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Interview

with Ir. Priyono, Chairman, Ir. Priyono

26.06.2012 / Energyboardroom

In 2011 Indonesia missed its production target of 945,000 bbl/d. How is this shaping BP MIGAS strategy in 2012?

It was clear when I joined BP MIGAS in 2008 that the future of Indonesian production depended on increasing the baseline number of oil and gas projects. With this objective in mind, BP MIGAS therefore initiated 48 new projects in 2011. However, these projects have found considerably more gas than oil with around 80% of all new discoveries being gas. The last major oil discovery was in the Cepu field with other discoveries being moderately small in size.

However, there are of course other techniques for increasing oil recovery from existing mature fields and extending production beyond primary and secondary recovery. Unfortunately, it seems that many operators have forgotten about Enhanced Oil Recovery (EOR) and the lessons to be learnt from Chevron who have doubled their production through tertiary recovery. In 2012 BP MIGAS has therefore made it a requirement for E&P companies to allocate a portion of their annual investment to EOR activities. Through this measure, our aim is to double national production by increasing EOR application by the majority of PSC contractors.

There are in fact many large reserves lying undeveloped within the Pertamina blocks and the issue here is to change the corporate culture of Pertamina to make them more aggressive in developing these reserves. Pertamina will be the backbone of Indonesia’s future production and carries a great national responsibility to explore and develop these fields.

How do you intend to better align Pertamina’s business with government strategy to increase production?

There is an issue with Pertamina taking over the fields from expired PSCs because it does not guarantee that the reserves will double or triple from these fields. There is no guarantee that Pertamina will be aggressive in its exploration and we can see that in the existing blocks, Pertamina’s exploration activities are the minimum level when compared to those of other operators, especially international ones.

Pertamina needs to introduce international operator standards into its production and this requires significant modification in their corporate culture. Adopting international corporate standards in itself will provide some guarantee that the company will take risks and become more aggressive in exploration.

Naturally, culture is very hard to change in a company without a corresponding change in the people. Although finding new talents to take control of the company should not so difficult because both Pertamina and BP MIGAS are surrounded by international operators with a wealth of talented individuals working for them. Engineers and geologists from Chevron or ExxonMobil have the same competencies as those in Pertamina, but the mentality is different. Such an exchange of talents would no doubt elevate Pertamina’s capability.

Pertamina will only improve by becoming more ambitious. The famous boxer, Muhammad Ali, became the greatest boxer and heavy-weight champion of the world because his sparring partner was always bigger and stronger than he was. It was by challenging himself all the time in training that Muhammad Ali elevated to such great heights and became a legendary sports figure. This spirit must be brought to Pertamina, who must look internationally for their sparring partners and look to aggressively acquire blocks outside of Indonesia.

With Pertamina assuming a greater role in national oil production, how should international companies participate in Indonesian production?

For Indonesia to become stronger in the international oil and gas industry it must continue to encourage the seven sisters to be involved in production. Without ExxonMobil, Chevron or Total involved here the international market would ask what had happened to Indonesia? However, this is not to exclude other players, indeed the key to developing the industry is the diversity of players involved in national production. BP MIGAS offers a friendly dialogue with all of these companies to reinforce our mutual needs and the ways we can strengthen our relationship. These companies can receive fair treatment and turn a profit, aided by measures such as tax holidays on exploration.

One other issue to overcome is Indonesia’s lack of infrastructure in the East of Indonesia and we should provide better incentives for investment in these zones and as a result the contract is more flexible for exploration in frontier zones. If for example, a company encounters problems, they will be able to exchange the block or work program with another operator. In addition, the terms and conditions for the split of production are generally much better in the East than in the West.

Indonesia also has a lot to learn from regions such as the Gulf of Mexico where the exploration blocks are much smaller in size – not 2-4000km2 but 90km2. By bringing this model to Indonesia, it will have the effect of introducing more players into E&P here. The wells themselves will be lower risk, smaller, of low-capital expenditure and if after 3 years – instead of 10 years at the moment – the contractor is unable to develop a well they will have to return it to the government. Establishing 200 small acreage areas will generate much more than 10 extremely large areas. The presence of more players making a large gross investment in Indonesia will create in a wave of drilling activity to bump up national production.

Regarding the investment climate, what is your strategy relating to establishing clarity in oil and gas governance?

Operators and investors may be keen to have increased clarity in the investment climate. My response is to ask whether spelling out all the details of terms and conditions and creating a rigid system is genuinely desirable. I believe that a better formula is to create flexibility in the system to accommodate a wide range of E&P companies and open up a dialogue with the contractors. This will allow us to make the production environment and the choice of operators more dynamic. Too much clarity, rigidity and detail in contracts would create problems for Indonesia’s development. Indonesia is going through several profound transitions and if we have to create new regulation to address one issue or another every year and apply this to all our existing contracts it will create bureaucratic problems and stifle the production environment. In my view it is better to maintain a dialogue with contractors with regard to expectations.

International operators need to be patient and persistent. BP MIGAS is willing to change if the operator partner is willing to make a commitment to the country and wait for this change. As is true for any oil and gas country from Nigeria to Iraq to Russia there are various political pressures affecting the industry because of the strategic nature of the industry. In this environment a contractor needs to maintain its dialogue with institutions like BP MIGAS for the benefit of both sides.

Having been in control of BP MIGAS since 2008 what is your personal objective?

I am on a continual mission to make the investment climate of Indonesia attractive for international players. We of course need to guarantee that the resources are there. Indonesia is going through a transformation of culture with a younger generation very different from their predecessors who have a broader perspective and are accustomed to international culture. We therefore can expect that the investment climate will become very competitive with time.

Indonesia is a unique place and some businessmen even refer to it as a mysterious country. There are no doubt challenges for international companies from corruption through to a lack of infrastructure and the growing importance of local government. Indeed regional authorities are demanding more rights and privileges from central government creating a quarrelling family. However in spite of these challenges the economy is growing at 6.5% and business is prospering.

The regulatory authorities are of course looking to establish greater harmony in the system and once we achieve this and put the economy first, Indonesia can look forward to an extremely enviable rate of growth. After all, Indonesia is abundant in natural resources: oil and gas, coal, geothermal, unconventional resources, palm oil etc.

I recently went on a business trip to Singapore and encountered businessmen there who told me they wanted to set up business in Indonesia, but because of the level of uncertainty in contracts they were uneasy about doing so. I said to them that in uncertainty there is opportunity and when you look at the facts, Indonesia has 20 undiscovered basins, secondary oil recovery is still to be fully utilized, and there are 42 billion mt estimated oil reserves. The only key to unlocking this potential is patience and persistence.

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