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Interview

with Jusuf H., Chief Executive Officer, Rachmantio, MITRA ENERGIA

23.07.2012 / Energyboardroom

By way of introducing Mitra Energia to our readers would you first outline the company’s origins, some of the key points in the company’s development and how it is positioned today?

Mitra Energia was created back in 2004 by three principal partners: Dr. Ilham Habibie; Patrick Alexander, who has a strong reputation in investment banking circles; and myself. Back in 2004 we observed two trends in the oil and gas market. Firstly, we saw that government tendering had recommenced in Indonesia having been dormant in the aftermath of the Asian Financial Crisis beginning in 1998 and continuing up until 2003. Incidentally, it is this lack of tendering and exploration activity which has led to the lack of oil and gas production today; sadly Indonesia’s daily oil production is still in decline. Secondly, we saw an opportunity to invest in the oil and gas market given that investments were already beginning to arrive in Indonesia. We therefore decided to invest in one or two projects to test the water. In 2004 we began by partnering with Elnusa on the Bankanai block containing the Kerendan Gas Field, investing around $1.5 million. In this deal Elnusa was the operator and Mitra Energia provided the funding. The production share was a 49:51 split and this represented the real birth of the company.

In 2005, through our industry connections Mitra Energia then found another project, by undertaking a joint study with another company. This was a joint study in West Java, where the Citarum block is located today. As a small cap private company Mitra Energia had to pay attention to how it funds its operations and the company’s strategy at the time was to seek out distressed fields or ones which were near production with a reduced exploration risk or enter joint studies with fewer financial obligations. At that time in the Indonesian market there were no requirements to put up $1 million performance bonds so it was relatively cheap to enter this market. Our task was then to expand our capabilities to become an oil company. Through Patrick Alexander we looked at the Singapore, UK and Canadian Stock Markets. As you know, equity markets for small cap companies dealing with high-risk exploration are predominantly led by London and Canadian exchanges. In 2005 we began making trips to London, getting to know the market and the players involved and through one of our brokers we found Sound Oil. Following 2005, what we needed was access to cash and the oil and gas expertise which the three partners of Mitra Energia did not have back then. In oil and gas, unless you have individuals with a legacy in oil and gas and big names with technical expertise it is very difficult to gain funding. Sound Oil met both our financial and expertise requirements. It was run by three individuals, two of whom were ex-Premier Oil directors, Gerald Orbell, director of exploration and Tony Heath, who was the CFO and still serves as chairman of the Premier Oil pension fund. This company did not have any assets but were listed on the secondary board of the AIM in 2005, raising around £12 million. Sound Oil was looking for assets and our two companies came together and we quickly agreed that this was the right match. In 2006 Mitra Energia became a 100% subsidiary of Sound Oil; our shareholders became shareholders of Sound Oil and the two assets we had were transferred.

What was the impact of the merger in the development of your company?

On top of the initial capital raised by Sound Oil, we needed to raise another £13 million to provide sufficient funding for 18 months of our drilling program. However, Mitra Energia then faced issues resulting from the classic delays inherent in Indonesian oil and gas production. Most of these delays resulted from the tendering processes. Mitra Energia had the cash, an experienced management team and the assets, but these assets were all being developed by our partners who were at the time just learning how to move into oil and gas. One of our partners, Elnusa, was in essence a service company and in Asia there was a trend in 2005 of major service companies entering into upstream production. However, many of these services companies lacked the required capabilities to make it happen.

Ultimately, Salamander replaced Elnusa as the operator of the Bangkanai block which now has a gas sales agreement with PLN. Salamander is also listed in London as a $500 million market cap company with a heavy footprint in Indonesia. On Citarum we are now working with Pan Orient, another listed company with $400 million on the Canadian Stock Exchange. Pan Orient has experts who are very knowledgeable of the Indonesian basins and the business here.

There was a delay of around 3-4 years before everything was in place and Sound Oil is now at the stage where we are drilling in Citarum with 3 wells projected this year. Two of these are high impact wells. On Bangkanai we are starting to drill through our operator: one high impact exploration well and 4 development wells with a gas contract already in place. This is the Kerendan gas field which is due to spud next month and it serves as validation of our efforts thus far. This is the ultimate destiny of our company – bringing oil and gas assets to full commercialization. However, because we are a listed company, we had to satisfy our investors in the 3-4 years it took to develop our assets and around 2 years ago, we started to acquire assets in Italy. It might sound strange but the Italian production environment is quite similar to that of Indonesia. Italy geologically is very similar to Indonesia being a highly tectonic region with a combination of carbonate and sand reservoirs. Sound Oil primarily chose Italian assets because this would allow the company to tap into the European gas market where typical prices are €10-12. Italy was an overlooked market during the equity boom of the medium oil and gas market in 2004-5. Most companies were looking at African markets and even Romania. Having taken this opportunity, Sound Oil now has 10 concessions of which we operate 9 and several awards pending, most of these contain existing discoveries with 71.5 MMBOE of contigent resources. In total Sound Oil has acquired 16 million barrels of discovered hydrocarbon reserves.

Italy is a very different operation for Sound Oil, how will this shape how the company focuses its investment and activity in the coming years?

Indonesia will continue to have a great importance for the growth of our company even though it is a tough market which makes prediction very difficult. The key to success in Indonesia is targeting distressed assets and if you run statistics on the tendering rounds from 2003 up until now you see a high volume of acquisitions made between 2004 and 2006. In terms of the quality of investment made during this period you see a lot of small cap companies with no records and no technical background acquiring assets. The Indonesian government was not experienced enough at the time to configure the bidding strategy to filter companies in terms of quality. This created a lot of horse-trading with high bids and it became a numbers game. This created a lot of assets which were over-capitalized in terms of commitments and on this basis one can calculate how long it would take for these assets to become distressed.

Large projects require a lot of money and between 2003 and 2007 there was a quadrupling in the cost of services and contractor fees. This multiplied by four the cost of drilling so that if a company had a commitment in 2003 to spend £7 million the figure would become more like $25 million in 2007. Small cap companies were no longer able to fund the wells and they fell victim to underinvestment. The assets neglected through underinvestment then became what I call the hanging fruits. All one has to do now is get a map of Indonesian assets and profile them to find the next hanging fruit.

As a small cap company we were looking at proven onshore assets which have infrastructure nearby. Bangkanai falls out of this group, however we were also looking for fields which were abandoned by larger companies at low oil prices. Bangkanai was abandoned by Unocal in the 1980s when the oil price was about $1.3 per barrel, but it had a discovery and certification. There are 2-3 other fields which are similar in profile which Sound Oil is aiming to acquire.

Aside from the opportunity in the market, Sound Oil is very confident in West Java because we have accumulated a lot of technical expertise. Our team has already identified other pockets where we can apply for a joint study or do a project in conjunction with Pertamina to invest more in the country. Having a strong technical team means that we are capable of fully developing an undervalued field. Sound Oil would like to repeat the Bangkanai project taking a distressed field, implementing a plan of development, increasing the value before then farming it out to a bigger company like Medco for production.

With a strong technical team in Indonesia and now a company working as an operator in Italy all under the Sound Oil umbrella, do you see the potential for crossover between these entities?

There is a separate team based in Italy with its own technical team. However the managing director of the Italian operation was a former director of VICO Indonesia back in 2003-4. Given this experience and the fact that both are under the same umbrella there is a good matrix for the horizontal transfer of knowledge within the group.

If we came back, how would we see Mitra Energia in 5 years time?

In 5 years we are aiming for at least 50,000 barrels booked to Sound Oil. Currently we are only at 1/10th of that figure so we will need high growth in the coming years. Sound Oil is also looking for new investors, bringing in Indonesian money introducing Indonesian investors to oil and gas. There are currently many strong Indonesian investors but rarely have they invested in oil and gas. The government is seeking giant oil fields in the East but this will only happen if they offer up more incentives. In the meantime, there will be smaller companies working together, consolidating and trying to build another Medco using their existing assets. For Sound Oil, because we have the technical capability, the network of the London market, we see potential in becoming a middleman working in-between to develop assets and farm them out, given our experience of varying risk appetites and the different investors in Indonesia. We believe we have time to educate Indonesian investors.

Looking back on your initial goals have you achieved what you set out to do and what is the next step?

If you set yourself too high a goal, you will become impatient because it is unrealistic. I personally like hiking and biking and go for journeys knowing that if I do not get the target now I might in the next month or the next year. You have to keep your feet on the ground and many deals in Indonesia fall apart because they become irrational. In oil and gas it is always necessary to partner with experienced people working in established companies. Mitra Energia has already done the cycle once and we believe we can make it work again.

In terms of geology, Indonesia still has one of the highest success rates of exploration wells in the world. It may even be double the global average. It is a rapidly growing market and the game is gas with prices already escalating to $6-7. In this game plan Indonesia is very interesting for Sound Oil and there are many players involved in the market who are relatively inexperienced and looking for partnerships suiting our business plan well.

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