View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Analysis
February 18, 2015

Decommissioning Indonesia’s oil rigs: a vast but challenging market

Indonesia’s oil rig decommissioning market has huge potential with over 450 oil rigs, many already 20 years old, set to be dismantled in the near future. However, outdated contracts and a lack of legislative guidance and clarity means the market has thus far been stagnant.

By Heidi Vella


Resting between the Indian and Pacific oceans in South East Asia, Indonesia is a vast equatorial archipelago of 17,000 islands, extending 5,150km east to west, which has been producing oil since discoveries were made in 1983. An OPEC member from 1962 until 2009 – increasing domestic demand forced the country to withdraw – Indonesia in 2013 was ranked as the 24th largest crude oil producer in the world, accounting for about 1% of world production.

Despite Indonesia’s prominence and long history in the Asia Pacific offshore oil and gas market, little oil rig decommissioning has taken place in the region. But with a reported 450 offshore oil rigs in Indonesian waters, three quarters of which are more than 20 years old, the potential of the decommissioning market could be huge.

However, for companies such as Chevron, Total, ConocoPhillips, ExxonMobil and BP, all of whom are major players in the region, assets could quickly turn to long-term liabilities because, so far, it’s not clear who is responsible for decommissioning oil rig structures or how they should be disposed of when the life of the well is has reached its end.

"The market could open up," says BMT Asia Pacific managing director, Johnny Tjea. "The market for decommissioning is big but there is still a dispute because there is no regulation in place – who will take responsibility?"

Who will foot the bill?

It is believed many production contracts that were signed 20 – 30 years ago do not state how or when decommissioning should happen but only that it should take place "at the end of life" of a well, which can be economically argued either way. Wood Mackenzie’s upstream manager, Andrew Harwood, says this has changed in more recent production sharing contracts, where operators have been required to make annual contributions to provisions for the removal and restoration of production equipment and sites. However, what exactly will happen with these contributions is still unknown.

China has put a record number of offshore blocks up for auction as it looks to kick-start its domestic oil and gas industry.

Tjea says that although the government does not have an official policy, technically state-owned oil company Pertamina Energy – which is currently undergoing a government crackdown after corruption allegations – is the owner of all rigs in Indonesian waters and therefore responsible for their fate.

"In reality it should be Pertamina who does the decommissioning, but until now I don’t think they have the budget for that – there is still a dispute about this issue in Indonesia now," he says.

"There is still dispute between the oil companies and the government."

According to the president and commissioner of risk management company Greencap Ltd, Karlheinz Spitz, speaking in an interview with DecomWorld, many of these contracts are up for renewal and for this reason there is suddenly pressure between now and 2018 to understand the potential financial liabilities associated with decommissioning and this will be a big part of the renegotiation of the extensions. Tjea and Spitz agree that it is highly likely companies will have to contribute to the decommissioning costs.

Professor Andrew Clennel Palmer from the Department of Civil and Environmental Engineering at the National University of Singapore’s Faculty of Engineering says the big question is whether the original owner, the production company, will still have a continuing legal liability if something goes wrong after the decommissioning, or if liability can be transferred to some other entity, such as a government agency.

Decommissioning costs for production companies is a major concern globally, not just in Indonesia, and how it’s treated fiscally could impact the region’s attractiveness for future exploration and production investment by foreign companies. Due to ageing infrastructure and depleting reserves, oil production has fallen dramatically in Indonesia and as a result the government is heavily investigating furthering their ability to produce, which will no doubt require foreign investment in the future.

"At the moment, I don’t see, here in Indonesia, any decommissioning being implemented – there will be a lot of studies, but that doesn’t mean that there will be implementation."

Lack of technical instruction

Even if financial liability was ironed out there is no regulatory and technical framework or guidance in place for decommissioning the rigs.

Globally, international conventions and treaties, such as the International Maritime Organization’s 1989 guidelines and the London Convention’s year 2000 rules, to which Indonesia is a signatory, provide some guidance. However, Indonesia has not conceded to the convention so it is not enforceable by international law.

In terms of Indonesian national guidelines, there is minimal legal clarity. Marine dumping legislation states that rigs are allowed to be placed into the sea – possibly in a rigs-to-reef scenario – however there are no technical guidelines for this.

Spitz says Greencap is meeting with the Indonesian Ministry of Environment and Ministry of Fisheries to develop some guidelines, which once in place could make way for a rigs-to-reef policy.

Palmer says a rigs-to-reef approach would be, in the short term, the cheapest option.

Can the island overcome local and neighbouring geopolitical tensions to reach its full offshore potential?

"The process leaves ‘litter’ for future generations, but many people will be relaxed about that," he adds.

Although it is important, when considering a ‘rigs to reef’ approach, to consider the timescale: "Are we thinking of 10 years, 100 years, 1,000 years or 10,000 years?" Palmer questions.

Most of Indonesia’s decommissioning problems stem from a lack of experience. A decommissioning report by Vision Global estimates that only around 50 decommissioning projects have been completed in the country, although it states that information in this regard is scarce.

Unlike in the US or the UK North Sea, where decommissioning is highly regulated and a risk-based approach is taken, in Indonesia even if a law is in place there might not be the necessary legislation and therefore there is much more room for interpretation, meaning the process can take much longer to be signed off.

This is a problem that is symptomatic of Asia Pacific in general, according to Spitz. For example, a mercury remediation project in India has been waiting 10 years to be approved while studies, reviews and expert opinions on the site are continually commissioned.

The future market

"The market for decommissioning is big but there is still a dispute because there is no regulation in place – who will take responsibility?"

"At the moment, I don’t see, here in Indonesia, any decommissioning being implemented – there will be a lot of studies, but that doesn’t mean that there will be implementation," Spitz says in the DecomWorld interview.

Tjea says the recent election of new President Joko Widodo, who Tjea describes as the Obama of Indonesia, offers "a lot of hope" for change. "We’ll see what comes out about the decommissioning," he says.

Vision Global’s report states that due to Indonesia having the largest proportion of ageing platforms in the Asia-Pacific area, the offshore decommissioning market is inevitably going to increase.

"The speed at which this is achieved is largely governed by investment, legislation and skills in Indonesia, although VisionGlobal anticipates an active market over the next ten years largely due to the age of structures," the report states.

Palmer agrees that if the many questions about decommissioning in Indonesia can be answered "it seems to me that decommissioning could be a safe and profitable business."

Follow Heidi Vella on Google+    

Energy link

Related Companies

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. The top stories of the day delivered to you every weekday. A weekly roundup of the latest news and analysis, sent every Friday. The industry's most comprehensive news and information delivered every month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy


Thank you for subscribing to Offshore Technology