with Maizar Rahman, Research Professor, Lemigas
Based on your experience as an OPEC governor, on the board of Pertamina and as head researcher for Indonesia’s principal oil and gas R&D body, Lemigas, what are some of the main issues and recent developments affecting Indonesia’s oil and gas sector in 2012?
Very little is changing in terms of oil production. Government expectations were that oil production would increase in 2011 but the schedule was not met by oil producing companies partly because of delays in developing the fields. Cepu is Indonesia’s largest new oil field and the government expects that it will produce 165,000 bbl/d but some time is still required.
Another new field belongs to Chevron in Makassar straits which will produce both gas and oil. This project is currently at the EPC phase but it will contribute significantly to Indonesian production. Many of the new production sharing contractors are still at the exploration stage.
The government has awarded many new contracts in the hope of new discoveries. We cannot expect an increase in oil production from Indonesia’s traditional oil production sites, except if companies apply enhanced oil recovery, which is also being incentivized by the government. Oil and gas discovery is more likely to occur in remote and frontier areas as well as deep sea such as the Makassar Strait and Masela.
The government is encouraging new E&P operations by providing better investment climate. The current legal framework is considered does not support business players so now this is being amended in the parliament.
b>Last time we conducted an interview you championed the PSC as making Indonesia attractive for investment. With FDI in Indonesia’s upstream stagnating at between $10 and $12 billion for the last 3 years, does the model of the PSC need to be changed?
The PSC’s offered by Indonesia are already good in comparison to other countries in terms of the production split between international companies and government and as well as equity split with our national oil company. When oil is discovered in Libya for example a big part of the share instantly goes to the national oil company. The share percentage is very good in Indonesia, especially regarding new exploration areas.
One of the problems in Indonesia is taxation. Under the present law, investors are required to pay various taxes during the exploration stage, including those imposed on the import of heavy equipment, a regulation which is uncommon in the oil and gas industry world. This was not the case in the past and current changes in legislation will restore the fiscal environment. Companies will then pay tax after hydrocarbon discovery.
What is the potential of enhanced oil recovery in Indonesia?
Almost all the existing wells are currently in the secondary stage, some are tertiary which deliver significant production. Therefore there is still a lot of potential for enhanced oil recovery. It may be possible to recover as much as 20 or 30% more oil. The important thing is to apply new technology which is more costly and the government must provide the right investment incentives. At the current global oil price level providing such incentives is not a problem for the government.
What is the importance of an organization like Lemigas in improving Indonesia’s oil and gas production?
Lemigas functions as a state owned oil and gas research and development center and arm of the government, whose first objective is to advise the government on oil and gas policy from upstream to downstream. Secondly, Lemigas engages in solving industry specific challenges. especially in the upstream area. This is because in upstream there are many companies who can benefit, whereas in the downstream area there is just Pertamina.
Lemigas has many cooperation agreements with Pertamina in research and with PSC contractors in technical services. This institute has also been conducting research into new and renewable energy sources such as coal bed methane (CBM) which was initiated around 10 years ago. Lemigas did the initial exploration and following this process the government encouraged investment. There are already several significant companies emerging in this industry and the potential of CBM reserves is huge with around 450 Tcf, which is one of the largest reserves in the world.
Again, almost all of the CBM companies are at the exploration phase. It would probably take 6-10 years to have significant CBM production in this country. is very different from natural gas production. We need to have many wells to bring results.
Indonesia also wants to develop micro algae for its renewable energy. This country has 80,000 km of shore and algae can grow in sea water meaning that Indonesia does not use fresh water and land which is important for food. Lemigas is currently conducting research on this.
Regarding Pertamina, what do you see as its evolving role nationally and in the region?
When I was on the board of Pertamina we put together a 15 year strategic plan. In the first 5 years the aim was to be leading in Indonesia. Pertamina is now the second largest oil producer in the country after Chevron and the company is continuing to buy new oilfields and equity. The hope is that the government will give Pertamina the rights to fields which are returning to the government following contract expiry. For example this would apply to Total in the Mahakam Strait who will finish their contract in 2017. Pertamina wants to increase its share of production in oil as well as in the gas market. Pertamina will also work as an operator on Natuna Island for Natuna gas production.
The second 5 year objective is for Pertamina to be a leading player in Southeast Asia both in upstream and downstream. The third phase is to be on an equal level with international players. So there are just 15 years to make the dream come true.
Pertamina is currently producing around 500,000 boed: 200 000 bod in oil and 1.6 bcfd or 300,000 boed in gas. In terms of barrel oil as well as of barrel oil equivalent Pertamina is the second largest producer after Chevron at the moment. Chevron currently only has oil production, but it will also be able to produce gas from the Makassar Strait.
What is the role that you see for international and local companies in the development of the industry?
International companies have played a role in Indonesian oil and gas production for around 120 years and they will continue to stay in the country. However, local companies must start to assume a more significant role. There are still relatively few local companies engaged in upstream production, although one good example would be Medco. The majority of these local companies produce only around thousands barrels/day. Therefore Indonesia needs to encourage the growth of local companies.
The issue is that the oil and gas industry requires strong capital investment. These smaller companies therefore need to take a long breath. The cost of drilling one offshore well is around $100 million or even more and it will be some time before local capabilities match this level of expenditure.
Only Medco has the potential to become a really large producer. Indonesia needs more entrepreneurs in the local oil, energy and petrochemicals industry such as Arifin Panigoro in Medco or Prayogo Pangestu of Barito Pacific. Barito, beside having Chandra Asri in Petrochemicals, Star Energy in geothermal, has also acquired oilfields. The government must assist and cannot expect such growth from the majority of small companies.
In terms of the 50% production target from local companies by 2025, I feel this is a little early. However, a lot depends on the law currently being negotiated. It may be the case that beside Pertamina a local company may also be allocated a producing area. having ato begin production.
If Indonesia does increase production, what is the country’s potential as an exporter?
At present Indonesia is concentrated on domestic consumption for both oil and gas. When the country begins to produce CBM in around 10 year’s time, the country will have more gas and can use this for export. The same applies to the giant Natuna gas project.
However, investments are currently more dedicated to serving the domestic market. Construction projects currently concern imports such as gas terminals to import from Qatar. However, the country has to wait for contracts to expire before retargeting much of its production to the internal market. The alternative is to export to countries like Japan and import from countries like Qatar provided that the financial balance is suitable.
At present, Indonesia produces fossil energy in oil equivalent of 6 million barrels (1 million barrels of oil, 2 million – gas, 3 million – coal). The problem is that Indonesia does not have sufficient infrastructure to use all of this energy. Current distribution infrastructure is poor. Almost all of Indonesia’s coal, around 70%, is exported, when the country needs this vital resource. If infrastructure were developed then Indonesia could easily be energy independent.
What would you say were some of the most important infrastructure projects for Indonesia?
The government needs to develop basic communication routes such as roads and railways. Infrastructure development is part of the MP3EI (Master Plan for the Acceleration and Expansion of Indonesian Economic Growth) to push development in 6 economic corridors within Indonesia which includes infrastructure. If infrastructure were better then perhaps Indonesia’s growth would not be around 6% but more like 8 or 9%.
Indonesia has many local basins which have not been explored and much depends on discovery, some of these will be in deep waters. We are still optimistic. According to hypothetical estimations Indonesia still has around 90 billion barrels of oil and this is why exploration must be encouraged.
Other types of energy such as CBM and shale gas are being developed. Renewable energy sources such as algae and biofuel also could replace the significance of oil and gas but only in the long term. Geothermal is also a good area for expansion with a potential of 29,000 megawatts. Pertamina is developing now nearly all the geothermal fields allocated to this company and if they do not develop them then they will be taken back by the government and reallocated, so there is strong incentive to develop these fields.
For investors there is a strong opportunity in Indonesia in geothermal, renewable, CBM, shale gas as well as oil and gas with many basins still to be discovered. Indonesia is still improving the economic conditions within the industry. In 1998 following the reformation there were many changes in the country system including the decentralization. Although local governments officials sometimes needed longer to understand the new conditions and priorities for Indonesia things are moving in the right direction and the development enthusiasm has spread to them which promote the investors to come to their region. This will be a big opportunity for the investors in many sectors including energy and certainly oil and gas.