Knowledge Sharing Conference
ERIA Explores the Role of International Oil Companies in Indonesia’s Net Zero Energy Transition
The 13th Knowledge Sharing Virtual Conference, 7 March 2024: Indonesia’s aim of reaching net zero emissions by 2060 requires support and close cooperation with international oil companies (IOCs) to renew the country’s energy strategy. In its energy transition push, Indonesia will continue relying on fossil fuels as it seeks to maintain energy security, ensure affordable and accessible energy sources, and decarbonise to achieve its emissions targets. As such, the Indonesian government has proceeded to use Carbon, Capture, and Storage (CCS), as well as Carbon, Capture, Utilisation, and Storage (CCUS) technologies in upstream oil operations. IOCs are integral players in the Southeast Asian country’s oil and gas industry where 70% of gas and 30% of oil are produced by these companies. Among the IOCs that have established relations in Indonesia include ExxonMobil, ConocoPhillips, Total, Shell, INPEX, Eni, and Mubadala.
To better understand the role of IOCs in the energy transition towards net zero, the Economic Research Institute for ASEAN and East Asia (ERIA), as the secretariat for the Asia CCUS Network (ACN) hosted the 13th ACN Knowledge Sharing Conference with Japanese multinational corporation, INPEX. The company is engaged in oil and gas exploration and production (E&P) in addition to green technology. They are the operator of Indonesia’s Abadi LNG project with plans to equip it with CCS and as such, INPEX is expected to maintain company operations for the next 30-50 years.
Mr Shigeru Kimura, Special Advisor to the President on Energy Affairs, ERIA gave the Opening Remarks underscoring the importance of IOCs in stabilising the global oil and gas market as well as supply, particularly, after the Russian invasion in Ukraine which resulted in oil and gas supply shortages. Moreover, Mr Kimura believes that it is essential that IOCs promote CCS/CCUS as it can serve enhanced oil recovery and enhanced gas recovery. With various IOCs operating in Indonesia, it may be beneficial to understand their business attitude regarding oil and gas business including CCS/CCUS.
The conference included a presentation session by Mr Ryohei Masumoto, Chief Analyst and General Manager, Research Business Department, INPEX Solutions, LTD on ‘The Success Factor of CCUS Projects: The Investor’s Perspective.’ Dr Gusti Sidemen, CCUS Fellow, ERIA served as the moderator. After stating that Indonesia is the most important country for INPEX, Mr Masumoto carried out his presentation that was structured in keeping with an unpublished report, in collaboration with ERIA, entitled ‘Strategies of IOCs and its Activities in Indonesia and the Energy Transition’ which will be published in the future. The first part of the presentation covered the global energy situation background in which he stated that despite numerous countries’ carbon neutral pledge, the United Nations Framework Convention on Climate Change found that projected greenhouse gas (GHG) emissions for 2030 are not in line with the agreement to limit global warming to the 1.5℃ – 2℃ scenario. Furthermore, Indonesia’s GHG emissions level is expected to rise from 1,334 million tonnes (MT) of carbon dioxide equivalent (CO2-eq) in 2010 to 2,869 MT of CO2-eq under the business-as-usual scenario by 2030. Assessments of unconditional and conditional mitigation scenario indicate that Indonesia must further reduce GHG emissions by deploying technologies like CCS.
Mr Matsumoto also presented IOCs’ global strategy and preparation for considering IOC’s activities in Indonesia. In light of the energy crisis, European IOCs have raised their oil and gas production targets while US IOCs engage in mergers and acquisitions (M&A) and also raise future production targets. Despite this upward trend in production targets, Chevron, Shell, and ConocoPhillips have exited the E&P business in Indonesia to better focus on their respective core areas and ‘adhere to investment discipline.’ Instead, Eni and INPEX have moved forward in developing new projects in Indonesia. Eni is expanding its Indonesian E&P business where it acquired Neptune Energy and discovered huge gas resources in the Geng North Area.
BP announced its 2050 net zero ambition in 2020 but has increased its oil and gas production target for 2030 due to the energy crisis and a business return perspective. BP has increased investment in low-carbon energy and the earnings before interest, tax, depreciation, and amortisation of BP’s low-carbon energy are expected to reach around $2-3 billion by 2030 in comparison to the expected $40 billion the company will earn from additional oil and gas business. Similarly, Chevron is also aiming to reduce its GHG emissions while increasing oil and gas production for the next five to ten years. Chevron was unable to extend the license for the Rokan block and as a result, Indonesia’s state-owned company, Pertamina, took over the operations in 2021. Another company, TotalEnergies, failed to renew its interest in the Mahakam block with the Indonesian government, also resulting in a takeover by Pertamina in 2018.
Mr Matsumoto additionally detailed INPEX’s five net zero businesses which include CCUS, hydrogen ammonia, renewable energy (RE), methanation, and forest conservation in addition to its aim of ensuring a stable supply of diverse and clean energy sources. The Japanese multinational company is striving to reach a target of 2.5 MT of injected CO2 through CCUS by 2030 while working towards achieving power generating capacity of 1-2 gigawatts through RE such as solar and wind power. INPEX is targeting a reduction in GHG by 30% or more while reaching an investment ratio for the gas business of around 70% by 2030. Indonesia has emerged as one of INPEX’s core business area operations along with Australia, Abu Dhabi, and Europe. Further, the company is aiming to reach a final investment decision (FID) on Indonesia’s LNG project in the second half of the 2020s.
A detailed overview of IOCs’ oil and gas business in Indonesia was also discussed during the conference which found that Indonesia’s oil production continued to decline since 2000 despite the discovery of large new oil fields. Meanwhile, national oil consumption has been on an upward trajectory since the 1970s, and by 2004, Indonesia became a net importer of oil. Similarly, national gas production has also decreased since reaching its peak in 2010 thus Indonesia must increase or maintain its gas production to continue its LNG export business and meet domestic gas demand growth.
INPEX is working on the Abadi LNG project in which part of the project development concept includes adding CCS to offset 100% of native CO2. Mr Matsumoto explained, ‘The Abadi project will be the 1st CCS-bundled project under the Indonesian production sharing contract (PSC) scheme where the CCS-associated cost can be recovered from the produced gas or condensate.’ Due to the significantly large reservoir capacity of the Abadi project, INPEX is open to potential business opportunities with third parties. Part of the driving factor behind INPEX’s investment in the project is its aim to achieve an internal rate of return (IRR) in the mid-10% range and it is in discussions with the Indonesian government on realising this target. Further, INPEX has forged strong relations with the project’s new partners, Pertamina and Petronas, to facilitate the supply of clean energy to Indonesia, Malaysia, and other Asian nations. As previously mentioned, INPEX’s FID is expected in the mid-2020s and to complete this process, the company ‘must do the marketing to secure gas buyers, engineering such as geological & geophysical surveys, financing, permits for environment and land procurement, and project economics to demonstrate profitability or IRR.’
Mr Matsumoto also explained the key factors to ensure a win-win situation between the Indonesian government and IOCs. The first key factor is increasing gas production to meet domestic gas demand growth, particularly, due to the expected rise in national gas demand in the late 2020s to 2030s. He stated, ‘I believe that Abadi and Eni’s projects will start and will meet that gas demand growth and also some energy export business.’ The second factor is improving the IRR of new projects given that it is a crucial part of making an FID. For example, Eni has set its IRR target for new E&P projects from 2023 – 2026 to less than 25% while INPEX maintains an IRR in the mid-10% range.
The final key factor is CCS which has driven Eni to establish CCS with a storage capacity of 10 MT of CO2/annum by 2030 and to provide 15 MT of carbon offsets annually through natural climate solutions and other means. ‘CCS is important for IOCs in Indonesia,’ Mr Matsumoto stipulated. Nevertheless, the Indonesian government must answer to the commercial, regulatory, and technical challenges surrounding CCS. This requires providing answers on aspects such as the possibility of subsidies, whether to make CCS mandatory or voluntary, cross-border CO2, and infrastructure. Mr Matsumoto concluded his presentation by stating that, ‘Although these three types of challenges are being faced, there is some progress in Indonesia. INPEX appreciates the Indonesian government and INPEX wants to continue collaborating with the Indonesian government and as a partner.’ Dr Sidemen closed the presentation session by noting that ‘as the companies pledge their own net-zero targets, CCUS will play an important role in oil companies’ emissions reduction,’ especially, as oil and gas will continue to serve as important energy sources for the next decade to come.
Dr Luky Yusgiantoro, Head of Indonesia Oil and Gas Institute, SKKMIGAS provided insightful information during the Commentary Session to complement Mr Matsumoto’s presentation. Dr Yusgiantoro pointed out how the global community’s interest in Indonesia for oil and gas production development began in the late 1800s. Recent times have changed that interest into CCUS in Indonesia due to the country’s abundance of resources, depleted oil and gas fields, and saline aquifers. Furthermore, he mentioned some ways to minimise the risks of engaging in the CCS/CCUS business in Indonesia. He underscored the significance of bankability in the oil and gas business which notes several challenges. The carbon market has not yet developed and instruments to monetise CO2 and CCS/CCUS have also not advanced, particularly in Indonesia. Although Ministerial and government regulations on CCS/CCUS have been issued, such as on cross-boundary CO2 transportation, other aspects have not yet been detailed. As such, establishing a clear regulatory framework is key to enhancing the bankability of projects and for derisking.
Dr Yusgiantoro ended the Commentary Session by inviting companies to develop Indonesia’s green industry for the entire value chain. He welcomed other industries, like petrochemicals or fertilizer plants, to come in and invest in Indonesia to develop the commercialisation of the industry. He said, ‘The Indonesian government believes that there is potential to develop that into a green industry with the availability of CCS/CCUS in Indonesia.’ Such projects would be beneficial for Indonesia as they have the potential to increase economic growth and lower the unemployment rate.
When prompted about the reason for IOCs’ low investment in low carbon business and continued strong investment in oil and gas during the Open Discussion session, Mr Masumoto made several clarifications. He explained that IOCs control the supply, not the demand which, at the moment, oil and gas demand is growing making it profitable for these companies. This is in comparison to the low-carbon business where profitability is low. He stated, ‘To make investment money for low-carbon business, the company has to make money from the oil and gas business.’ Mr Masumoto answered a question about his view on increasing local content which he mentioned is a sensitive question. Ultimately, local content requirements are in every country, but the level varies. Areas or countries that require high local content may cause new projects to stop due to the attributed high costs or capital expenditures. Mr Masumoto underscored the importance of collaboration as a workaround to this issue.
Dr Yusgiantoro answered a question regarding the joint credit mechanism (JCM) for undertaking the CCUS business. He shared that the Indonesian government is discussing the challenges of JCM ‘because the fiscal term for oil and gas in Indonesia is under the production sharing contract.’ He added, ‘It’s important to have open discussions with the partners on potential JCM but based on our regulations, any sort of financial mechanism is allowed for CCS/CCUS projects.’ Dr Yusgiantoro additionally provided information about SKKMIGAS’ support to facilitate Indonesia’s goal of becoming a regional CCUS hub. ‘That’s our model is to become a regional hub but it’s not easy to become a hub,’ he said.
Indonesia must improve the infrastructure aspect while also identifying the source and sink of the CO2 given that it varies depending on the country. Although there is some available technical information on the country’s reservoirs, Dr Yusgiantoro shared that there is always a possibility to conduct further studies in more detail which can be done through collaboration. An evaluation of the costs and economics to become a hub must also be undertaken and if the country achieves this objective, it can ‘scale up to develop a big reserve of depleted oil and gas reservoirs or saline aquifers.’ Dr Yusgiantoro remarked, ‘It’s a challenge but it’s a model that Indonesia is looking forward to discussing with the regional partners. Partnerships are important to enhance the hub model.’
In his Closing Remarks, Dr Han Phoumin, Senior Energy Economist, ERIA underlined that oil and gas companies have various pathways to low-carbon emissions technologies encompassing CCUS, geothermal and RE. In addition, certain IOCs’ decision to exit the E&P business in Indonesia while others invest in the country highlights Indonesia’s significant role in regional energy security. To advance low carbon technologies, derisking the business is essential by addressing the bankability factor, and regulatory as well as technical risks. Ultimately, ‘there is no single pathway’ to net zero and achieving it requires using the current infrastructure available today. ‘That’s why oil and gas [companies] will play very important roles,’ he concluded.
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