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Uncertainty clouds Indonesia’s energy sector

By  Audrey Raj Tuesday, 01 December 2015 10:18
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Although Indonesia’s return to OPEC could increase foreign investment in its upstream and downstream sectors, onerous regulation might remain a deterrent for investors.

OPEC headquarters in Vienna.  Photos from OPEC.

As AOG goes to press, the Organization of the Petroleum Exporting Countries (OPEC) is planning to accept Indonesia’s request to rejoin the oil exporters group, after a break of about seven years.

This will see the country become the only Asian member of OPEC, plus the only member that is a net importer of petroleum and other liquids. Jakarta originally joined OPEC in 1962 but suspended its membership at the beginning of 2009, due to market challenges.

While Indonesia’s oil production peaked in 1976, the year 1995 saw the start of a new era in its upstream sector. Oil production started to decline dramatically, because of aging fields and limited investment.

According to the US Energy information Administration (EIA), by 2004 Indonesia had become a net importer of petroleum, as domestic demand was exceeding production. In 2014, the country produced about 790,000 b/d of crude oil and condensates, the third lowest level among OPEC countries.

Mriganka Jaipuriyar, associate editorial director at Platts, says Indonesia’s return to OPEC should not have any impact on the global oil markets and other Asian producers.

“The country exports under 250,000 b/d and imports over 300,000 b/d,” Jaipuriyar says. “It is not in a position to boost oil exports given declining production and reserves, so there is no risk of more supply hitting the oil markets.”

So, why do it all?

Indonesia currently buys crude oil and petroleum products through third parties or traders, and wants access to long-term crude oil supply contracts through negotiations made between the national oil companies (NOC) of OPEC.

“This would help to strengthen cooperation with oil producing countries through direct deals,” explains Candace Dunn, analyst, EIA.

“Moreover, Indonesia needs to attract more foreign investment in its upstream and downstream sectors and sees OPEC membership as an opportunity to garner greater investment.”

Since it lacks oil exploration and production technologies, an OPEC membership could also open doors to more machineries in the country adds Anas Pradipta, Indonesia energy policy analyst from Energy Charter.

“Under the new minister, Indonesia is trying to reform several aspects in its oil and gas business,” Pradipta says. “By joining OPEC, Indonesia could communicate formally and informally with ministers of OPEC countries and be actively involved in bilateral or multilateral cooperation”

“As for OPEC, Indonesia being the only Southeast Asian country in the group could act as a bridge between oil producing countries and oil consuming nations in the region.”

Foreign investment

OPEC headquarters in Vienna.  Photos from OPEC.

Indonesia anticipates more crude oil imports will be needed to meet domestic demand, so the country is planning a number of expansions slated to become operational within the next decade.

“The country’s Refinery Master Development Plan involves upgrading existing refineries and boosting capacity to around 1.7 MMb/d,” Dunn explains.

“Indonesia also announced plans to build four new refineries with 300,000 b/d capacity each and has been in discussions with various countries, including Kuwait and Iran.”

According to Jaipuriyar, companies like China’s Sinopec, Saudi Arabia’s Saudi Aramco and Japan’s JX Nippon Oil and Energy were to help with this expansion but plans are faltering.

For example, upgrade of the Plaju refinery has been canceled, as it was proving to be uneconomical. “Sinopec was to upgrade the Plaju plant, too,” Jaipuriyar adds.

“Discussions with Aramco and JX Nippon regarding other refineries have also hit a roadblock with the main contention being the extent to which these companies can participate in the downstream market in exchange of participating in the upgrade plan.

“Meanwhile, Indonesia is also planning greenfield refinery projects but no progress has been made. Previous attempts to build new refineries have failed due to taxation and land acquisition issues,” Jaipuriyar says.

“We have not seen NOCs express upstream interest, but that could be due to lack of attractive upstream fiscal policies. Should the government be able to straighten things out at the policy level, Indonesia may be able to attract NOCs to the upstream sector, too.”

Exploration incentives and permits

The Indonesian government is looking to target gas production between 1.1-1.3 MMboe/d and oil production approximately 800,000-830,000 b/d in 2016.

In addition, next year the government plans to hold bidding round for 21 new oil and gas blocks, comprising of 13 conventional and eight non-conventional oil and gas blocks. Eight conventional oil blocks will be offered through regular tenders while the rest through direct tenders or joint studies.

“Indonesia is actively promoting increased exploration in the country through incentive packages too,” Pradipta adds. “For example, there is additional concession for oil produced from pre-tertiary reservoir rocks, deepwater contract areas, and remote areas.”

In August, the Ministry of Energy and Mineral Resources (MEMR) said it intends to offer a new contract scheme aimed at boosting exploration and production activities.

As opposed to a product-sharing contract (PSC) where recovery cost is substituted by the government, the new scheme, a system used in Australia, is gross split or sliding scale.

Under this arrangement, the government will not provide recovery cost to contractors who will in return be entitled to a larger production share during the initial stages. As soon as investors recover the costs spent on exploration, the government will then receive more shares from the production.

In addition to the lack of oil and gas law and tardy bureaucracy, another key hurdle in the Indonesian upstream sector is the sheer number of permits that contractors need to take before they can start exploration work, Jaipuriyar says.

“The government has cut the number of permits required by the oil and gas ministry from 52-42. But that still leaves some 289 permits that contractors need to take from the transport, forestry and environment ministries and from regional governments where their blocks are located.”

Potentials in Indonesia

Ophir Energy’s Indonesia operation. Photo from Ophir.

In the near term, the largest discovery that will increase production in Indonesia is the Cepu block, including the Banyu Urip field, Dunn says.

“The field commenced production in early 2015 and output was 75,000 b/d in September 2015 and production is expected to peak at 205,000 b/d in 2016.

“The country has other smaller fields that are slated to become operational over the next few years but these will not be able to offset production declines from mature basins” Dunn says.

“Chevron is employing enhanced oil recovery techniques in the Duri and Minas fields, the two largest fields in the country.”

Since January-September, Indonesian oil and gas regulator, SKK Migas has approved 18 field development plans worth US$3.652 billion.

Some of which include PT. Chevron Pacific Indonesia’s Gulamo North-01 well in the Rokan block; the Kisaran block operated by Pacific Oil and Gas; PHE ONWJ’s Foxtrot field; and PT. Pertamina EP Cepu’s Cepu block.

Most recently, the group also approved PT Energi Mega Persada’s (EMP) plan to further develop the Seng and Segat gas fields in the Bentu PSC and Ramba Energy’s proposal to develop the Lemang block in the Akatara field.

In October, Canada-based Pan Orient Energy who has three PSCs in Indonesia found 3.7 MMscf of natural gas, 142.2 bbl of condensate and 25 bbl of condensed water in the Akeh-1 exploration well in the Batu Gajah PSC.

Hong Kong-listed CITIC Resources’ Lofin field in the Seram Island Non-Bula block showed prominent prospects, too. As of August, the amount of contingent reserves and resources of gas, recoverable gas and condensate are estimated at 3070 Bcf, 2020 Bcf and 18.25 MMbbl, respectively.

Cooper Energy’s Tangai-Sukananti KSO development saw oil production of 38,200 bbl in the September term, 24% higher than the June quarter. Moreover, appraisal well, Bunian-4 was completed and results showed new oil bearing reservoir, said the Australian explorer.

In recent acquisitions, Sydney-based NuEnergy Gas focused in unconventional gas production in Indonesia is in the process of purchasing Dart Energy’s Indonesian coal bed methane assets, under a conditional agreement of $1 million.

This includes Dart’s 45% interest in Tanjung Enim and 50% interest in Muralim, both in South Sumatra; and 100% participating interest in Bontang-Bengalon in East Kalimantan. All of these blocks have been awarded a six-year exploration permit previously.

Singapore-headquartered Mandala Energy is also buying 35% participating interest in the Lemang PSC from Ramba Energy’s subsidiary PT Hexindo Gemilang Jaya. Subject to Indonesian government approval, Mandala will invest up to $179.6 million with an up-front cash payment of $26.25 million.

Up in the UK, Ophir Energy, too, expanded its portfolio in Indonesia with the acquisition of four deepwater PSCs from Niko Resources, including West Papua IV, Aru, Kofiau and Halmahera-Kofiau, all of which will be operated by Ophir.

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