OIL AND GAS INDUSTRY MULTIPLIER EFFECT

Upstream oil and gas sector has a multiplier effect on the growth of the national economy, ranging from the use of local products to transactions through national banking. This sector is one of the major contributors to the national economic growth reaching US$ 23.7 billion in 2016.

Local Procurement CONTRIBUTION OF UPSTREAM OIL AND GAS SECTOR TO GDP (US$ billion)

% % % % %

5.1

4.6

5.5

2.6

2.5

11.5

9.3

11.8

5.3

3.1 Every investment of

US$ MILLION

2012 2013 2014 2015 2016

Creating added value of n

Goods Services

US$ 1.6 MILLION

The ratio of local content to the expenditure

Transactions through the National Banking System (US$ billion)

Additional GDP of

US$ 0.7 MILLION

9.3

8.2

12.4

9.7 Upstream oil and gas GDP in 2016 Creation of job opportunity of

US$ BILLION

23.7 ± 100 PEOPLE % contributing 3.3 to GDP

OIL AND GAS INVESTMENT DECREASES REGIONAL ECONOMIES SLOW DOWN

Oil and gas sector has caused an economic slowdown in a number of producing regions in which this sector is a major contributor to the economic growth.

Rokan Hilir, Riau Bengkalis, Riau Kampar, Riau

2015: % 2015:

2015:

1.0

-2.7

1.1 2014: 4.1% 2014: -3.9 2014: 3.4

Siak, Riau Kutai Kartanegara, East Kalimantan

2015: -0.2 2015: -7.6 2014: -1.0

Penajam Paser Utara, 2014: -1.5 East Kalimantan

2015:

0.2 2014: 4.4 Tanjung Jabung Timur, Jambi

Sorong, West Papua 2015:

1.9 2014: 5.8 2015:

2.3 2014: 3.1 Musi Banyuasin, Natuna, Riau Island

South Sumatra 2015:

3.3

2015:

2.3 Economic growth 2014: 3.5 2014: 4.7

OIL AND GAS EXPLORATION SHIFTS TO DEEPWATER AREAS

Upstream oil and gas activities in Indonesia have begun to shift from old onshore fields to offshore and deepwater areas. Most oil and gas reserves potential is still largely unexplored, although over the last three years, offshore oil and gas working areas (WK) have always dominated the Government auction.

INDONESIA’S HYDROCARBON POTENTIAL Conventional Work Areas Offered of oil and gas

5 reserves are

2 %

7 located in offshore areas

2014 2015 2016

n n

Onshore Onshore-Offshore Offshore

Deep Sea Exploration Challenges Expensive investment cost Drilling of one well costs US$ 80-100 million Low investment rate of return (IRR)

Basins already in production ( 16 areas )

IRR projects in Indonesia are 55%

Basins with hydrocarbons found, not yet in production (7)

lower than the average IRR of 30

22 Basins not yet explored ( )

global deepwater gas projects

Drilled basins, hydrocarbon not yet found (

15 ) Long exploration period

LICENSING ISSUES HAMPER OIL AND GAS INVESTMENT LICENCE COMPLEXITY

Licensing is one of the major barriers to investment in the upstream oil and gas sector.

FROM MINISTRIES/AGENCIES

2 (-)

9 (2)

16 (14)

MMAF • Increased

4 (3)

Public Works Min.

In addition to the large number of licences required, the procedures to obtain them take a long time. Data from The Coordinating Ministry for The Economy, as of February 2017, indicates 373 types of licences needed from 19 central and regional institutions.

Transportation Min. Labour Min. Defense Min.

76 (58)

16 (14) Finance Min.

74 (52)

MEMR

Note: () in 2015 Note: () in 2015

19 Police

11 (12) Trade Min.

3 Land Min. Navy Law Min.

Survey and Exploration 117 Post-Operation Activities

3 Nuclear Agency

2 Private Land Owner Information Min.

3 Industry Min.

Impacts of Complex Licensing Expensive production cost

36 (40)

Prolonged production activities Increase of Cost recovery

Regency/City 373 LICENCE TYPES Increasing from 341 (2015)

53 (66)

Province • Reduced

29 (35)

Environment Min.

4 • Stayed the Same

10 Production 109 Developments and Constructions 137

INVESTMENT DECREASES, OIL AND GAS RESERVES SHRINK

The fall in crude oil prices occurring since mid-2014 caused oil and gas contractors to improve efficiency, including by reducing investment spending. As a result, the national oil and gas reserves decreased due to the lack of exploration activities.

EXPLORATION AREA AND RESERVES DECREASE

110 Active Work Areas of oil and gas Exploration 52 233 238 235 228 199* Areas Unconventional Work Areas of oil and gas

37 Work Areas Oil Reserves in termination process 3.741,3 3.692,5 3.624,5 3.602,5 3.306,9

(million barrels) Gas reserves

(TSCF) 103,3 101,5 100,3 98,0 101,2 2012 2013 2014 2015 2016 Exploration Investment Decreases Causes of Investment Decline (US$ Billion)

Oil price decline Low in return 1,3 1,4 1,1 0,5 0,1

Period of discovery to Constraints in extension of the production takes 15 years working areas and legal certainty

2012 2013 2014 2015 2016*

Land acquisition constraints and Low ratio between reserve replacement

) Data as of November 2016 lengthy licensing bureaucracy and successful exploration.

INDONESIAN OIL AND GAS INVESTMENT CLIMATE

RANKS THE LOWEST IN ASEAN

The 2016 Policy Perception Index Survey released by the Fraser Institute shows the oil and gas investment climate in the country is less competitive compared to neighbouring countries. The declining attractiveness of the investment climate can be seen from the reducing number of parties

interested in the auction of oil and gas working areas (WK) in the last two years.

WK Auction Lacks Enthusiasts* Myanmar Cambodia Philippines

17 Rank*

11 RRR** No discovery and

(2009-2013) % production since

51 45 2005 Thailand

Vietnam Brunei Darussalam

2012 2013 2014 2015 2016

161 221 141 n

Total number of areas offered

Total number of winners

) Conventional and unconventional

Malaysia Factors that are being evaluated

41 among others include high taxes; Indonesia the burden of regulatory obligations; uncertainty of environmental 141

) of 96 jurisdictions

regulations and upstream oil and gas

) Reserves Replacement Ratio: The amount of

industry regulations; and also concerns

proved reserves added to the reserves base

compared to the amount of production

LARGE FUNDS NEEDED

US$ MILLION)

5. South East Sumatra CNOOC SES Ltd September 5

6. Tengah JOB Pertamina - Talisman Ogan Komering February 28 ^th , 2018 US$ 1,1 million 2,1 thousand bpd 6,3 mmscfd

25 Terminated Blocks

412.3 1910 8 blocks

Funds Needed (

2017-2018 and these eight Blocks require a lot of funds. Up until 2021, there are

17 other Blocks that will be terminated.

8. East Kalimantan

The Ministry of Energy and Mineral Resources has handed over to Pertamina

the management of eight oil and gas Blocks of which contract period expires in

2. Ogan Komering October 25 ^th , 2018 US$ 56,4 million 12,1 thousand bpd 68,1 mmscfd Chevron Indonesia Company

^th , 2018 US$ 229,5 million 30,9 thousand bpd 70,9 mmscfd

1. Attaka March 31 ^st , 2017 US$ 4,9 million 6,6 thousand bpd n/a

Note:

Estimated operating expenses in a year

Gas Oil

Operator End of Contract

bpd : barrel per day mmscfd : million standard cubic feet per day

7. North Sumatra Offshore PHE NSO October 15 ^th , 2018 US$ 13,26 million 0,1 thousand bpd 20,2 mmscfd

4. Sanga-Sanga August 7 ^th , 2018 14,9 thousand bpd 200,2 mmscfd Virginia Indonesia Company (VICO)

3. Tuban February 28 ^th , 2018 3,4 thousand bpd 2,3 mmscfd JOB Pertamina- Petrochina East Java Ltd

INPEX Corporation

October 4 ^th , 2018 n/a n/a Total E&P Indonesie

OIL AND GAS LIFTING THREATENED BY FURTHER DECLINE

LIFTING PORTION OF 25 TERMINATED OIL AND GAS BLOCKS

Bentu Segat • Rokan • Selat Panjang
Offshore North West Java • Mahakam • Lematang • Attaka
Pendopo & Raja • Bula • Seram-Non Bula
Tuban • Ogan Komering • Sanga-Sanga
South East Sumatra • B Block • Tengah • NSO/NSO Ext • East Kalimantan • Makassar Strait – Offshore Area A • South Jambi Block B • Brantas

2021 2021 2016 374 6685 4384

2016 820

2021 2019 2020

9 49 251 2017 2018

Note: POTENTIAL DECLINE IN OIL & GAS LIFTING 1756 107 390

(million cubic feet per day)

Gas

(thousand barrels per day)

3 oil and gas blocks Oil

4 oil and gas blocks

6 oil and gas blocks

4 oil and gas blocks 8 oil and gas blocks

In the next 5 years, as many as 25 oil and gas blocks will end their contract period. If the transfer process for the Blocks is not prepared now, this situation has the potential to decrease the national oil and gas daily lifting rates.

Salawati • Kepala Burung • Malacca Strait • Jambi-Merang

OIL AND GAS JOB OPPORTUNITIES ARE SCARCE

The declining interest in oil and gas investment in Indonesia has resulted in a decrease in the recruitment of new workers in the sector. As a result, graduates with technical qualifications in the field of oil and gas have slim chance to work and fulfill their potential. The same situation has also occurred overseas as many global oil and gas companies have been carrying out efficiency measures.

INDONESIA’S MINING STUDENTS 2016 Reduced Investment, Limited Employment Petroleum Geophysical Geological Mining 20,4 15,6 10,4 Engineering Engineering Engineering Engineering 32.292 31.745 ? 5,469 2,644 8,074 14,170

2014 2015 2016

students students students students 30,357 n n

Investment (US$ billion) Work Force

in universities in universities in universities in universities Students

37 GLOBAL DRILLING Causes of Investment ACTIVITIES DROP Reduction

Efficiency rig 3,657

Low oil prices (October 2014)

Less attractive investment climate rig 1,620

(October 2016) Selective investing

INDONESIA’S FISCAL INCENTIVES

LESS COMPETITIVE

Oil and gas exploration targets in Indonesia have been shifting from onshore to deepwater

offshore locations which are much more expensive. Oil and gas producing countries must offer

fiscal incentives to attract investment in a low oil price environment. From a global investors

perspective, Indonesian deepwater prospects are less attractive compared to other countries.

Top 10 Deepwater

INDONESIA LESS ATTRACTIVE

Destinations*

% Deepwater

Government

IRR post

acreage Country

Country Share

awarded

FID (%) ₂ pre-NPV (%)

(000 km ) Canada 27,778

40 UK

41.5

40.1 Papua New Guinea 14,750 Ireland

40.3

43.2 Cyprus 11,665 Papua New

38.2

37.7 Cote d’ Ivoire 9,300 Guinea

Ireland 8,963

Canada

33.9

58.9 Australia 8,248 Mauritania

32.8

58.7

30 Norway 7,218 Mozambique

31.0

63.9 Mozambique 5,288 Australia

30.4

64.7 post FID (Final Investment Decision)

Mauritania 4,300

Investor Investment Rate of Return (IRR)

25 UK 3,527 Indonesia PSC

24.8

73.9 PSC ... ... Indonesia

22.3

78.7 gross split PSC Gross Split

Indonesia

60 80 100

Since 2016, only BP, Chevron, Eni,

Government share pre-NPV ExxonMobil, Shell, Statoil, Total

OIL AND GAS INDUSTRY MULTIPLIER EFFECT