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Interview

Dr. Syamsu Alam – Upstream Director, Pertamina Indonesia

Pertamina’s upstream director reviews 2015’s domestic production in Indonesia, including its averaging demand and supply gap of approximately 600,000 bpd and highlights how international expansion will help Pertamina secure Indonesia’s energy supply. Moreover, he considers Indonesia’s hydrocarbon reserves, emphasizing the significance of offshore gas for Indonesia’s future, specifically underlining Pertamina’s willingness to partner in this segment.

In 2015, Indonesia’s crude oil output was approximately 800,000 bpd, domestic demand however stood at approximately 1.4 million bpd. What are Pertamina’s plans to enhance oil production?

In 2015, Pertamina’s domestic contribution to national oil production was approximately 200,000 barrels per day (bpd) in addition to approximately 70,000 bpd shipped in from our overseas operations in Iraq, Algeria and Malaysia. The big question for us is: how can we bridge the current supply and demand gap of roughly 600,000 bpd?

Obviously we will try to boost domestic production; however, the potential is limited due to the low oil price which forces us to operate in a survival mode. We already enhanced efficiency to a whole new level in order to reduce our operational costs and provide economic feasibility to domestic production. In the West Mandura Offshore (WMO) block for instance, we reduced our operational costs to under USD 30 per barrel by implementing enhanced efficiency measures.

In the context of the low commodity price, the strategy to overcome the supply and demand gap in Indonesia is clear: we will enhance our international upstream operations and bring more crude oil into Indonesia, whilst improving our domestic capabilities of operating and managing our different assets. Oil and Gas combined, our 2016 target is 638,000 barrels of oil equivalent per day (BOE/D), of which 534,000 BOE/D will be produced domestically and 104,000 BOE/D will be brought in from our overseas operations.

What role are Pertamina’s international operations expected to play in the future?

As a state owned enterprise (SOE) and national oil company (NOC), our primary concern is to fulfil Indonesia’s energy demand. We realize the sizeable gap between domestic supply and consumption and identify the challenge of raising domestic supply, as new resources are yet to be discovered. Therefore, the need of international expansion is substantial and is consequently resulting in an aggressive, non-organic expansion strategy overseas. We are currently closely observing the overseas market, scrutinizing potential opportunities; in particular in Africa where we already identified some potentially qualified assets, which we believe will enable us to further supply domestic demand. Notwithstanding these developments and the appropriate strategy, it will take time to establish our overseas operations to the extent that it will close the domestic supply and demand gap. The current target is to achieve this by 2025, depending on the development of our financial capacities.

Pertamina has set aside approximately USD 1 billion for foreign acquisitions. What specific assets can we expect Pertamina to pursue?

I can’t share specifics of the assets we’re considering, however there are basic guidelines that we have established. We are focusing on oil assets were the crude oil specifics match domestic refineries and are thus compatible. Moreover, we need to scrutinize country specifics that ensure political stability and offer an overall sustainable environment, as past experience has taught us, that in some countries we weren’t able to continue operations due to these issues.

85 percent of Indonesia’s remaining reserves are natural gas assets which implies that Indonesia’s hydrocarbon industry will be dominated by gas in the future. How is Pertamina preparing itself for this change in market dynamics?

We understood ten years ago that Indonesia’s hydrocarbon industries lies in natural gas thus realizing that domestically our future business will switch from oil to gas as well and were consequently concentrating our efforts on that topic through Pertamina EP. We already reached the climax of domestic gas assets attributing a much better financial profile than oil assets. Despite the positive outlook, we face the challenge of lacking gas infrastructure; we have made some substantial gas discoveries, but have not yet established the needed infrastructure to deliver it from the asset to the consumer. Despite the current lack of infrastructure development the key message here is, that domestically we are already in the gas mind-set, therefore I am confident that Indonesia’s gas potential will be exploited to its full extent.

Pertamina recently expressed the wish to acquire a ten percent stake of the Masela block. What is the strategic significance of the Masela block to Pertamina?

We first communicated our interest in the Masela bloc in 2011; however Inpex was not open to sharing it. Now we have communicated our interest again and it seems that we will get the share. The Masela block is one of the largest gas blocks in Indonesia and thus naturally is of upmost significance to us. The latest certification outlined the size of the Masela block reserves to be 10 trillion cubic feet. As mentioned earlier, gas is our future hence why it goes without saying that we have a genuine interest in that block. With our share we will be able to operate the bloc together with Inpex for the benefit of Indonesia. We are committed to prioritizing the use of domestic gas production for domestic consumption and with our share we will be able to tap into this vast potential for the benefit of Indonesia.

If the Masela block is that significant, why are you only seeking to acquire a ten percent stake?

Given what was said, evidently we’re interested in a higher stake. However, we have to be realistic with our financial capacities as well.  With ten percent I believe we have well established means of access and we will see if Inpex will be willing to give up a higher stake in the future and if we will have the financial capacities to acquire those.

Another paradigm shift in Indonesia’s hydrocarbon industry can be seen from onshore to offshore, as some 75 percent of remaining reserves are in fact located offshore. Pertamina’s offshore operation costs are at approximately USD 30 per barrel in comparison to USD 18 per barrel on onshore fields. In the context of these operational costs, how will you realize Indonesia’s offshore potential?

Obviously the operational costs of offshore operations are much higher than onshore operations. As mentioned earlier, we have succeeded to implement efficiency measures that reduce our operating costs; in WMO for instance from USD34 per barrel down to USD 26 per barrel thus providing economic feasibility to our operations in that block. Despite all efforts to enhance efficiencies, offshore operating costs will remain higher than onshore operational costs.

We need more operational control in the remaining blocks in order to reduce operational costs and enhance output for domestic consumption. If we succeed to acquire a similar share in the Masela bloc as we now have in the Mahakan bloc, we will additionally be able to reduce operating costs as we can produce more. If the current commodity price remains and aforementioned options are exhausted we will engage in a dialogue with our government and agree incentives and conditions which will re-establish economic feasibility.

Will Pertamina be seeking partnerships to collaboratively develop the offshore blocks?

We realize that under current market conditions nobody can survive alone; therefore we’re actively looking for partners. Obviously we prefer the large international oil corporations (IOC) as we believe that we will be able to learn from them – however, were not only open to IOCs but to any partner, as long as the partnership creates the right synergies.

You mentioned you would like to learn from your partner, what are you seeking in terms of knowledge and technology transfer?

Offshore is the hot topic for us right now, particularly as we are seeking to take over some offshore blocks from expiring production sharing contracts (PSC) in the near future. Therefore, we would gain most if we partner with an IOC with extensive offshore and deep-water experience which will help us fully exploit the blocks; simultaneously we will learn and share our knowledge as well. In addition to seeking partnerships, we have already sent some of our staff to offshore and deep-water operations in Malaysia in order for them to learn and develop into experts in that area.

What capabilities is Pertamina currently seeking to develop organically?

Our current target is to become a world class operator. Therefore, we have to develop our own capabilities and our own people to gain the necessary skills. We have already made significant progress in line with our goals; becoming a world class operator in the WMO (West Madura Offshore) and ONWJ (Offshore Northwest Java) blocks. Therefore, we are confident in our ability to develop and are thoroughly willing to work hard and educate our staff by remaining open minded for new technology and providing opportunities for our staff to develop.

You have mentioned your newly acquired share of the Mahakan block simultaneously reducing the share of Inpex and Total. Given this context, the call for partnerships sends mixed messages around the world. Could you please elaborate on the developments that led to the acquisition of the Mahakan block?

The previous majority share operators, Total and Inpex, operated the Mahakan block for over fifty years. However, there was significantly reduced investment in the block in recent years, meaning that it consequently did not realize its full potential for Indonesia. It was time for us to become the majority stakeholder of that asset, to ensure proper operation for the welfare of Indonesia. It was a joint decision made by us and our government in a business to business approach. Total and Inpex are still on board, negotiations are still ongoing and we will establish the right terms and conditions soon.

You have started your career in Pertamina in 1989 resulting in an unmatched 27 years’ experience in the industry. During this time you have witnessed three oil price cycles. Given this vast experience, what is your recommendation to the global industry in terms of navigating through times of low commodity prices?

In my 27 years at Pertamina I have been through ups and downs; however genuinely mostly ups. Pertamina has constantly developed and grown in its professionalism on a day to day basis. This is especially true since 2003 when Pertamina became a limited enterprise and didn’t act as regulator anymore, changing the mind-set of the company. Pertamina is focused on profitability and professionalism; there hasn’t been any other focus than to get better to become the power house for Indonesia.

Notwithstanding my experience, I am not an advisor to the global Industry; I don’t assume the position of omnipresent knowledge. Every country and every company has its individual challenges and needs its individual tailored strategy. Pertamina, as the NOC of Indonesia, has its individual challenge of the supply and demand gap. Compared to Malaysia or Saudi Arabia for instance, where there is no domestic consumption issue, I can’t possibly assume an expert position and give advice. I can only advise the direction Pertamina is taking, and I will continue to do so in the best interest of our company, our people and our country to fulfil the obligation the help Indonesia and secure its energy supply!

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