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with Chris Phillips, President & CEO, VICO

02.09.2011 / Energyboardroom

VICO has a long tradition in Indonesia as a company with a very international ownership. Would you give us a brief history of VICO, and explain the importance of leveraging a diversity of strengths in managing a collaborative partnership?

Beginning as HUFFCO in the 1960s, VICO’s ownership changed over time, and is presently majority-owned as a 50-50 joint venture between BP and Eni. These two companies each have a 37.8% interest in VICO’s underlying asset, the Sanga Sanga PSC. VICO essentially made Indonesia into an LNG-exporting nation with the Badak discovery of 1972, and is now on the brink of revolutionizing the industry once again with Coal Bed Methane (CBM) development. In this way, the company is renewing itself and is very excited about its present state and looking toward to the future.

VICO is structured primarily as an Indonesian company, employing approximately 850 full-time employees and 4,000 contractors who are responsible for drilling, construction, operations, and so forth. The company utilizes very few expatriates from its parent companies, and at any given time has no greater than 24, a small proportion of the nearly 5,000 total workforce. VICO is very selective about its expatriate positions; my role as President, for instance, is mandated to rotate every three years, and several other VP positions are the same. This creates balance of ownership in the joint venture, but mostly VICO’s BP and Eni expatriates bring a great deal of technical skills and experience from outside Indonesia. One problem in being an Indonesian company rather than an international concern is a lack of experience outside Indonesia. The real benefit from foreign ownership and involvement are those skills and knowledge brought from outside, whether from Thailand, Russia, Egypt, Alaska, Africa, or elsewhere in the world. Part of management’s role is not to lead the company in our own image, but to support VICO and its competitive edge in adopting anything of benefit to an Indonesian business.

In terms of practical considerations in transferring those beneficial technical skills, 24 out of nearly 5,000 represents less than half of one percent foreign content. Are there formal structures in place to transfer those skills, and if not, how does the knowledge sharing occur?

There’s not a formal structure, but every foreigner selected to join VICO is chosen partially because of the potential to pass on the skills they possess. VICO is required under agreement with BPMigas to have personnel with certain minimum experience levels when they come from abroad. Secondly, VICO chooses people who have the ability to coach and encourage others, and it is absolutely clear that an important aspect of the job is passing skills and best practices to the Indonesian workforce, and in doing so VICO has been very successful. VICO’s Jakarta head office has only two floors, and I am personally very visible and accessible, and very often I go upstairs and see expatriates sitting down with Indonesians, coaching and demonstrating new techniques which is the behaviour we need from them.

VICO has two specific benefits with this mix of employees. One is as a very Indonesian company, there is an Indonesian flavour to our business and our government dealings, because these functions are performed by Indonesians. BPMigas and Migas view VICO as Indonesian, rather than coming
across as BP, Eni, etc. It’s a great advantage to be viewed in this way, while still retaining the benefits of international exposure, and having people to bring an outside perspective. Another area is the business and performance management profile of international companies, who with public shareholding bring a sense of edge, which wouldn’t otherwise be found in a small Indonesian company. There’s always someone measuring performance delivery, and at VICO this idea works very well.

How are Indonesians, in terms of receptivity, toward this approach?

Indonesians are absolutely receptive. They recognize the advantage of working with an Indonesian company, yet with access to global standards of international major players, and in this respect get the best of both worlds. In developing talent from within Indonesia, VICO is able to make overseas placements to BP and Eni, in places like Australia, Vietnam, and the Americas. Although these placements don’t represent a large percentage of the workforce, those placed gain valuable experience, and it’s good for people here to see that there’s such a career path for those who so desire.

At the end of 2006, VICO had plans to increase investment from $190 to $300 million to increase production. Can you speak to that plan, its realization, and your current investment forecast for 2008?

Turning the clock back to 2005, at that time VICO had planned to invest $112 million in 2006, which represented a 2.5 rig year program. As we saw opportunities to continue investment, we created our Renewal Plan to grow production, and in 2006 changed the initial investment program from 2.5 to 3 rigs per year, and investment increased along with that figure from $112 million to $155 million. In 2007 VICO ramped up investment even further, and capital spending totalled just short of $190 million, with 2008 plans for a 5 rig year, with 50 wells drilled and $285 million total investment. To recap, the plan for 2006 was $112 million, and the plan for 2008 is $285 million, which represents a 2.5 times investment increase over a couple of years ago.

These figures speak to the opportunity to invest in Indonesia, and to an effective way to maintain production in an environment where underlying production is decreasing at 40% p.a. Investment is required to overcome that decline, particularly when dealing with 30 year old gas fields. Whereas last year’s production was 474 mmcf per day, we expect to average 485 mmcf per day this year and next year VICO will produce over 500 mmcfpd. This is the plan, and like all plans it requires effective execution to make it happen.

With this large investment in ageing fields, what are the kinds of technologies in which VICO is utilizing to maximize this kind of ongoing, increasing production?

This is the kind of area where VICO has an advantage in innovating with new ideas, and involves a new, different, and smarter investment. Indonesia as a country is less a place of testing new technology, and more a place of implementing new technology, such as horizontal wells, cluster wells, and fracturing, which is currently in trial and could provide further reserves from VICO’s deep low permeability reservoirs. One area of very new technology that fewer than 300 wells have used is called radial drilling, which has been proved in Russia among other countries.

As is the case with gas fields everywhere, pressure declines over time and investment is needed to maintain production. To debottleneck facilities and add compression, VICO has wellhead compressors en route from the Canada to East Kalimantan, in our continual efforts to reduce back pressure and increase gas supply to Bontang. Other technologies include deliquification, of which we have ~60 very successful installations.

In terms of investment, VICO plans to spend $285 million this year which is the second highest level of investment ever since discovering gas at Badak, and the number of wells planned to be drilled is the highest ever. VICO has 600 wells to date total, and this year will drill 50 new wells. Roughly 70% of the investment funds are directed toward technologies not necessarily used before, and can be quite expensive. Horizontal wells, for example, cost $7-9 million each, and cluster wells are similarly expensive – although we effectively get 4 wells for the price of 3.

While our reservoirs and operations are complex, the concepts around running an oil and gas field are simple: manage the pressure, manage the existing well set, make sensible investments on top of that to keep on plateau or stop decline, protect the environment, and keep everyone safe.

To reflect on the sense of achievement and making things simple: VICO discovered gas in Badak in 1972 and, together with Pertamina, secured gas contracts, supported the construction of two trains at the Bontang LNG plant and shipped the first cargo to Japan in August 1977. This first LNG cargo was shipped five and a half years after the discovery, and that is unprecedented and unparalleled, an achievement of which the founders of VICO and Pertamina as well should be proud. History has proved that with sufficient determination, projects of this nature can be completed, although in today’s more complex world such speed may be more difficult to achieve.

What is the source of all this growth, now?

When VICO examined its fields in the late 1990s, it did so without a complete understanding. VICO is complex; it’s not just one reservoir in East Kalimantan, but four major and three subsidiary fields, and over 2,500 reservoirs. To understand the performance and behaviour of all these is difficult, and as a result there were tremendous production declines in 2002-2004. We reassessed and developed a much deeper understanding of the reservoirs and their performance. This work was the genesis of a Renewal Plan, where VICO seized the opportunity to invest wisely to increase our activity levels and leverage technology to effectively develop the complex set of reservoirs within the Sanga Sanga PSC.

In stemming that continuous production decline, where else is VICO looking?

VICO’s expertise is onshore gas in East Kalimantan. We manage the whole pipeline production system for all of East Kalimantan including all of Total’s and Chevron’s production, and we are a 20% owner in PT Badak, which operates the Bontang plant. Looking toward the future, the investment VICO is making in the existing reservoirs are quality investments, but we started to wonder if additional potential existed. In 2004 we began to recognize CBM potential, and subsequent studies revealed that VICO actually has one of the highest and best potential areas in Indonesia, in the Sanga Sanga block. Every single well drilled in the block passes through a layer of coal containing gas. VICO knows the gas is there, and believes is present in considerable volumes. The real challenge with CBM is how permeable the coal is, and whether gas is producible in economic quantities and rates. Generally, coal needs to be dewatered before gas is produced. This has two unfavourable consequences, of environmental concerns as well as large upfront expenditures. Unlike gas production from conventional sands, CBM gas production tends to increase with time as the water volume goes down. VICO realizes there is a lot of opportunity, and has been lobbying the government over the last year, making it known that we are ready to bring CBM aboard. VICO believes it can go into testing, appraisal and, if successful, development of CBM very quickly. What is important is that the marketplace is hungry for gas, and will be desperate for gas in the next 10 years. Anything VICO can bring to the marketplace is going to be beneficial for us, but more so for Indonesia. In the end the country will always benefit more than the contractors.

What kinds of incentives is VICO encouraging, going forward with CBM?

Clarity of regulation is the biggest incentive. Third party CBM studies on Indonesia have been performed and concluded 450tcf of CBM potential, although I am personally somewhat skeptical of these figures because many of these resources will be uneconomic, particularly in green field situations for example.

The primary difference with VICO is that rather than being informed by prospective guesses, we have actual data from 600 wells, with seismic surveying already completed and a thorough understanding of the entire area. Additionally, there are already facilities sitting on top of all these resources, easy market access available through Bontang, water disposal facilities, and furthermore expertise from BP, one of world’s leading CBM producers. BP’s operations in San Juan basin (USA) alone produces 700 mmcf of CBM gas per day. In Indonesia, VICO has recently put a team together, with one of the world’s foremost CBM experts, with over 27 years experience, coming to lead the team as the Director of CBM Business Development. With the full support of BP and Eni, VICO has been talking to the government, BPMIGAS and Migas, for 10 months, lobbying the government at all levels. The message we are delivering is that VICO is ready to go, with the infrastructure largely already in place. Unfortunately, regulations make it quite difficult for us. What VICO hopes is that the government becomes interested in bringing CBM to market quickly, because if this happens VICO could be producing gas by 2010 in limited volumes, and by the middle of the next decade could possibly be adding 500 mmcf per day to Bontang. This figure may be an exaggeration, but it may also be an understatement. VICO believes CBM offers real potential for the future, with the view to make it happen. My personal goal is that, as VICO brought LNG to this country 30 years ago, today we’re going to bring CBM. Would it be a tremendous achievement if we could do this in fewer than five and a half years?

Of these regulations in the way of VICO’s CBM ambitions, which are the most important to change?

It’s important to be clear who owns the gas and the structure of the organization that runs CBM. VICO believes our current PSC gives us the right to CBM, although there is a difference of opinion around this. Some people would say that CBM is different, but I would contend that, in fact, it is the same, because the methane from the coal bed is the same methane that ended up in VICO’s reservoirs being produced today. CBM gas can go up a pipeline and be liquefied at Bontang just like the gas currently being produced, although it is leaner and has a different composition. The main characteristic distinguishing CBM from the gas VICO has in its other reservoirs is the production mechanism; however wells are still needed to produce CBM and oil and gas facilities are needed to process it.

One issue is the rights of coal miners, who have certain rights associated with coal and in overlapping areas this could cause a conflict. VICO’s view is that these problems have been solved before elsewhere in the world quite simply. Either by a depth cutoff, for example everything above 300m depth belongs to the coal miners, and everything below that to the oil and gas companies; or by resource allocation, with gaseous substances belonging to the oil and gas companies and solids belonging to the miners. The government has an opportunity to solve this and we believe that they are considering options to do so. They have taken the first step and put CBM under the Migas portfolio to be regulated under oil and gas laws, and VICO is blessed with one of the best opportunities, although only a test will tell.

It is not very often that there’s an opportunity to do something that is major significance to change the direction of the company. If this opportunity does not succeed, VICO will look very different. Because the Sanga Sanga PSC ends in 2018, it is impractical to invest up until 2018, and VICO must be careful that investments continue to be high quality up until that time, because when investments degrade and our returns descend under a certain level, it becomes infeasible to continue. CBM is really a game changer for VICO and will revive the company for a bright new future.

What is your vision for VICO over the next five to 10 years?

My vision in five to 10 years is for VICO to be producing 700 mmcf per day through Bontang with contracts to export, and appropriate domestic requirements as well. Additionally, VICO will continue – and this is the most important thing of all – to maintain its unparalleled safety record, having run 27 million man hours without a single day away from work case. That is a world class record and an enviable place to be. As long as VICO continues safe behaviours, looking out for one another, being safe at home, and keeping our product inside the pipe, we will be doing the right thing. And VICO has a track record that says we’ve done it.



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