Andika MahardikaAn energy service company perspective2014

Outlook for Indonesia's Oil Industry in Response to Low Oil Prices

Impact of Oil Price on Indonesia’s Economy

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1. Effect on low oil price 2. Current situation3. Strategy as energy services company in shrinking

market

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How Oil Price influence to Indonesia Economy

OIL Price

Supply & Demand Effect

Wealth Transfer Effect

Real Balance Effect

Inflation Effect

Consumption,Investment

Sectoral Adjustment Effect

Source : Pusat Kebijakan Ekonomi Makro, Kementerian Keuangan- RI

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1.Supply & Demand Effect

Market over supply and Oil company tend to “wait and see”OPEC Decision to keep production rate will push oil price to lowest levelUS Shale Production increasing since successful “Fracking Technology”

2. Wealth Transfer Effect

Purchasing power move from exporter to importer Country since low oil price will increase demand at Importer Country . Importer country should be have positive economic growth.

How Oil Price influence to Indonesia Economy

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3.Real Balance Effectlow oil price make surplus money in the market and interest rate will be down , economic growth will be positive (consider effect world economic)

How Oil Price influence to Indonesia Economy

4.Inflation Effect Low Oil price should be bring down inflation rate

5.Consumption,Investmentwith current price, consumption at net importer country will be high but Oil company will be hold their investment to drill new well and execute high risk well such as : deep water, Exploration Well,etc

6.Sectoral Adjustment Effectsome oil company hold their investment since will burning cash , some sectoral adjustment has been made for example reducing rig count, delayed project , etc

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Current Situation since Oil Price Drop

1. Oil Company start to cut off Budget around 35 %, less revenue- less spending

2. Production curtail (hopefully!!!) until price reach “new equilibrium” around 60-65 USD / Barrel

3. Wait and see on adjustment period , 1 quarter lag ( OPEC vs US Shale Oil) for net importer countries.

4. Suspend any high risk /high cost investment , waiting for regulator commitment and country energy policy

5. Reducing rig count lead to increasing number un-employment at oil and gas sector

6. No - economic Fundamental risk will lead to economy recession.( 1998 - Asian Market Drop; 2008 - US economic recession)

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Where Service Company Stand??

Indonesia Energy Policy Oil Company (PSC,KSO) Production Rate

Service Company

Service Company should be part of solution to Oil Company. Helping oil company to keep drilling at current low oil price. Market will be adjust to “new price Standard” (60-65 USD / Barrel).“Service” shall transform to “Care”

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Where Service Company Stand??

Supply & Demand EffectWealth Transfer Effect

Real Balance Effect

Inflation Effect

Consumption,Investment

Sectoral Adjustment Effect

Oil Company adjustment area :

Regulator adjustment area :

Service Company

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Service Company Business Strategy

Challenge Strategy

Drilling Budget Cut by +/-35 %

- Low price doesn't mean Poor Service Quality. - Reduce operation margin to 10-15 % - Reduce Operation cost by 25 %, (head count??,asset??). Oil price down = operation cost down??

- Depends on low cost business model

Delayed Drilling Campaign

- Help Oil Company to keep drilling by cost - technology optimization

- Client Customize , different client - different marketing treatment. (deep water, onshore, KSO,PSC , etc)

- Utilize marketing Intelligence

Business Downturn, Share value drop. No CAPEX

- Synergy between service company, Asset utilization

- in Long term , looking for “cheap investment”, to increase product and service capabilities especially from “fail to survive” company after this adjustment period.

- Concern on volume rather than pricing margin- Consider sunk cost

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Conclusion

Service Companies shall became part of solution at this adjustment time before oil price reach new equilibrium, which is concern to volume than pricing margin, by using low cost business model and customized marketing strategy to each client to bring down lower operation cost for operators.