over BP Migas regulations/”grandfathering” of prior Pertamina rulings

Labor regulations Confusion over energy policy and supportingblueprints (gas utilization etc.)

Political risks Uncertainty over cost recovery and BP Migas /BPKP audit ndings

Taxation

“Contract sanctity is a must forinvestment.” Survey participant comment



29

PwC Indonesia

Staring Down the BarrelChallenges facing the industry

“GR79 has substantially eroded benetsassociated with PSC agreements. Protection of long term investment has been compromised,as such long term investment in Indonesiamay see a reduction.” Survey participant comment

Top ve challenges facing the industry

Table 8.2

Challenge

2010 survey % of

responses rated issueas “1 - Signicantly Important”

2010 survey % of


2008 survey % of


Contract sanctity 54% 48% 32%

Taxation 53% 32% 24%

Interference fromother governmentagencies, such as thetax authorities

49% 55% 30%

Uncertainty over costrecovery and BP Migas

/ BPKP audit ndings

48% 48% 37%

Confusion as theroles of the central,provincial & regionalgovernment

42% 38% -

The challenges highlighted above in table 8.2 were also included in the topve challenges in our 2010 survey.

“The PSC system has become unworkable due

to the paranoia surrounding cost recovery.” Survey participant comment



PwC Indonesia


0

The 2012 survey results are probably not surprising given the recently issued regulations related to cost recovery and taxation. The 2012 survey participants are clearly more aligned in terms of the areas which aresignicantly important to the industry, namely 1). Contract sanctity, 2).Taxation, 3). Interference from other government agencies, such as the taxauthorities 4). Uncertainty over cost recovery and BP Migas / BPKP audit

ndings, and 5). Confusion as the roles of the central, provincial & regionalgovernment.

“The issuance of GR-79 has created moreuncertainties around contract sanctity especially in respect of taxation applicationand other scal terms. There will be more

government stakeholders to manage

including Directorate General of Taxes, theSupreme Auditors and local governments” Survey participant comment



PwC Indonesia


31

Survey participants’ view on the development of challenges over the next12 months:

Chart 8.1

Development of challenges (over the next 12 months)

2010

Gettingsignicantly

worse

Stayingabout the

same

Gettingsignicantly

better

1

3

5

3.00

3.48

3.343.30

2.70

3.43

2.10

3.04

3.40

3.11

Interferencefrom other

government

agencies,such as taxauthorities

Uncertainty over cost

recovery andBP Migas /

BPKP auditndings

Contract

sanctity Corruption,

collusion andnepotism

(KKN)

Confusion overLaw No.22/

Implementingregulation

: improving

: staying about the same

: deteriorating

2012

Change from2010 survey



PwC Indonesia


2

“The government needs to stop trying to“micromanage” the industry and let capitalismwork. There are too many examples of policiesand regulations being issued without adequateconsideration of the consequences to theindustry and its competitiveness.” Survey participant comment

Survey participants’ view on the likely status of challenges (over the next oneto ve years):

Chart 8.2

Likely status of challenges (over the next one to ve years)

1

3

5

2.93

2.802.70

3.11

2.50

2.872.70

2.89

Contractsanctity

Interferencefrom other

governmentagencies, such

as the tax

authorities

2.93

2.80

Gettingsignicantly

worse

Stayingabour the

same

Gettingsignicantly

better

2010: improving


: deteriorating

2012

Uncertainty over cost

recovery andBP Migas /BPKP audit

ndings

Corruption,

collusion andnepotism

(KKN)

Confusion overLaw No.22/

Implementingregulation

Change from

2010 survey



PwC Indonesia


33

“History will record that the past decade has seen a big increase in political interferencein the oil and gas industry and it is no

surprise that oil and gas production has beenadversely affected. Ours is an industry thatrequires long-term investment, longer thanthe government political cycles and only with contract sanctity and stability in theregulatory regime can that investment be

sustained. Our industry provides the bulk of the GDP for Indonesia yet has been hijackedby the Ministry of Finance as a result of

their incessant greed for a greater share of revenues. This has clearly stied investment,

particularly in the Exploration sector -comparative data shows that Indonesiacan no longer compete with its regionalneighbors.” Survey participant comment

As can be seen in chart 8.1, survey participants were generally neutral

or pessimistic on the development of these challenges over the next 12months. We noted that survey participants were slightly optimistic onthe anticipated developments on a number of challenges over the longerterm as they expect some improvements within the coming ve years.However, despite this, the survey participants also indicated that they don’t expect any signicant improvement for the remaining challengessuch as interference from other government agencies (including the taxauthorities), uncertainty over cost recovery and BP Migas / BPKP auditndings and contract sanctity. The main reason behind this somewhatpessimistic view may be that many of the challenges confronting Indonesia,such as KKN and judicial reform, require structural changes, which willtake time to implement.



Competitiveness

4

Indonesia’s petroleum industry has for decades been viewed by internationalpetroleum investors as an attractive destination for investment however in

recent years there has been some concern that the country’s competitiveness isslipping. To gauge the accuracy of this concern we asked the survey participantsto rate Indonesia’s competitiveness compared to other countries on thefollowing features (1: highly competitive, 3: neutral, 5: not competitive at all):

Table 9.1

Feature

Geological opportunities Infrastructure

Trained workforce Risk premiumPolitical stability Regulatory framework

Environmental regulations Contract and project approvalprocess

Ease of foreign ownership The existing scal framework



35

PwC Indonesia

Staring Down the BarrelCompetitiveness

What are the most attractive features of investing inIndonesia?

Table 9.2

Feature 2012 Score 2010 Score Change from2010 survey

Geological opportunities(including access to acreage)

1.9 1.8

Trained workforce 2.4 2.5

Political stability 2.8 2.4

Environmental regulation 2.8 3.0

Ease of foreign ownership 2.9 2.6

The features highlighted were in the top 5 competitive features in the 2010survey.

As can be seen in Table 9.2, survey participants indicated that Indonesia’smost competitive features have remained the same compared to the lastsurvey or have decreased slightly. Geological opportunities have alwaysbeen regarded as Indonesia’s most competitive feature. It is interesting tonote that environmental regulations and ease of foreign ownership areregarded as signicant competitive features, especially since environmentalregulations had been classied as one of Indonesia’s least competitivefeatures in our 2010 survey. The fact that the political stability hasremained a competitive feature may be the result of increased governmentfocus on stability throughout the archipelago.



PwC Indonesia


6

“Indonesia is facing general elections within 2 years from now. It’s difcult to expectmore business friendly policies to foreigninvestors as it might be counter productiveto the politician populist agenda aroundnationalization.” Survey participant comment

What are the least competitive features of investing inIndonesia?

Table 9.3

Feature 2012 Score 2010 Score Change from2010 survey

Contract and projectapproval process

3.5 3.3

Existing scal framework 3.5 3.2

Regulatory frame work 3.4 3.4

Infrastructure 3.2 3.1

Risk Premium 3.2 3.0

Ratings:

1: Highly attractive

3: Neutral

5: Highly unattractive

The features highlighted were in the top 5 least competitive features in the2010 survey.



PwC Indonesia


37

The fact that the views on theregulatory framework have remainedthe same is somewhat surprisingas there has been a lot of push back from the industry on the newly issued regulations on cost recovery

(e.g GR 79) and taxation.Thishighlights once more that survey participants value contract sanctity and do not appreciate any changesto existing contracts. This is probably also the reason why risk premiumscored lower compared to our 2010survey. It is interesting to note thatenvironmental regulations havenow become one of Indonesia’s mostcompetitive features, as they werelisted as one of Indonesia’s least

competitive features in 2010.

In addition, we asked survey participants their views on thedevelopments they expected in thecompetitiveness of these features. Asshown in charts 9.1 and 9.2, survey participants indicate that they believethat Indonesia’s most competitivefeatures will improve over the coming12 months and Indonesia’s lesscompetitive features will remain hesame, except for the scal framework

which they believe will get worseover the next 12 months. Should this

view persist it will not help to attractinvestors.

However it should be notedthat, similar to our 2010 survey,participants remain optimisticregarding the development of allfeatures over the coming 5 years.

In 2010, 2008 and 2005 PwCundertook similar surveys andincluded many of the competitivefeatures listed on the previouspage. Although not true in allrespects, we noted that Indonesiaseems to have continuously lostcompetitiveness in several areascompared with the results fromprevious surveys, or at best isstaying the same.



PwC Indonesia


8

Getting

signicantly worse

Staying aboutthe same

Signicantly improving 1

3

5

2.532.52

3.03

2.82

3.133.19 3.29

A JIHGFEDCB

Geological opportunities

Trained workforce

Political stability

Infrastructure

Ease of foreign ownership

The existing scal framework

Risk premium

Contract and project approval process

Regulatory framework

Enviromental regulations

A

J

I

H

G

F

E

D

C

B

2.83

3.1

2.9

Development

: improving


: deteriorating

Chart 9.1Development of competitiveness (within 12 months)



PwC Indonesia


39

Chart 9.2Development of competitiveness (within 1- 5 years)

Getting

signicantly worse

Staying aboutthe same

Signicantly

improving 1

3

5

21.92

2.48

2.33

2.552.64

2.65

A JIHGFEDCB

Geological opportunities

Trained workforce

Political stability

Infrastructure

Ease of foreign ownership

The existing scal framework

Risk premium

Contract and project approval process


Enviromental regulations

A

J

I

H

G

F

E

D

C

B

2.46

2.482.48

Development

: improving



PwC Indonesia


0

Indonesia’s competitiveness compared to other oil & gasproducing countries

Although no signicant changes compared to the 2010 survey results, itseems that survey participants are slightly more optimistic and expect someimprovement on certain challenges in the one to ve year window, albeitthis is a less overwhelming perspective than in our 2010 survey. This may be because the majority of these challenges are regarded as structural andrequire a long time to achieve real improvement.

Survey participants were asked to rate the relative competitiveness of different countries in comparison with Indonesia on four different features,namely geological prospects (including access to acreage), infrastructure,political stability and regulatory framework.

(Please see the map on the inside of this fold out page, for the results)



Chart 9.3

Angola

Geologicalprospects(including accessto acreage)

Infrastructure

Political stability


Vietnam


Infrastructure

Political stability


UAE


Infrastructure

Political stability


Venezuela


Infrastructure

Political stability


China


Infrastructure

Political stability


: More competitive than Indonesia

: Less competitive than Indonesia

: Same as Indonesia

Norway


Infrastructure

Political stability


Nigeria


Infrastructure

Political stability



PwC Indonesia

USA


Infrastructure

Political stability


Thailand

Geologicalprospects

(including accessto acreage)

Infrastructure

Political stability


Malaysia


Infrastructure

Political stability


Australia


Infrastructure

Political stability




PwC Indonesia


41

As can be seen in chart 9.3 onthe previous page, geologicalprospectivity remains one of Indonesia’s most competitivefeatures. Of the countries includedin the survey, only Norway, Angola,

the USA and the UAE are seen to havebetter geological prospects. DespiteIndonesia’s young democracy, thecountry was also rated favorably on political stability with only Norway, China and the USA being

viewed more favorably. Surprisingly,Indonesia was rated positively oninfrastructure, with only the UAE,the USA, and China rated more

favorably. This can may be able tobe partly explained by the resultsof an aggressive program that theGoI has put in place to increaseinvestment in infrastructureprojects. Survey participants

rated the regulatory framework in Indonesia as above the middlerelative to its peers, with somecountries scoring higher and somescoring lower than Indonesia.



Other challenges

2

A. There have been several high prole arrests in relation tocorruption. Do you think that these will improve the perceptionof Indonesia’s commitment to ghting corruption?

Chart 10.1

Do the recent arrests have a positive impact on the perception around thecommitment to ghting corruption?

Noimpact

21%

Yes58%No

21%



43

PwC Indonesia

Staring Down the BarrelOther challenges

As can be seen in chart 10.1, themajority (58%, 2010: 60%) of thesurvey participants indicated thatthe recent high prole arrests inrelation to corruption are having apositive impact on the perception of

Indonesia’s commitment to ghtingcorruption. In addition, it should benoted that still 42% is of the opinionthat the GoI’s approach has a positiveimpact on perception of commitmentto ghting corruption. This may bean indication that survey participantsare remaining skeptical about theeffectiveness of the GoI’s approach toghting KKN.

The GoI issued its revised Energy Mix in 2012 calling for greaterdiversication of the country’senergy mix. As part of this debatethe country‘s policymakers havebeen discussing the development

of nuclear energy to fuel aportion of Indonesia’s futureenergy needs. We asked survey participants if they believed thecountry was ready for nuclearenergy and if it possessed therequisite knowledge and expertiseto operate a nuclear power plant.

“Improveinfrastructure,eliminatecorruption,efcient

governmentbureaucracy.” Survey participant comment

2030 Targeted Energy Mix

Oil Coal Gas Hydro Geothermal CBM Biofuel Other renewable

energy resource

Source: MoEMR

5%

26%

2%

30%

3%3%

4%

27%



PwC Indonesia


4

B. Do you think Indonesia is ready fornuclear energy?

Chart 10.2

Readiness for nuclear energy

As shown in charts 10.2 and 10.3, survey participants believe that Indonesia is not yet ready for nuclearenergy. The main reasons behind this reluctance may be the lack of knowledge and the risks associated with

volcanic eruptions, earthquakes and terrorism. However, as Indonesia will eventually run out of oil, it isdenitely something that could be considered in due course.

C. Do you think Indonesia has theknowledge and expertise to operate anuclear power plant?

Chart 10.3Does Indonesia have the knowledge and expertiseto operate a nuclear power plant?

Don’t know26%

Yes10%

No64%

Don’t know32%

Yes13%

No55%



PwC Indonesia


45

“CBM is land use intensive. Too crowded tomake it work here. Too much negative impact

from local communities. CBM needs to be ahighly efcient execution machine to make itwork.” Survey participant comment

D. Will Coal Bed Methane (“CBM”) be a viable alternative fordomestic gas?

Chart 10.4

Is CBM a viable alternative for domestic gas?

Don’t know10%

Yes68%

No

22%



PwC Indonesia


6

E. Should the government provide more incentives for thedevelopment of geothermal energy?

Chart 10.5

More incentives for the development of geothermal energy needed?

Indonesia holds 40 percent of the world’s potential geothermal energy reserves, but ranks third for energy output after the United States andthe Philippines. At a geothermalconference in Bali, President SusiloBambang Yudhoyono indicated thathe intends for Indonesia to becomethe biggest user of geothermal energy in the world.

“Geothermal isthe best renewableenergy.” Survey participant comment

Survey participants clearly seethat CBM and geothermal are

viable alternatives for oil and gas.In order to stimulate the use of

these alternative energy sources,they indicated that the GoIshould provide more incentives.The fact that 87% of the survey participants indicated that they believe that more incentivesshould be given, supports this

view, especially since it hasincreased from 64% in 2010.

Don’t know10%

Yes87%

No

3%



PwC Indonesia


47

F. Has your company ever considered leaving Indonesiabecause of the issues described earlier?

Chart 10.6

Ever considered leaving Indonesia?

G. Are you satised with the current return on investment you are getting from your operations in Indonesia?

Chart 10.7

Satisfaction with return on investment

Don’tknow33%

Yes

15%

No52%

2010 survey 2012 survey

2012 survey 2010 survey

Don’tknow

33%

Yes27%

No40%

Don’tknow37% Yes

30%

No33%

Don’t know/

no opinion17%

Yes53%

No

30%



PwC Indonesia


8

“Governmentmust work harderto resolve alloutstanding issuesthrough bettercoordinationamong relevant

stakeholders and properly manageany political

pressures from politicians.”

Survey participant comment

Don’t know

27% Yes

27%

No46%

2010 survey

H. Do you anticipate a signicant improvement in returnsfrom the oil and gas industry in Indonesia over the nextve to ten years?

Chart 10.8

Improvement in returns expected?

2012 survey

Despite the problems and issuesnoted in the earlier sections of the survey, investors are notcurrently considering leavingIndonesia, mainly due to the good

geological prospects. Althoughit should be noted that 27% of the participants indicated thatthey were considering leavingIndonesia, and that this was only 15% in 2010, so there is clearly achange in sentiment. However,53% (2010: 30%) of the survey participants indicated that they are satised with the returns they are getting on their investmentin Indonesia and 59% are

pessimistic about improvementsover the next ve to ten years.The fact that investors are not

Don’t know/No opinion

28% Yes41%

No31%

considering leaving Indonesia yet is undoubtedly linked toIndonesia’s good geologicalprospects in combination

with high commodity prices.

In addition, in 2010 27 % of the participants indicatedthey anticipated signicantimprovements in return from oiland gas industry in Indonesia,in 2012 this percentage hasincreased to 41%. In addition, theparticipants who indicated “don’tknow” have remained the same asin 2010. These developments may be an indication that althoughIndonesia is still regarded as

attractive for investors, the“shine” is wearing off.



Conclusion

0

As this is the fth edition of theoil and gas survey, we have been

able to identify trends in survey participant’s perception of variouschallenges facing the industry andthe competitive features of theIndonesian oil and gas industry.Overall, survey participants indicatedthat Indonesia is still regarded asattractive; however the “shine”seems to be wearing off. Thegeneral downwards shift in survey participants’ sentiment which wealready reported in our 2010 survey

seems to have continued, which is notgood for investment.

Geological prospectivity has alwaysbeen Indonesia’s most competitivefeature, followed by the presenceof a trained workforce and politicalstability. The survey participantsindicated that they expect globaland Indonesian demand for oil andgas to increase over the coming

years. Survey participants indicatedthat they expect that there is stillsignicant oil and gas reserves to be

g

discovered in Indonesia. Similar toprevious survey results, they expect

that there are likely to be more gasreserves to be discovered than oilreserves. According to the survey participants, these new oil and gasreserves are likely to be found inEastern Indonesia (Papua, Maluku,etc).

Although this is a positive for theindustry, the majority of the survey participants indicated that they expect their capital spending to

decrease or stay the same over thenext 5 years. Only 38% indicated thatthey expect their capital spending to(signicantly) increase. This outlook is not a positive signal given thelong-term nature of the industry andneed to plan far in advance beforeinvestments reap measurable returns.This pessimistic view is a worryingdevelopment as the GoI is keen tosee an increase in investment in theIndonesian oil and gas industry.



51

PwC Indonesia

Staring Down the BarrelConclusion

Similar to our 2010 survey, themajority of the survey participantsexpect to encounter difculties inattracting sufcient skilled humanresources. Although 59% of thesurvey participants indicated thatIndonesia does not have sufcientskilled staff to perform the requiredactivities, the trained work force

remains a competitive aspect of the industry in Indonesia. Theoil and gas industry has a longhistory in this country, which hasresulted in a large, well educated

workforce, especially of geologistsand engineers. The experience andexposure gained by the workforcethrough employment by internationaloil and gas companies has enhancedtheir competence and expertise inthese companies’ operations.

We noted that the top 5 issues haveremained more or less the samefor a number of years. The majorchallenges facing the industry thatremained in the top ve of the leastcompetitive aspects of the Indonesianoil and gas industry are:

• Contract sanctity

• Taxation

• Interference from other

government agencies, such as thetax authorities

The troubling fact is that, similarto the 2010 survey, the survey participants do not expect signicantchange (i.e. improvement) within thenext 5 years for the above mentionedissues. They indicated that they expect the situation for these issuesto improve slightly.

On a positive note, survey participantsexpect slightly more improvementin relation to corruption, collusionand nepotism. This is a positive,

as it conrms that the GoI is onthe right path and its signicantefforts in ghting KKN are beingrecognised.

Overall one can conclude that,in order to remain competitive,it is critical that the investmentclimate in Indonesia continues

to improve. In order to attractmore investment Indonesia needsregulatory clarity, consistency,certainty and competitiveness.

However, it would not be fairto only look at the areas whichneed improvement. Indonesiahas become more attractive forinvestors in some respects. This ispartly due to the new initiativesof the Indonesian Government,

for example the opening up of CBM acreage. The Government of Indonesia needs to stay focusedon the issues highlighted in thissurvey and ensure that properaction is taken.

We believe that the Presidentand the relevant ministriesand government ofcials areaware of the need to develop anenvironment conducive to doingbusiness, in addition to providingscal incentives. However, therecent Presidential InstructionNo.2/2012 in regard to oilproduction testies to this. Basedon the responses of the survey participants, it is clear that theindustry is keen and supportsthe current government to takethe necessary action to achieve abetter business environment.



About PwC

2

Why PwC?

As the world’s largest professionalservices network and one of the bigfour accountancy rms, PwC rmsprovide Industry-focused assurance,tax and advisory services for public andprivate companies. Close to 169,000people in 158 countries connect theirthinking, experience and solutionsto build trust and enhance value for

clients and their stakeholders.

A globally integrated rm

Being part of a global network means we can invest in priority clients, sectorsand markets and deliver leadingedge ideas, products and servicesmore quickly and effectively thanour competitors. We work acrossborders without the constraints of geographic considerations and we

work to a global standard and quality.Our global network structure enablesquick decision-making and worldwidedelivery of the best resources.

About the PwC network

We are organised into industry groups,of which the oil and gas industry groupis one of the largest. Our industry focusensures our people have both a broadoverview of the marketplace and a deepunderstanding of the industries andmarkets in which they specialise.

Our oil and gas industry group haspriority status in terms of investmentand resources in all key marketsincluding Indonesia, reecting our

worldwide dominance in this market.

Our strength in the oil and gas industry is one of which we are proud. Thismeans we are the most committed rmto achieving oil and gas client’s needsand actively participate in the industry in all countries in which the industry is active. We work closely with our oiland gas clients, offering the benets of our experience, to help achieve their

goals.



53

PwC Indonesia

Staring Down the Barrel About PwC

PwC Indonesia

PwC Indonesia’s (PwC or we) oiland gas team brings together localknowledge and experience withinternational oil and gas expertise.Our strength in serving the oiland gas industry comes from ourskills, our experience and ournetwork of partners and managers

who focus 100% of their time onunderstanding the oil and gasindustry and working on solutions

to oil and gas industry issues.Detailed oil and gas knowledge andexperience ensures that we havethe background and understandingof industry issues and can providesharper, more sophisticatedsolutions.

PwC is organised into three Linesof Services, each staffed by highly qualied experienced professionals

who are leaders in their elds. The

lines of service are:• Assurance Services which

provide innovative, highquality, and cost-effectiveservices related to anorganisations’ nancialcontrols, regulatory reporting, shareholder

value and technology needs.

• Tax Services which providea range of specialist taxservices in three mainareas: tax consulting, taxdispute resolution, andcompliance. Some of our

value-driven tax servicesinclude:- International tax

restructuring- Mergers and

acquisitions- Compliance services- Dispute resolution- Indirect taxes

- Transfer pricing; and- Tax process reviews

• Advisory services whichprovide comprehensiveadvice and assistancerelating to transactions,performance improvementand crisis management,based on long-termrelationships with clientsand our nancial analysisand business process skills.

For companies operating in theIndonesian oil and gas sector, thereare some compelling reasons to

choose PwC as your professionalservices rm:

• We are the leadingadvisor in the industry,both globally and inIndonesia, working withmore explorers, producersand related serviceproviders than any otherprofessional services rm.In particular, PwC auditsover 60% (in terms of

production) of the oil andgas producers in Indonesiaunder Production SharingContract agreements, andprovides other professionalservices such as taxationand advisory servicesto oil and gas producersin all stages of theirdevelopment.

• We have operated inIndonesia since 1971and have over 1,300

professional staff, including38 Indonesian nationalpartners and expatriatetechnical advisors, trainedin providing assurance,advisory and tax servicesto Indonesian andinternational companies,and the Government of Indonesia.

• Our Energy, Utilities andMining (“EUM”) practice in

Indonesia comprises over300 dedicated professionals

across our three Linesof Service. This body of professionals brings deeplocal industry knowledgeand experience withinternational oil and gasexpertise and provides us

with the largest group of industry specialists in theIndonesian professionalmarket. We can also drawon the PwC global EUMnetwork which includesmore than 10,000 qualied

industry experts.

• Our commitment tothe oil and gas industry is unmatched anddemonstrated by our activeparticipation in industry associations in Indonesiaand around the world, andour thought leadershipon the issues affectingthe industry. Through

our involvement with theIndonesian Petroleum Association (“IPA”) we helpshape the future of theindustry.

• Our client service approachinvolves learning aboutthe company’s issuesand seeking ways to add

value to every task weperform. Detailed oiland gas knowledge and

experience ensures that wehave the background andunderstanding of industry issues and can providesharper, more sophisticatedsolutions that help clientsaccomplish their strategicobjectives.

PwC Indonesia (www.pwc.com/id)



PwC Indonesia

Staring Down the Barrel About PwC

4

For further information, please do not hesitate to contact any of the following specialists from our IndonesianEnergy, Utility and Mining (“EU&M”) practice:

Tim [email protected]: +62 21 528 90370

Anthony J [email protected]: +62 21 528 90642

Gadis [email protected]: +62 21 528 90765

Ali [email protected] T:

+62 21 528 90622

Advisory

Joshua Wahyudi [email protected]: +62 21 528 90833

Hafdsyah Mochtar

[email protected]: +62 21 528 90774

Agung [email protected]: +62 21 528 90666

Triadi [email protected]: +62 21 528 90821

Antonius [email protected]

T: +62 21 528 90972

Tjen She Siung [email protected]

T: +62 21 528 90520

Mirza [email protected]: +62 21 528 90950

Gopinath [email protected]: +62 21 528 75772

Assurance Tax

Yanto Kamarudin [email protected]

T: +62 21 528 91053

Daniel Kohar [email protected]: +62 21 528 90962

Yusron Fauzan [email protected]: +62 21 528 91072

Paul van der [email protected]: +62 21 528 91091

Anthony [email protected]: +62 21 528 90687

Dwi [email protected]: +62 21 528 91050

Fandy [email protected]: +62 21 528 90749

Sacha [email protected]: +62 21 528 90968



PwC Indonesia

Staring Down the Barrel Acknowledgements

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Acknowledgements

PwC Indonesia appreciates the involvement of those companies which took the time to participate in this survey and share their thoughts and opinions

with us.

Photographic contributions

We would like to acknowledge and thank the following companies whichprovided photographs for inclusion in this report (in alphabetical order):

• Chevron IndoAsia Business Unit.• ExxonMobil Oil Indonesia Inc.• Premier Oil Natuna Sea B.V.• Santos Indonesia [Santos (Sampang) Pty.ltd.]• Talisman Energy Inc. [Talisman (Sageri) ltd.]• UMW Standard Drilling Sdn. Bhd.

Editors

• Anthony J Anderson

• Paul van der Aa

Other contributions

We would also like to acknowledge and thank the following individuals which assisted in the compilation of this report:

• Ade Marni

• Aranti Syamsuddin

• Yan Stephanus

• Indah Setiawati

• Kertawiradhany



PwC Indonesia

Staring Down the BarrelGlossary

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Glossary

BOPD Barrels of Oil per Day

BP Migas Badan Pelaksana Kegiatan Usaha Hulu Minyak danGas Bumi (Government Executive Agency for UpstreamOil and Gas Business Activities)

BPH Migas Badan Pengatur Hilir Minyak dan Gas Bumi (Oil and GasDownstream Regulatory Agency)

BPKP Badan Pengawasan Keuangan dan Pembangunan(Government Audit Body)

CFO Chief Financial Ofcer

COO Chief Operating Ofcer

EU&M Energy, Utilites, and Mining

GoI Government of Indonesia

IPA Indonesian Petroleum Association

KKN Corruption, Collusion and Nepotism

LPG Liquied Petroleum Gas

MEMR Ministry of Energy and Mineral Resources

Pertamina Perusahaan Pertambangan Minyak dan Gas BumiNegara (The Indonesian State Oil Company)

PSC Production Sharing Contract

US$ United States Dollar

VAT Value Added Tax

indonesian oil and gas survey 2012

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