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Interview

with Sammy Hamzah, President & CEO, Ephindo

08.06.2012 / Energyboardroom

Director General Legowo was quick to point out CBM as one of the major development opportunities in the Indonesian market in 2012. As the founder of the CBM advisory board and co-founder of Ephindo, what is the potential of CBM as an Indonesian power source?

Indonesia is transitioning from oil to gas and CBM is methane just like natural gas. CBM is a huge resource in Indonesia, but now is the time to prove it as a source of energy. As yet no company has really “unlocked the play” for CBM in Indonesia, however Ephindo is in the final stages of a project to develop CBM as a viable energy source.

The CBM industry is lucky to have a government which has been active in assisting its development and helping players like Ephindo. Understandably, the government has exercised caution in introducing new laws relating to CBM as they are still testing the water on whether CBM can be a meaningful contributor to Indonesian energy. Today, the onus is more on the CBM players themselves to prove to the government and other stakeholders the value of this industry.

How challenging is it for these CBM companies to develop this industry and prove its worth?

One of the greatest challenges that the CBM industry faces is land access. However, at this stage, not all CBM players are fully aware of this challenge. Development of CBM reserves will require hundreds or even thousands of wells which involve hundreds of hectares of land. Forest areas, plantations and overlapping boundaries with blocks for other mineral resources represent a huge challenge. Of course, some companies have been actively warning the government about this challenge and I believe it just takes one company to successfully unlock the play and this will convince government to move in terms of land regulation for CBM.

The immediate challenges are at the moment slightly different to those faced by the oil and gas industry which has been in the firing line for the last few years with issues such as cost recovery and environmental lobbying against the impact of oil and gas production. Furthermore, Indonesians are highly conscious of developments occurring in Latin America and have seen what happened in Argentina in the last few days with the nationalization of YPF. There are many pressures emerging in public sentiment towards the oil and gas industry, which are not yet faced by the CBM industry but since CBM is governed under the Oil & Gas regime, ultimately these challenges will be faced by the CBM players. At this initial stage, CBM has a different set of challenges being a newer, marginal industry. Of course the fact that CBM has a much larger footprint creates a larger land and environmental challenge.

You mention proving the industry’s worth but how have you managed to convince the stakeholders already that CBM has value?

It has been relatively easy to convince local authorities of the value of CBM development. The pilot project Ephindo is carrying out in East Kalimantan is adjacent to Sangatta city, a regent which has the highest economic growth and yet the city experiences frequent electricity shortages. In this case it was just a matter of explaining how CBM can fill the gap in supply and stop electricity shortages within 1-2 years.

We are at the stage where local stakeholders are starting to ask us to deliver on the millions of cubic feet of gas that we promised originally. The challenge for Ephindo is therefore not in gaining acceptance but in overcoming the everyday obstacles of a logistical and operational nature. Administration is not yet flexible enough considering that CBM is a marginal industry. For example, if you go to BP MIGAS asking for approval for a $1million well they can end up processing it in a similar way to a deepwater well of $100 million. Such delays would kill a CBM project in the administration phase.

What is the situation regarding the development of your current projects?

The most advanced property is probably the Sangatta Block in East Kalimantan which we are operating jointly with Dart Energy and with Pertamina as a partner. Ephindo has drilled 7 wells there: 3 core, 4 pilot and we even began producing gas early last year. However it was necessary to shut in the well because there were some issues we needed to resolve regarding our surface facilities including gas separators and electric submersible pumps. These logistical issues have created delays and we are waiting on deliveries of some equipment from the USA. There is another issue related to water treatment management. However, I am confident that we will be able to restart production in the 3rd quarter of this year and carry on developing this pilot project.

Given that this is a new development how are you working out the gas supply agreement with PLN and how do you see domestic pricing developing?

Originally Ephindo wanted to supply electricity to PLN, however the current law does not permit us to do this as an upstream company. Ephindo has competency both in upstream E&P and downstream electricity production and we therefore tried to convince the government that we should have such approval. However, this was rejected and we have decided to sell the gas and let PLN or an independent power producer generate the electricity and sell this to PLN. However, we are in negotiation over the final gas price.

Overall, the development of the local gas market looks very positive. Domestic prices are increasing and becoming more viable from the producer perspective. Ephindo is confident that the domestic gas market will grow in its attractiveness for unconventional plays like CBM. Certainly the market is looking good when compared to the downward direction of pricing in the US market. 3 years ago the price of gas in the USA was 5 times its present figure and no one would have believed 5 years ago that the US gas price could fall below $3. Of course there are no guarantees of pricing stability and the oil and gas price has always depended on market economics; we have experienced oil prices ranging from $12 to $140. All the domestic producers will have to prepare for the possibility of the domestic price falling. However, looking at the growth over the next few years we are in a good position to develop in Indonesia given the rapidly growing demand.

Given the attractiveness of the Indonesian CBM market, what is your perspective on the entry of new players into Indonesia?

This can only be a good thing for the industry. More investors will mean a greater willingness to take risks in developing new projects. Within this picture Ephindo stands to do well as a small national player. When setting up the company in 2005 we believed that CBM requires a strong local knowledge, network and level of competency. Local producers can compete effectively as it is a marginal business and not a deepwater or frontier business which requires heavy investment and complex technology. Ephindo is dealing with shallow and cheap wells where the company has to decide technical and operational matters quickly. When a “Giant” player has to decide on whether to perform lateral, vertical or horizontal drilling they will have to go through their headquarter, set up a working group and then come back 2 years down the line having made the decision. As a marginal business CBM cannot be developed in this fashion, so in our niche we believe Ephindo can compete well to secure projects.

Where is Ephindo today relative to your vision for the company when you first set up the business in 2005?

In terms of milestones, Ephindo has reached 70% of what we wanted to achieve by this stage. The challenge for us now is resource to reserve conversion, which will require many technical discussions, project development meetings and troubleshooting for logistical challenges. However, I am happy with the progress so far. The next step is unlocking the play and moving towards full-scale development. This will of course require a significant financing campaign.

Looking forward, Ephindo would like to be seen as a focused company. Naturally, we have plenty of opportunity to expand into the region but we believe success lies in having this focus to our business. Our mid-term goal is to unlock the CBM in Indonesia and become a significant producer here. In 5 years time I will be happy if Ephindo can produce significant quantities of gas and hold around 10 PSCs operating 80% of these.

What is your perspective on how Indonesia is fitting into the global unconventional resource map?

If the industry ends up unlocking the play in East Kalimantan and South Sumatera then stakeholders and investors will be able to fully see its potential. East Kalimantan and South Sumatera is a highly coal-rich region with 60% of the CBM potential in Indonesia. However, the really interesting aspect in East Kalimantan is that there is a sitting and under utilized LNG facility capable of channeling CBM into an export market. This makes the development of CBM to LNG export very fast, because we will not have to apply for approval from government, conduct front end engineering and design or wait 3 years to build an LNG plant. If we compare this to the situation in Queensland, Australia where they are struggling to build an LNG plant and dealing with environmental issues, Indonesia has a huge opportunity thanks to the infrastructure already in place. With this in mind, Indonesia can be right on top of the global CBM production list and I believe 2012 will be an important year for Ephindo and this industry.

Looking back on your decision to leave the corporate ladder in 2005 and set up Ephindo how do you feel about the decision?

I used to work for Unocal and subsequently Chevron before setting up Ephindo with my business partner Pak Judiana who was the previously President Director of Chevron Pacific Indonesia. I felt at the time that in my early 40s the risk of switching from being an employee to entrepreneur didn’t seem that great because if things did not work out then I could go back to the industry and find another job. This made the decision relatively easy.

7 years along the road I am very happy with the decision. I now have much more freedom and can pursue my interests on the board of several companies including Rio Tinto, also through working as Vice President of the IPA and in other organizations as well. I enjoy my work a great deal.

It is an exciting time to be in Indonesia and Asia in general. I just hope that the political stability will remain until 2014. We are fortunate to have experienced very good political stability in the country over the last 7 years. This provides a stable environment for business and I am glad to be doing business in my own country and with the industry transitioning towards gas, CBM offers a great opportunity.

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