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Interview

with Soekoesen Soemarinda, General Director, SPC Mahakam Hilir Pte. Ltd.

22.06.2012 / Energyboardroom

When we spoke to you last time in your capacity as Corporate Senior VP of Upstream for Pertamina, you said that Indonesia was moving towards utilizing energy for the domestic market. Pertamina has a clear national responsibility in promoting this trend; it must be very different analyzing this trend from the perspective of a multinational company. How do you see the difference?

Indonesian government policy clearly outlines that gas production should go to the domestic market and as an Indonesian I fully agree with this policy. Oil is now harder to produce with production falling below 1 million bpd to around 900,000 bpd and gas should therefore take on the role of supplying Indonesia’s domestic energy needs. After all gas reserves are now much greater than those of oil.

As the largest oil and gas player in Indonesia, Pertamina ultimately carries the greatest responsibility for guaranteeing the domestic supply of oil and gas. By comparison, the private sector is analysing this sector from a very different standpoint and relates to the market very differently. Following my time at Pertamina, I transferred to SPC which was back then a similar company, being partially state‐owned. SPC was then 100% acquired by Petrochina. As a Chinese‐owned multinational company, SPC, has naturally given me a different viewpoint on the Indonesian market.

Private companies have always been concerned that domestic gas prices will be too low to make gas sales attractive. Investors will compare domestic and export (LNG) gas prices and the price right now for the domestic market is around $5 per unit. However the export price stands around $9 making it more attractive for the investor. The key concern for any private company is generating profit. However, profit generation can either be through high margins or high volumes. If a company finds huge reserves of gas then it can generate high profitability by delivering large volume gas supplies to the fast growing domestic market.

Prices for the domestic market cannot rise too high as in order to guarantee that there is a domestic market for gas, the price must be kept affordable. Low prices will create a multiplier effect for other industries driving up further the demand for gas. From an industry perspective, the only way to create low prices is to unlock large gas reserves, have good access to gas infrastructure and increase supply through extensive E&P activity.

The main obstacle at the moment for investors is the low level of infrastructure for gas production, transportation and distribution. This is ever more acute as exploration is now taking place in frontier zones. This has the effect of driving up the price of production.

Ultimately, with 61 oil and gas basins and a rapidly growing domestic demand, Indonesia is an important country to be in for private players. To give some indication of the importance of the Indonesian market almost all of the upstream employees in SPC are Indonesian.

In February this year the company hit gas on the naga utara field (north dragon) after a relatively short drilling program starting in December. What have been your experiences and expectations for the development of this field?

SPC has a partnership with Australian company, Cue Energy for the Mahakam Hilir Block, where they possess a 40% interest. There are strong indications that there are huge reserves there but it is now too early to give estimates. East Kalimantan has mostly gas reserves; these are plentiful and have access to the Bontang LNG facility nearby and there is also the possibility for gas to power generation for the local population. The only problem at the moment is that we do not know the price.

Drilling in East Kalimantan is not very cheap in this area because of the high pressure and there is a lack of infrastructure. There is a small gas pipe near our field but it is more likely that we will have to build new pipeline infrastructure to transfer gas from the field. Without knowing the sale price, I need to concentrate on lowering production costs through efficiency savings. Efficiency can be brought through the experience of our local people and through the support of HQ in Singapore and from Petrochina.

SPC has three options for gas development on Kalimantan: gas to power, gas to LNG and even building a pipeline to the market. In making the calculation between these options, SPC will not concentrate on the profitability. Indeed my advice to all international investors when looking at the Indonesian market is to not only think of profit but about the social welfare of Indonesians. SPC believes that if it demonstrates that it is ready, capable and committed to supplying the domestic market it will receive more blocks in Indonesia. This is our long‐term strategy.

SPC has established extremely good relations with local authorities. What would you say was the secret to building a strong relationship and acceptance for onshore exploration?

Through regionalization local governors are now stronger than policy makers in Jakarta. 10 years ago Pertamina could arrive in a region and declare that they are going to drill and no one would disturb them. Now there is much greater regional autonomy and they can decide their own policy in relation to oil and gas. Indonesian onshore operations are now more difficult than offshore as villagers, local governments, NGOs all have a say in operations.

In our case, the local authorities appreciated the fact that, as General Manager, I personally visited the rig site and approached them about the operation. Indeed, I like to form friendships with the local stakeholders. Knowing that the top management of SPC are engaging with them goes a long way to smoothing over relations. SPC also begins by undertaking corporate social responsibility programs in advance of commencing E&P operations. The third factor which allowed us to create a good relationship is the fact that we are engaging in constant discussion with local stakeholders throughout the project.

One of the advantages of being in a smaller private company is the speed at which we can move. For example, local government in East Kalimantan called me in Jakarta one day at 8pm telling me I had a meeting at 9am the following day. It was important to show to them that SPC is committed to production in the region.

When we spoke to Pak Priyono, he praised the IOCs for their aggressive strategies and tolerance of risk. How do you see the role of a company like SPC in developing Indonesia’s gas potential?

Whatever the role of international oil companies, Indonesia needs a national oil company and this can be created in one of 3 ways: BP MIGAS could become a national oil company; we build a new national oil company; we could revert to Pertamina as the national oil company. Pertamina already has a network across Indonesia and they are present everywhere in the downstream part of the market. Foreign companies like SPC will be very happy to partner with Pertamina.

International oil companies are becoming more independent in the Indonesian market. IOCs are now coming into Indonesia by themselves and dealing with the challenges they face independently. When a landlord does not want to sell the land for a drilling area we have to deal with the issues ourselves. IOCs can do this provided that the decision‐maker of the company is Indonesian and in order to confront these issues, the operation needs to have a lot of independence from headquarters. When I agreed to work for SPC I put forward the request that all my staff should be Indonesian.

What are your near‐term ambitions for SPC Mahakham both from a national perspective and in terms of the company’s ability to aid the growth of the company?

Over the next 5 years SPC should be producing more and should have a big presence in Indonesian oil production. We are focused on East Kalimantan at the moment with the Mahakam Hilir Block and over 2012 and 13 we will drill many wells. We do not yet know the amount of production possible from these fields but we will seek to acquire the exploration blocks surrounding these areas. This will require substantial investment especially since over the next 5 years we cannot predict the oil price. However, if the estimates maintain the oil price above $100 we should acquire the blocks now so that in 5 years we will already be in production. SPC now has an aggressive exploration program in place for its existing block. We have a small block so our activity is highly focused. SPC is now drilling Naga Selatan 1 where we hope we will find oil, giving us one gas field and one oil field in the Block. The previous operator only extracted from the shallow prospects, whereas SPC is now looking at deeper prospects. Ultimately I am a risk taker – an explorationist by nature and believe that SPC should not shy away from risk. There were many problems in Naga Utara because of high pressure systems but the project has found gas much ahead of schedule.

You spent 30 years working for Pertamina as a National Oil Company before switching to an IOC. What motivates you?

My main motivation is to increase Indonesia’s production not only from the government’s side but by working with strong international companies to increase production. SPC is not a very large company, so it can move very fast, no longer constrained by bureaucracy. I aim to deliver greater production on schedule, in line with corporate policy and in a cost efficient way. In doing this I value my staff and have lunch with all my employees from top to bottom as our operation depends on everyone in the team. When visiting the site I will sleep in the portocabins at the rig site and I believe it is important to create this link throughout the organization. It is important that my people are motivated in the same way; they work on fields named north, south, east and west dragon and I call them the dragon force.

What would be your final piece of advice on operating in Indonesia?

My advice to IOCs is to not only think about generating profits; accepting lower profits will allow a company to have greater business. Companies should therefore concentrate on improving the well‐being of Indonesians.

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