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Interview

with Eko Lumadyo, President Director, Santos Indonesia

15.11.2007 / Energyboardroom

You have just recently assumed as head of the Santos office in Indonesia, after a relatively short time in the company and many years working for another IOC. How do you perceive the state of the company you are going to be leading?

Fall 2006 marked a turning point for Santos in Indonesia when our first production began in the Maleo field for gas delivery in East Java. This turned our office into a full exploration and production operation. As a result, the organization here is growing and forging a strong identity; the team is motivated to continue working hard for even further achievements. This is all more significant to Santos since Maleo is our first offshore operated overseas field.

In September 2007, our second producing field, Oyong, was inaugurated by the Indonesian President Susilo Bambang Yudhoyono. This field is currently producing oil, but by the third quarter of 2009 we will deliver the second phase of the Oyong development which will produce gas. There is also another gas discovery nearby, called Wortel, which we are planning on tying back to Oyong in 2010. Santos is keeping a close eye on gas demand in East Java in order to best position ourselves to fulfil the needs of the market there and work with local customers. In the meantime, Santos will continue pursuing its exploration program in the area with three wells in 2008.

How has the oil boom of the last several years created new challenges and opportunities for Santos in Indonesia’s O&G sector?

High commodity prices bring considerable constraints to oil companies, through high competition for seismic vessels and limited rig availability. Our strategy in this regard is to partner with other companies operating in the same areas in order to establish a timesharing agreement that allow us all to pursue individual goals while optimizing costs and schedules. For example, Santos is partnering with Pearl, BP and Anadarko in order to succeed in getting a long term contract for jack-up rigs. This arrangement is also in line with the government’s requests to accelerate projects while still in compliance with the procurement procedures.

After consolidating its position as a major Australian O&G company, Santos has embarked on its internationalization in the 1990’s and 2000’s. To what extent is the company’s ability to grow tied to its overseas activities? What is Indonesia’s role within this strategy?

Santos’ core asset is its oil and gas production in Australia. However, expansion in the Southeast Asian region has been established as one of the five key drivers for growth. This includes Bangladesh, Vietnam, India and most importantly, Indonesia. Our activities in Indonesia have already spanned a full chain of business, from exploration and production to operations, generating revenue and profits. This is a result of our commitment to Indonesia since 1997.

Experts like Achmad Luthfi of BP Migas / IAGI and Peter Adam of SPE agree that Indonesia is still a land of great geological potential for oil and gas discoveries, yet exploration and production have been in decline over the last several years. What is your assessment of the main opportunities and challenges that companies in E&P activities face in Indonesia?

In the E&P business the time span is very long between the moment of signing the contract and the first oil or gas, generally between 7 to 10 years. The recent high commodity price environment has prompted many companies to get involved in new exploration and in marginal projects that suddenly became economical. The actual impact of this new interest on production will take several years to be felt. Santos has two new fields, Maleo and Oyong, that are in production and contributing to increase the overall level of output in Indonesia. In the medium to long-term we are going to continue exploring and striving to deliver projects as quickly as possible.

What is your view on the investment climate in Indonesia’s O&G sector? How investor-friendly would you rate Indonesia’s regulatory and institutional framework?

The investment climate meets our criteria, and that is why Santos is present in Indonesia. Of course, we share some of the same concerns as other foreign oil companies on issues such as conflicting regulations on taxation, regarding VAT on imported equipment for example. The commitment to contract sanctity should be unequivocal, so that companies can have full certainty on the basis for long term investment plans and returns. Since we have also been signing gas sales agreements on a business to business basis in the country, we also hope that towards the future the commitments will be honoured by all parts. These are issues which we follow closely, but fortunately we have encountered no serious problems so far and have a strong support from the government.

What will Santos’s strategy for growth in Indonesia’s upstream sector be primarily based on: existing fields, new acquisitions? How prepared is Santos to take part in challenging but prospective deepwater operations in unexplored areas of Indonesia?

In addition to our near-field exploration, Santos is also actively exploring in other areas. We are operating a deepwater block in the Kutei basin, and also have non-operating interests in other blocks. At the same time, the company is following and evaluating the upcoming bid round. Together with the team in Adelaide, we are watching closely in order to make sure Santos does not miss good opportunities. Moreover, new ventures will require establishing partnerships, so we are also in the process of defining what kind of companies we would potentially like to collaborate with. Our current partners in Sampang are Singapore Petroleum Company (SPC) and Cue Energy from Australia, and in Madura offshore we are working together with Petronas. In addition, on deepwater activities we are cooperating with Anadarko and Pertamina. We enjoy good relationships with all of these partners and continue to be open to discussing new opportunities.

We are operating one of the deepwater blocks in the Kutei Basin. We have engaged deepwater experts with extensive Indonesian experience and will continue to build our exploration portfolio.

Santos by size is not in the league of major oil companies, neither can it be considered a small company with a value of over A$8 billion. How is being a medium-sized O&G company an advantage in today’s market?

Santos’ size gives us a competitive advantage, in terms of being more dynamic and able to make quick decisions. This gives us an edge in evaluating and taking opportunities, in contrast with bigger companies that have to go through much longer and complex processes. At the same time we don’t have the same capacity as the super majors to take on some of the big risk projects; however Santos is ready and able to embark on frontier area exploration in Indonesia if we consider it a good opportunity.

Minister Purnomo Yusgiantoro mentioned to us the GOI’s priority to develop gas for the domestic market, which requires above all big investments in infrastructure for distribution and transmission all around the Archipelago. Based on Santos’s expertise throughout the gas value chain and your experience in Australia, what kind of opportunities do you see in this sector in the near future?

Santos is focusing its gas production and sales in East Java. Right now, our customer for Maleo gas is PGN, and the gas from the second phase of the Oyong Field will be sold directly to a local power company. Our production has come very timely for the government, because they are facing gas shortages and increasing costs due to high oil price. Through this gas supply, Santos is contributing to cleaner and less expensive energy in Indonesia.

Santos is a big player in LNG in its home market, and Indonesia is a pioneer and one of the main exporters of LNG in the world. What kind of potential for business or cooperation in this field do you see?

LNG is clearly a significant area of focus for Santos. We are currently involved in exporting LNG from the Darwin LNG plant, and are progressing on a number of other significant LNG project opportunities. In this regard, we have a deep water gas and condensate discovery in the Kutei Basin which is strategically located near the Bontang LNG facilities.

Santos has expressed interest in another sector which the GOI is actively promoting, CBM. What are your expectations for this alternative energy source in Indonesia?

Santos is a major player in CBM (or coal seam gas, CSG, as we call it) in Queensland, Australia. The Indonesian government is very interested about the potential to tap into this alternative energy source, especially given the natural abundance of coal all over Indonesia. We are continuing to discuss opportunities with them, and an Indonesian delegation has been to Australia in order to get a first-hand look at what we are doing there.

Santos aspires to become a leading energy company in Southeast Asia over the coming years. How is Indonesia preparing to contribute in a significant way to this ambition?

Continuing to grow our Indonesian business is key to achieving our aspiration to be a leading energy company in the region. Above all, the key thing in Santos is the focus on our people. We hire individuals who are genuinely excited about working for this company and taking advantage of all the opportunities we offer. We also look for people who are good team players and can deliver results. Santos is hiring a lot of local professionals and giving them the chance to spend time working in Adelaide through our rotation programs. Based on all these ingredients, the office in Indonesia has established a strong project team managing day-to-day operations. In addition to Santos’ focus on developing human resources, we are making a big effort to improve our safety culture through behaviour safety audits and we are also focusing on process safety improvement.

We want Santos to be the company of choice in the O&G sector in Indonesia.

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