The Current State of Indonesia's Oil and Gas Industry: Challenges and Prospects

Introduction

Indonesia’s oil and gas industry remains a cornerstone of the national economy, even as the world shifts toward renewable energy. Oil and gas will continue to serve as critical components of the country’s energy supply for the foreseeable future. This article explores the current state of the industry, highlighting reserves, production, investment, infrastructure development, key challenges, and government efforts aimed at sustaining growth in this vital sector.

Reserves and Production

Indonesia’s oil reserves are projected to last approximately 9.5 years, while natural gas reserves could sustain production for up to 19.9 years at current extraction rates (Handbook of Energy & Economic Statistics of Indonesia, 2021). However, crude oil production has been declining, averaging just 661,000 barrels per day in 2021 (Figure 1). This decrease is primarily due to the aging of existing fields and the lack of major new discoveries.

In contrast, natural gas production has been more resilient, reaching 5,481 million standard cubic feet per day. To counterbalance declining oil output, the government is aggressively promoting exploration activities to uncover new reserves and bolster production levels.

Investment and Infrastructure

Investment in Indonesia’s upstream oil and gas sector reached USD 15.56 billion in 2023 (PwC, 2023), with a focus on exploration and exploitation activities aimed at increasing reserves and production (Figure 2). Significant attention has also been directed toward enhancing natural gas infrastructure. A prime example is the Cirebon-Semarang (CISEM) gas transmission pipeline, a project designed to improve natural gas distribution and availability throughout the region.

Given Indonesia’s vast archipelago, developing infrastructure that supports efficient transportation and processing of hydrocarbons is challenging. The government has been addressing this by investing in strategic projects aimed at improving connectivity and alleviating bottlenecks in the oil and gas supply chain.

Figure 2. Investment in Indonesia's Oil and Gas Sector Over Time (PwC, 2023)

Challenges and Government Initiatives

One of the industry's most pressing challenges is infrastructure bottlenecks in the downstream sector. Outdated facilities are often unable to meet the growing demand for energy, necessitating substantial investment in refining, processing, and distribution capacity. The government has responded with increased infrastructure development while simultaneously promoting energy diversification.

Another ongoing challenge is the volatility of global oil prices. Indonesia’s oil and gas sector, like many others, is highly sensitive to geopolitical risks, economic shifts, and fluctuations in supply and demand. As highlighted by Bahlil Lahadalia, the Minister of Energy and Mineral Resources in 2024, “The high volatility of crude oil prices significantly impacts Indonesia’s ability to plan long-term energy strategies and maintain stable revenues.” To mitigate these risks, the government has encouraged the adoption of long-term contracts and hedging mechanisms to stabilize revenues.

Additionally, Indonesia has been a net importer of oil since 2014, creating a drive to reduce dependence on foreign supplies. The government aims to reverse this trend through increased domestic production and energy efficiency initiatives. Moreover, efforts to diversify the energy mix by promoting biofuels and renewable sources are underway to reduce reliance on fossil fuels.

Environmental and Social Considerations

The environmental footprint of oil and gas activities is increasingly scrutinized. Extraction, processing, and transportation often result in environmental degradation, including air and water pollution, habitat destruction, and greenhouse gas emissions. In response, the government has implemented stricter environmental regulations and is promoting cleaner technologies to reduce these negative impacts (EPA, 2023). Social considerations are equally critical. While the industry provides jobs and stimulates local economies, it can also cause displacement and social conflicts. The government is working to ensure that the benefits of oil and gas projects are distributed fairly and that the rights of affected communities are respected (UNEP, 1997).

Future Prospects

Despite the challenges, the future of Indonesia’s oil and gas industry remains promising. The government’s focus on increasing investment, improving infrastructure, and diversifying energy sources will be key drivers of growth in the sector. New discoveries and advances in exploration and production technologies will also play a significant role in the industry’s sustainability. Recent giant discoveries in South Andaman and North Ganal have boosted optimism about the sector’s potential. Maintaining this momentum will require continued policy support from the new government, which is set to take office on October 20, 2024 (IATMI, 2024).

The development of unconventional resources, such as shale in the Rokan block, and the acceleration of Enhanced Oil Recovery (EOR) projects are also seen as significant future prospects. These initiatives are expected to help maximize the extraction of existing reserves and extend the life of mature fields.

The global energy transition towards renewable sources presents both a challenge and an opportunity. While long-term demand for oil and gas may decrease, Indonesia can capitalize on its abundant natural gas reserves as a transition fuel. At the same time, the development of biofuels and other renewable energy sources positions Indonesia to emerge as a leader in the cleaner energy landscape. The government is also focusing on regulatory reforms, such as revising the Oil and Gas Law (RUU Migas), to create a more flexible and investor-friendly environment (Marves, 2024; ESDM, 2024).

Conclusion

Indonesia’s oil and gas sector is at a pivotal moment. The industry faces significant challenges, from declining reserves and infrastructure deficits to environmental and social concerns. However, these obstacles also present opportunities for innovation and growth. The government’s proactive measures, coupled with continued investment and collaboration, will be critical in shaping the future of the industry.

By leveraging its resources, adopting advanced technologies, and fostering sustainable practices, Indonesia’s oil and gas sector can continue to play a vital role in the national economy and contribute to the global energy landscape.

Author: Dandi Alvayed (Director of Communication, Indonesian Petroleum Engineering Association Saudi Arabia (IATMI-KSA) 2024/2026)