Indonesia’s Nationalistic Oil Law Could Reduce Country’s Appeal to Foreign Investors, Says Report

Political events can have a significant influence on the price of oil, but the price of oil also has a strong influence on political events. In 2016, the latter was in full force, with enormous geopolitical consequences from the downturn in the price of oil.

In its  2017 Oil and Gas Risk Reward Index, Marsh quantifies and ranks a country’s attractiveness within the context of the oil industry, based on the balance between the risks and rewards of entering and operating in different countries.

The study examined six oil-rich countries that have the potential for long-term economic transformation that could impact international businesses, investors, and — of course — the energy industry.

The only Asian country assessed by the report is Indonesia.

A growing sense of nationalism in the Indonesian upstream segment poses a major risk to its long-term production growth outlook and could severely reduce the country’s attractiveness as a destination for private and foreign investments.

Investors are unlikely to be enthused by the country’s more nationalistic oil and gas law, introduced last year, which will provide further preferential treatment for state-owned Pertamina.

Private participation in exploration and production will be restricted under a cooperation agreement with a newly formed state-owned entity, BUMN-K.

Furthermore, the law does not provide clear-cut guidelines on several key mechanisms, including cost recovery and production sharing, which will negatively impact investor sentiment. In the downstream space, private firms will be able to conduct business as usual, with relevant government-issued licenses.

However, the new law calls for a new downstream operator, BUP, to centralize the compulsory sale and purchase of oil and gas production for domestic consumption.

All downstream firms will now be required to sell substantial parts of their fuels output to BUP.