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Interview

Craig Stewart – General Manager, Ophir Indonesia

Craig Stewart [General Manager Ophir]

The general manager of a feisty new entrant to the local market outlines the company’s lofty offshore ambitions while shedding light on the rationale behind one of this year’s headline mergers and acquisitions.

Maybe you could start by giving an overview of Ophir’s newly acquired assets in Indonesia and their current state of commercialization?

Ophir today possesses 13 PSCs in Indonesia: seven of which belonged to Salamander and with a further six deepwater blocks which were recently acquired from Niko Resources. To give you a sense of the background, Salamander’s Indonesian arm was established in 2006 and the prize asset in the portfolio constituted the Keredan stranded gas field which commenced development back in 2012. This particular field is located in the middle of central Kalimantan in a very remote location. In my former capacity as general manger of Salamander, we concluded a gas contract with PLN for this core development asset in which they committed to building a dedicated power plant out in the jungle and 300 kilometers of transmission lines so as to evacuate the power into the Kalimantan grid.

Last year, Salamander made the headlines for its discoveries in West Keredan which essentially ended up doubling the size of the original Keredan field to 600 bcf. We are thus forging ahead with the development of this very promising field. The first phase should be complete by fall 2015 and entails the construction of the power plant and connecting infrastructure. PLN is currently a little behind schedule in putting in the transmission lines but, even so, around 80 percent of those installations are already nearing completion and this work tempo should enable us to bring the field on-stream during the first half of 2016.

Successfully integrating Salamander within the Ophir Group will naturally be a key priority for this year alongside our work schedule for realizing operational milestones on our existing assets. At the same time we will be conducting a reevaluation of all the acreage in the portfolio so as to define the plan of development for subsequent phases and with a view to laying the groundwork of any future drilling campaigns. Our analysis will also entail evaluating existing and potential markets. For Keredan, for example, we want to explore the viability of supplying the local coalmining industry whom appear keen on the idea of substituting their considerable diesel consumption for LNG.

Prior to the takeover, Salamander was a full cycle upstream oil and gas company with an illustrious reputation as one of the more vigorous independent E&P companies in Indonesia. Ophir’s backdround as an Africa-focused deepwater explorer is markedly different. What, then, can we expect from the effective merging of these two very distinct entities?  

Salamander’s business strategy was very similar to that of some of the other smaller independent E&P companies active in Indonesia such as Pearl or Kris Energy. The idea was essentially to seek out and target discoveries dating from the 1980s and 1990s which were considered non-economic at the time. With new innovations in technology over the past decade and a soaring increase in commodity prices these dormant assets suddenly became much more economically viable to develop. At the same time, they remained under the radar screen of majors who wouldn’t consider them to be scalable enough. It was a niche that was perfect for an entity like Salamander which was also pursuing the same model to great effect elsewhere in countries such as Thailand. Typically Salamander would concentrate on a small number of asset positions, or hubs, that offered the full spectrum of production, development and exploration opportunities and would insist on holding the operatorship so as to be able to control the scale, scope and pace of implementation of the work programmes across its asset base.

Ophir, by contrast, has been a deepwater explorer, pure and simple with a geographic focus firmly on the African sphere. We’re taking about big money drill programs with a single well costing anything between 50 and 100 million USD. Their target would be the sort of mega discoveries that would also be of interest to the majors and super-majors. 

So, when you blend those two very different approaches what do you get?

Well, the acquisition allows Ophir to expand its footprint to transcontinental proportions. It also enables the company to build a production base that can help finance the sort of ambitious exploration programme that it is very keen to pursue. The purchase of Salamander is in many senses the first step to establishing that readymade production platform for internal financing. The simultaneous buying up of Niko’s deepwater acreage also makes sense because those are precisely the sort of high-impact, frontier exploration assets that Ophir consider to be their specialism, their bread and butter so to speak. Similar acreage has also been purchased in Myanmar which broadens the Asian footprint even further.

In many respects Salamander was a perfect choice for takeover because of the immense experience and know-how contained within. We’re talking about a fully-fledged, stand-alone actor with a strong track record active across the full chain of E&P activities in Indonesia. Not only do you acquire the expertise of being an operator, but also the know-how of how to play the Indonesian market, which is notorious for being difficult. In Africa, Ophir could operate from Perth and parachute in personnel and technology as and when needed right up to the preliminary development phase. Indonesia, however, represents an entirely different ball game.

You cannot get anywhere acting remotely. Procurement has to be conducted within country. There are local content requirements to deal with and local service suppliers to be navigated if you are to strand any chance of executing any blocks for which you possess the licenses. Salamander isn’t then merely a production base for generating cash flow, but a fount of insider knowledge and readily functional operating entity that is going to be vital to the success of any deepwater exploration campaign Ophir desires to undertake. The end product is therefore a logical blending: not just of geographies but also of capabilities and a fusion of expertise. It’s a fit that makes a lot of sense.

This must mean quite a change of gears for you personally in these sense that you will be running a very different outfit from now on?

Actually it means I’ve travelled full circle back to where I started from. Prior to Salamander and Vico, I was vice president at Unocal for Indonesia and Thailand where the focus was again very much these sorts of high-impact mega exploration projects that we’re now going to be undertaking. I’m relishing the challenge to be at the forefront of all that all over again.

You’ve mentioned you will be conducting a thorough reevaluation of your acreage so as to high grade your prospect inventory. Is this the precursor to a new drilling campaign and about positioning yourself to extract full advantage of the softening rig market?

We are taking things sequentially. No new drilling campaign is yet formulated, but Ophir is in fine financial condition so the door of possibilities is wide open. One of the benefits of the merger from Salamander’s perspective is the capital injection that Ophir brings. The company enjoys deep pockets and has actually just sold equity in some deepwater assets so investment will be forthcoming if deemed beneficial to the strategy we wish to roll out. This year and next year we will be shooting a lot of seismic studies: thee onshore one offshore all of which will be tendered to expert geophysical outfits. After that we will have a clearer picture and understanding of where and when to drill.

Our emphasis will be on frontier areas in the East. Looking at our portfolio of PSCs right now, we have a number in Central Kalimantan around the hub of Keredan and obviously it makes sense to extend and build on that especially now that we are putting in hard infrastructure and identifying new opportunities to diversify our markets and migrate away from being solely reliant on the PLN market. Then there are our blocks in the Makassar strait which is practically where all recent deepwater discoveries have been made so that should also form a focal point for us. 

You mentioned you were going to be undertaking geophysical studies. We noticed many other E&P actors in Indonesia are doing the same right now. Is that a reflection of prevailing market conditions and the suspension of costly drilling campaigns during this period of belt tightening?

For some companies it could be and the current uncertainty as we await a new oil and gas law could also be a factor deterring stakeholders from committing to extensive drilling campaigns. At Ophir, we don’t face such constraints, but investing in seismic data acquisition and processing tends to be part and parcel of being in Indonesia because of the distinct lack of data sharing in the market. Indonesia never set up a centralized open-access data system. Whatever data the state maintains tends to be incomplete and is not accessible anyway. PSC holders generally keep their data to themselves for the duration of their contract. Having a state maintained database of geophysical and seismic data open to all would be a good incentive to E&P activity, but such systems are costly to set up and run and the Indonesian government has always treated the oil and gas industry as a cash cow, rather than an industry meriting strategic investments. 

Is the acquisition of Salamander symptomatic of a broader trend taking place across the Indonesian E&P landscape? We’ve been witnessing firms like Niko and Hess exit the market and some stakeholders are speaking of a consolidation in the upstream market.

The Indonesian market has always been pretty tricky for the smaller E&P players and with the oil price crash everything has got a whole lot tougher. Explorers have to grapple with a highly demanding operational environment in which the time taken to bring a discovery into production exceeds 15 years. You need pretty deep pockets to be able to endure this length of time without generating revenue.

In Indonesia you can identify different clusters of companies. Firstly there are oil majors sitting on legacy assets – ConocoPhillips, Chevron, Total and so on – who were granted their PSCs in the late 1960s and whose contracts are now coming up to the expiry of the first extension. They remain committed to the market because their assets are high performance and producing, but there is increasing uncertainty over the extent of their future engagement with the market with the government seemingly intent of turning over many of the choice assets to Pertamina on expiry of the contracts. Right now there is a willingness on the part of the authorities to grow Pertamina into a more robust NOC and handing over greater control of these mature fields seems to be the mechanism chosen to realize that ambition. Total has thus controversially been assigned a minority state for Mahakam and the next big field due for a contract extension will be Chevron’s Sumatran assets.

Then there’s a second group of actors who made discoveries in the 1990s and have been striving to commercialize and bring on stream those resources. Some have managed to do this in a big way such as BP in Tangguh which started production in 2009 or are well on the way to doing so such as Abadi gas field. Others have not managed to, but continue to hang in there conscious of the potential value of their as yet, unrealized assets.

More recently, we’ve seen a push for unconventionals with a number of heavyweight players trying their hand at the deepwater prospects in the Makassar straight with mixed degrees of success: ENI, Statoil, Marathon and Anadarko to name a few. We are midway through that cycle with those PSCs having been awarded a few years ago and this is a bandwagon that Ophir is now climbing on. Our ambition is to continue and further the cycle.

Finally there are the smaller E&P players, both local and international, focusing on stranded fields or seeking to carve out other niches. This is where we’ve seen most volatility with mergers and acquisitions. North American outfits in particular have been under great pressure to pull out of difficult markets such as Indonesia and to focus instead on their home markets. Hess, for example, would fall into that category. It used to be that the smaller companies would target pockets in the vicinity of the large discoveries, but many of these ‘crumbs under the table’ have now been hoovered up. The outstanding opportunities now are going to be in the underexplored east and unconventionals and that is going to be high risk, costly and require a lot of staying power.

Aside from deepwater, unconventionals haven’t rally taken off in Indonesia. Why is that? 

You have some great basins in Kalimantan, South and Central Sumatra and some areas of Java where it should be possible to get unconventionals working, but Indonesia’s geology is different from other parts of the world and requires locally adapted solutions. There was a lot of hype surrounding coal based methane (CBM) because of the high quantity of coal to be found in Indonesia, but geologically no one has really made this work yet. My old company, VICO, gave it a good shot, but the end results were disappointing. At the time, everyone’s concern was about optimizing the process to make it cost-efficient. The real stumbling block turned out to be actually more to do with being able to extract sufficient quantities of gas to be commercially viable. No one has really cracked that yet. Shale is also a bit of a pipe dream because entirely new methodologies have to be pioneered and experimented for Indonesian geology and there are real doubts as to whether the existing Indonesian regulatory and fiscal environment can sustain such innovation and entrepreneurship.

What advice do you have for incoming upstream actors seeking to make a success out of the Indonesian market?

You need to build up a strong indigenous workforce. Nationalistic tendencies abound in Indonesian oil and gas and you will need to embed your business into the local ecosystem if you are to be successful. Luckily the local level of human capital is technically very high as Indonesia enjoys long and historically bountiful oil and gas heritage. There’s plenty of capable Indonesians to choose from both in the technical and managerial categories who really understand their local environment and, especially now with some of big PSCs expiring and changes in operatorship looming, many are seeking new career paths.

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country. 

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