Domestic

Abstract
Indonesia has many potential undeveloped reserves and currently still depends on petroleum resources to support its economy. In Indonesia case, the Discounted Cash Flow (DCF) is much more widely applied than Real Option for valuation of the petroleum project. Generally, ROV was chosen to accommodate flexibility management in adapting and revising future decisions in response to changing circumstances. The ROV technique makes efficient use of market information and minimizes reliance on subjective and arbitrary data inputs, as observed in the illustrations in Paddock, Siegel and Smith (1988).
Two approaches can be used to value petroleum reserve using ROV i.e.:
– Internal approach that uses the output of DCF result.
– External approach that uses market data i.e. historical actual reserve transaction price.
ROV still requires the use of an existing DCF model when we want to value the petroleum project under our company. Since the field under our internal control, there will be much technical and financial information about the field, and we can use that information to make economics projection for that field.
However, if we want to value the petroleum project beyond our control for instance, in the acquisition program, external approach is required to see how market expects the value of the petroleum reserve at this moment. In this case, ROV can make efficient use of market information and minimizes reliance on subjective judgments and arbitrary assumptions provided by an analyst, as the illustrations in Paddock, Siegel and Smith (1998) demonstrates.
In internal approach, we identify the underlying asset as the net present value of developed petroleum reserves. The NPV exhibits a log normal probability distribution, so the volatility of the underlying asset is based on the logarithm of the future cash flows.
In external/market approach, the underlying asset is valued based on the historical actual reserve transaction data from Adelman and Watkins’ study in 2003. This paper tests for co-integration between the estimated oil reserve price and WTI spot price. The output of the Error Correction Model will be an input for ROV in term of underlying asset parameter.

A LOCAL PLAYER PERSPECTIVE ON INDONESIAN OIL INDUSTRY
ISSUES AND CHALLENGE
Currently, the oil industry is experiencing a boom due to high oil prices. Although this situation is not sustainable, there is no sign of slow down in demand. It was indicated that the oil price will remain well over $20.00/bbl.
Recent reports indicate that oil and gas demand has risen from 47 mmbd in 1970 to 82 mmbd today sign of slowdown. Non OPEC production is expected to decline because due to limited resources, while reserves in some regions may have been exaggerated by both companies and countries.
While demand has been growing at an annual rate of 1.5% over the last 5 years, production capacity has grown at only 0.2%. It’s likely to be needed to enable OPEC to meet future demand, around $400 billion for oil and $200 billion for gas.
Indonesia as a member of OPEC is also encouraged to increase their production especially since Indonesia has already been a net importer. A change in incentive policy related to oil and gas investment is required since there are some exodus foreign investment from Indonesia especially for US and Europe investors.
On the other side, China has entered Indonesia and may effect the reduced invest of the western oil investor. From the local player’s perspective, the situation created a high competition.
Indonesian government needs to consider how to provide incentives to local players in competing with other country in energy business considering that in future, Government needs local oil companies to secure oil supply for the domestic demand.
In building competitiveness to attract oil & gas investment in Indonesia, Government should restructure the current PSC by providing some incentive for to utilizing local resources even though the government take would potentially be reduced.