Oil and gas in the capitals

As the low price of oil continues to restrict E&P, the government of Indonesia has come up with a new coping strategy: Produce more oil and gas domestically, and internationally—the Indonesian version of, “drill, baby drill!” President Joko Widodo and his energy advisors see E&P as a matter of national security and national pride, both major themes of Joko’s presidency.

Joko is keenly aware that Indonesia’s energy consumption grew 43% from 2003 to 2013, a trend that will continue into the future. Because this surpasses current production rates, the government is increasing domestic output and imports, the latter spearheaded by Indonesian energy companies, such as Pertamina.

There also is an energy mix issue connected to the new strategy. By 2025, the government plans on reducing national oil consumption from 38% to 25%, and natural gas will increase from 15% to 22%. This is, in part, because Indonesia’s oil reserves are in decline. There are, nowadays, fewer finds of more than 1 Bbbl in Indonesia and more finds of less than 100 MMbbl, says regional energy expert Madjedi Hasan.

That doesn’t mean that Indonesia is shelving oil projects. It still wants to exploit all that it can. In fact, Joko said on Aug. 17, Indonesia’s Independence Day, “We will develop areas such as Entikong, Natuna and Atambua, so that the world sees Indonesia as a great nation that pays attention on every inch of its land.”

For 2017, the government has an oil production target of 815,000 bpd, just slightly below its 2016 target of 820,000 bpd. As for gas, Pertamina’s LNG V.P., Didik Sasongko Widi, said in October, “If our gas supply is low, our economic growth will also be low. We will need a lot of natural gas by 2020, so we have already started stockpiling LNG commitments.” The national stockpiling goal is 4 million metric tons per annum, so it’s lucky for Indonesia that it has 141 Tcf of proven natural gas reserves, making it 14th in the world and third in Asia.

Attracting foreign E&P investment is a must. Foreign technology helps Indonesia overcome various technical difficulties, such as deepwater fields and high carbon dioxide content in places like East Natuna.

Domestic projects. While neighboring Southeast Asian countries have halted operations where overhead E&P costs exceed $60/bbl, Indonesia is charging full steam ahead. This is partly because, according to Pertamina, it costs just $15.60 to produce a single bbl of oil in Indonesia. The Wall Street Journal says it’s higher at $19.71. Either way, it’s still cheaper than a lot of projects in places like deepwater Vietnam.

In May, the Indonesian government offered 15 blocks—seven onshore and the rest offshore. Indonesia encouraged Malaysia’s Petronas to partner with Pertamina to explore 10 of those blocks, to strengthen Southeast Asian upstream and downstream relationships, which, Indonesia believes, will help keep costs down. In August, Pertamina said it planned to sign a PSC with ExxonMobil and PTT to develop the East Natuna block, making it operational by 2019.

Then there was a September surge of news regarding at least five domestic E&P projects. First, Andalas Energy and Power announced that it signed agreements with Pertamina to speed up the exploitation of five marginal gas fields in Riau, Jambi and South Sumatra provinces. These are linked to the government increasing national power generation by 35,000 MW by 2019.

Second, Chevron said that it began gas production at the Bangka field development project, the first stage of the Indonesia Deepwater Development Project in East Kalimantan. It has a natural gas capacity of 110 MMcfd, and a condensate capacity of 4,000 bpd.

Third, Thailand’s Mermaid Maritime Public Company announced that it was awarded two subsea contracts worth $5.1 million, one in the Middle East, and the other a 30-day project in Indonesia’s Natuna Sea. Fourth, London-based Ophir Energy began commercial production at Kerendan gas field in the Bangkanai PSC, which provides up to 5 MMscfgd to national electricity distributor, Perusahaan Listrik Negara.

Fifth, Saka Energi Indonesia, the E&P subsidiary of state-owned gas distribution company Perusahaan Gas Negara, just discovered a 300-MMbbl oil reserve via the Sidayu-4V well on the Pangkah offshore block in East Java. In 2015, Saka discovered an oil and gas reserve via the Sidayu-3ST1 well in the same block, making East Java an important energy source for Indonesia.

Overseas projects. Indonesia’s overseas projects are increasing as well, mainly through Pertamina. The Jakarta Post reports that Pertamina’s biggest overseas production location is Iraq, at 43,700 boed. Its second-biggest is Algeria, at 39,000 boed. Malaysia is third at 35,770 boed.

In September, Pertamina signed an agreement with Algeria’s Sonatrach to increase production from oil and gas fields there. Sonatrach also is supposed to help Indonesia formulate a plan to develop a strategic petroleum reserve.

In October, Pertamina was in negotiations with Russia to secure 20% of the offshore Northern Chayvo project, and as much as 37.5% of the onshore Russkoye field. If the firm succeeds, this will be Indonesia’s first-ever E&P project in Russia. Indonesia is considering E&P in Saudi Arabia, U.A.E., Iran, Gabon, Azerbaijan and Kazakhstan.

Taxes. To attract more foreign investment, the government has announced, via Government Regulation No. 79/2010, the broad elimination of multiple taxes on E&P. Wiratmaja Puja, director of the Ministry of Energy and Resources, said of the measure, “Global exploration (companies) will return enthusiastically. Investment will increase.” Detractors abound, however. They say the flip side of the regulation eliminates a necessary protection clause regarding cost recovery under PSCs. The regulation is being amended in the legislature to address these concerns.

About the Authors

Jeff Moore

Contributing Editor

Jeff Moore runs Muir Analytics, a risk consulting firm specializing in deciphering threats in conflict zones. He is author of the book, Spies for Nimitz, which depicts America’s first modern intelligence agency. He holds a PhD from the University of Exeter in the UK.