When Oil Exports Run Dry

Want a glimpse at oil's future? Consider the curious case of Indonesia.

The world's fourth most populous country used to be a significant oil player. Indonesia joined OPEC in 1962 and enjoyed decades of carteldom. From 1996 to 2006, however, the country's output declined by 32%. The 2001 oil sector reform, in which national oil company Pertamina's grip was loosened on the exploration and production sector, may have been designed to avert a fall to net importer status. Despite the activities of Chevron (NYSE:CVX), ExxonMobil (NYSE:XOM), CNOOC (NYSE:CEO), and others, that's exactly what occurred just three years later. Indonesia finally let its OPEC membership expire last year.

This turn of events has become less curious as more countries have followed the Indonesian pattern. The U.K., for example, swung to a permanent net importer this decade. Apache (NYSE:APA) has done a yeoman's job increasing production at former owner BP's (NYSE:BP) Forties field, but that boost has been no match for the country's rising oil consumption. Then there's Mexico, whose rapid production declines I've identified as the greatest threat to U.S. oil supply. That country, which has seen oil production drop 7% in the first 10 months of 2009, appears headed for zero net exports in as little as two years.

Each country will face quite the challenge in propping up production during its twilight years. Indonesia, for one, is taking steps to incentivize explorers to sink more wells. Foreign players like Marathon Oil (NYSE:MRO) are likely to be taxed less and get a bigger piece of the pie in future production-sharing contracts. Indonesia thus goes from exporter to importer to implorer. I would expect the U.K., and eventually Mexico, to follow suit and practically fall over themselves to attract foreign E&Ps.

This is a tough development for Indonesia and its post-peak producer brethren, but it's certainly timely for Talisman Energy (NYSE:TLM) and other eager explorers.