Indonesia: Upstream Revival Push Faces Structural Roadblocks

What happened: Energy Minister Bahlil Lahadalia announced plans to offer 118 new oil and gas working areas for investors.

Why it matters: The announcement reflects a major effort to revive upstream exploration amid declining production and rising domestic energy demand.

What happens next: To woo foreign investors, the Prabowo administration must address structural challenges such as permitting delays, overlapping regulations, contract uncertainty, tough local content requirements and slow project approvals.

Last week, the Ministry of Energy and Mineral Resources (ESDM) announced that it is offering 118 potential oil and gas working areas and launching a new bidding round for 13 exploration blocks. In our view, this is one of the government's most ambitious attempts to revive investment in the upstream energy sector.

The development is important because domestic oil and gas production has been continuously falling for more than a decade. While Indonesia has aggressively promoted downstream nickel processing and mineral industrialization, its oil sector has steadily weakened. In recent years, the country has seen rising dependence on imported crude oil and fuel products despite substantial untapped hydrocarbon resources.

Since coming into office in October 2024, the Prabowo administration has been trying to open more blocks and accelerate exploration. This is needed to help the country move closer to its long-standing target of producing 1mn bpd (almost double the current 600,000 bpd). ESDM officials have also emphasized that Indonesia will provide a "fair" investment climate for both domestic and foreign companies.

Promises Not Kept

On paper, the announcement appears positive. Indonesia's resource potential is significant. The 13 blocks offered in the first 2026 bidding round alone contain estimated resources of around 16bn barrels of oil and more than 81tn cubic feet of gas. Several of the proposed areas are located in resource-rich Papua, Natuna and the Andaman Sea (Aceh water areas), all of which remain relatively underexplored. If successful, these regions could become future growth centers for the oil and gas industry.

However, this type of announcement is not something new. Successive governments before this one have repeatedly promised production growth, regulatory reform and stronger investment inflows. Yet the structural problems facing the sector have proven too difficult to solve.

The biggest challenge is converting potential resources into commercially viable projects. Many of the newly offered blocks are located in frontier regions, requiring substantial exploration investment. Even if discoveries are made tomorrow, production could take a decade or more. This means the economic benefits of the new oil and gas blocks will take several years to materialize.

There is also a contradiction within Indonesia’s broader policy direction. President Prabowo Subianto's economic policy increasingly combines resource nationalism, state-led industrialization and stronger government involvement in strategic sectors, particularly via Danantara. New regulations on centralized commodity export control and expanded state participation in resource governance have triggered investor concerns about policy uncertainty.

Upstream oil and gas development depends heavily on foreign capital, international technology providers and IEC interest. Indonesia cannot realistically develop many of its frontier basins without substantial foreign investment. This creates a dilemma for the Prabowo administration: On the one hand, it wants to tighten state control over strategic resources; on the other hand, it needs to woo foreign investors to enter long-term projects.

The promise of a fair investment climate is critical. ESDM chief Bahlil Lahadalia has publicly stated that the government will ensure equal treatment between SOEs, domestic private companies, regional actors and foreign investors. ESDM Director General of Oil and Gas Laode Sulaeman recently stated that 25 of the 118 working areas on offer have attracted interest; another 43 are in the joint study phase.

Unresolves Issues

• Licensing procedures can still be slow despite ESDM's promise to reform them.
• Regulatory authority is highly fragmented across ministries and agencies. For instance, unclear boundaries between ESDM, SKK Migas, BPH Migas and BPMA (for Aceh) often create bureaucratic gridlock. Projects spanning both upstream extraction and downstream distribution require approvals from multiple entities with different assessment criteria and timelines.
• A growing list of local content requirements increases project costs.
• Approval timelines remain unpredictable in some cases, and contract negotiations can become lengthy due to red tape.

Geopolitics

Recent instability in global energy markets has renewed interest in energy security across Asia. Indonesia is trying to position itself as both an investment destination and a future regional energy supplier. Large gas developments could strengthen Indonesia’s role in Asian LNG markets and reduce domestic import dependence.

However, competition for investment is increasing, and investors are becoming more selective. Beyond geological prospects, regulatory stability, contract certainty, infrastructure readiness and political risk are becoming more critical for long-term investment in the sector.

Meh Outlook

Indonesia’s upstream sector is notorious for its high barrier to entry. Many investors view the Prabowo administration as difficult to deal with. The government’s challenge goes beyond simply attracting initial interest in bidding rounds — it needs to ensure projects move from exploration to development quickly.

Looking ahead, the most likely scenario is that only a small portion of the 118 potential areas will attract serious commercial interest. Big IECs may focus on high-potential gas plays, particularly in eastern Indonesia, Aceh and offshore regions. Smaller or technically challenging blocks may struggle to secure financing despite government fiscal incentives.

For the Prabowo administration, the announcement of the new blocks is an important signal about the government's intention to attract investment in the sector. But institutional reform is critical to give investors confidence that contracts will be fully honored, approvals will be swift and commercial decisions will not become subject to shifting political priorities.