IHS Global Insight Perspective | |
Significance | Both Malaysia and Indonesia are keen to assert sovereignty over Ambalat given its favourable oil reserve estimates, as a means of reducing reliance on oil imports, and to meet projected increases in domestic oil demand. The area’s location astride an important Sea Lane of Communication (SLOC) through which large-tonnage oil tankers pass means asserting sovereignty over the area is important from an energy security perspective. |
Implications | The Indonesian government is likely to take a strong stand against any challenge to Eni's exploration efforts given the political sensitivities surrounding issues of territorial integrity and partly to appease domestic constituencies that have carried out anti-Malaysian demonstrations in response to previous clashes. |
Outlook | For Malaysia, drilling by Eni is likely to be viewed as an assertion of sovereignty over the area. The close proximity of Malaysian and Indonesian naval patrols in the area will create a potentially volatile situation, which could lead to increased deployments of military forces to the region and even a potential confrontation. |
Eni Discovers Oil at Ambalat
Indonesia's Energy Minister Purnomo Yusgiantoro has announced that Italian oil group Eni has found a large reserve of oil in the Ambalat area off the east coast of Borneo island, which is disputed between Indonesia and Malaysia. According to Yusgiantoro, the discovery could produce between 30,000 b/d and 40,000 b/d, although the government has asked Eni to carry out further tests to more precisely ascertain the size of the reserves there. To date Eni has not been able to carry out any drilling in the area because of the sovereignty dispute, so further exploration activities could prompt a reaction from Malaysia.
Indonesia however, has strong incentives to move ahead with developing oil reserves in the Ambalat area. Crude oil production in Indonesia has been steadily falling over the last decade, placing growing pressure on the state budget from oil imports. Indeed, in March 2009 Indonesia's oil production was 832,200 b/d, compared with 844,300 b/d in February, and 862,000b/d in September 2008 (see Indonesia: 30 October 2008: Indonesia's Crude Oil Production Falls Again in October). Falling oil production, which sank to levels 40% below the maximum quota set by Organisation of Petroleum Exporting Countries (OPEC) last June also forced the government to formally suspend its membership of the organisation in September 2008 (see Indonesia: 10 September 2008: Indonesian Government Officially Suspends OPEC Membership Following Vienna Meeting).The need to boost oil production has increased the value of blocks like Ambalat and hardened sovereignty claims. In addition, both Indonesia and Malaysia anticipate significant increases in domestic crude oil consumption in line with their pursuit of energy intensive growth strategies and industrialisation efforts. Given the perception of growing competition over global oil resources, asserting territorial control over the Ambalat area promises significant benefits in securing long-term supplies to the domestic market. Indeed, the Ambalat Block is said by the Indonesian government to have oil reserves of between 100 million and 1 billion barrels of oil with the potential to be exploited for 30 years. The Ambalat area lies on an important Sea Lane of Communication (SLOC) running from the Lombok Strait through the Makassar Strait and to the Molucca Islands in the Celebes Sea. A number of large-tonnage oil tankers pass through this route, making the area important in terms of energy security.
In addition, asserting sovereignty over the Ambalat Block is important politically. Territorial claims against Indonesia are a sensitive political issue given the history of separatism in certain regions of the country. The state is therefore likely to take a defiant stance against any attempted threats to its territorial claims from Malaysia, partly to send a strong message to separatist areas within Indonesia. Previous clashes over Ambalat have led to shows of patriotism through anti-Malaysia demonstrations, which also heighten pressure on the government to take strong action.
The stakes for Ambalat are therefore high and this has been reflected by a number of previous clashes between Indonesia and Malaysia in the area. As recently as October 2008, allegations that Malaysian armed forces were committing territorial violations around the Ambalat area led Indonesia to threaten to increase maritime and air patrols to match the presence of Malaysian troops (see Indonesia – Malaysia: 23 October 2008: Indonesia and Malaysia Clash over Ambalat Block). In 2005, the Malaysian government's issuing of exploration licences to Shell and NOC, Petronas Carigali, for blocks ND-6 and ND-7 (which overlap with the Ambalat and East Ambalat Block) led Indonesia and then Malaysia to deploy naval and air forces to the area to protect their territorial interests. In previous years, Malaysia has protested strongly over the Ambalat concessions that Indonesia gave to Eni and the now defunct Unocal. Eni managed to drill several wells in the Bukat blocks located near to Ambalat, although its exploration efforts could have been a major reason for Malaysia's decision to step up patrols around the area, which led to the clash in October. Both sides have attempted to bring in IOCs, partly to strengthen their territorial claims to the area and Eni's exploration efforts are therefore likely to be viewed as an assertion of sovereignty.
Outlook and Implications
Indonesia's government does not appear to have consulted with Malaysia over Eni's exploration plans for the area. Indeed, the government appears to be acting assertively, pledging to give full support including security back-up for Eni's operations. Having received a security guarantee of sorts from the Indonesian government, Eni is likely to move ahead with drilling. Indeed, the company was awarded a production sharing contract (PSC) for the Ambalat Block in 1999 and now, a decade on, will be keen to move forward with exploration, particularly as oil production from Ambalat will complement the 24,000 b/d which can be produced from six experimental wells at the nearby Bukat Block. Eni may be keen to explore for gas in the Ambalat area, which could be used to supply a proposed floating LNG terminal, sourced partially from the nearby Bukat Block. Eni also stands to strengthen relations further with the Indonesian government through developing Ambalat given its strategic significance, which could help the company boost its upstream foothold in Indonesia.
However, Malaysia is unlikely to stand by and let Eni proceed with exploiting oil reserves in the area. Malaysia has tolerated drilling at the Bukat Block which could account for the government's willingness to risk proceeding with exploration at Ambalat. However, Bukat lies outside the disputed area while most of the Ambalat Block lies within it. Malaysia has shown its willingness to defend territorial claims over Ambalat in the past and will do so again and exploration attempts by Eni are only likely to raise bilateral tensions in the short term. Both Malaysia and Indonesia maintain naval patrols in the disputed areas to emphasise their territorial claims. At best, Eni is likely to receive warnings from Malaysia not to proceed with exploration while the close proximity of patrolling Malaysian and Indonesian vessels will create a potentially volatile situation. At worst, Malaysian vessels could try to escort Eni's drilling vessels from the area which could lead Indonesia to increase deployments of naval vessels and aircraft, raising the worrying possibility of armed clashes between the two nations.