Indonesia's expiring production licenses valued at $10 billion

11/29/2016

SINGAPORE -- In a recent report, Indonesia’s expiring PSCs: $10 billion of potential upstream value, Wood Mackenzie valued Indonesia's expiring oil and gas production licenses or production sharing contracts (PSCs) at close to $10 billion.

These 35 licenses account for over 1 MMboed of production in 2016 and will face expiration in the next decade. The lack of clarity on license extensions, and the scale of production at risk, make expiring PSCs one of the biggest issues facing Indonesia's upstream sector.

Wood Mackenzie expects Indonesia's national oil company Pertamina to play a key role in expiring assets with strategic value to the country, given its interest to meet aggressive near (863,000 boed in 2017) to mid-term (2.2 MMboed in 2025) production targets.

Alex Siow, upstream research analyst, said, "Assets such as Offshore Mahakam, Corridor and Jabung would be of interest to Pertamina as these are material gas exporting projects with exposure to LNG and piped gas contracts. Corridor and Jabung connect to the lucrative Singapore and West Java markets, while Offshore Mahakam supplies LNG through the fully depreciated Bontang liquefaction plant.

"Given financial and technical constraints, Pertamina could take on operatorship in cooperation with service companies with the ability to manage and produce under an integrated project management structure. Taking up minority interest in more technically challenging projects will also allow it to develop the skills needed on its own assets as they near end-of-life."

The 35 licenses provide opportunities to a variety of players, from experienced domestic players to new start-ups with new strategies, and fall under four main categories: mature projects with upside, enhanced oil recovery (EOR), late-life fields, and discovered resource opportunities (DRO).

Mature projects with upside, such as Offshore Mahakam, Corridor and Jabung, which account for over 80% of expiring PSCs, have extensive infrastructure already in place and the potential to deliver stable cash flow. These projects will be most suited for large, experienced operators.

EOR opportunities will require specialist expertise and advanced technology to unlock remaining reserves and value via thermal, gas or chemical injection. Chevron's Rokan, expiring in 2021, is one of the world's largest steam injection projects and produces over 200,000 boed. However, the block needs over $2.7 billion of investment annually to maintain output and mitigate field decline.

Late-life assets offer potential for companies that can manage old facilities and improve operational efficiency. These old fields also come with potential decommissioning liabilities, which must be taken into consideration. The biggest three, Sanga Sanga, South East Sumatra and East Kalimantan, will expire in 2018.

DROs need a commercial solution to either challenging reservoir conditions, difficult project economics or a lack of market demand, but may offer the most straightforward opportunity for companies trying to build development experience. However, the time to recoup investment can be much longer, particularly given Indonesia’s bureaucratic regulatory environment.

Indonesia's liquids production is expected to fall to a new low of 780,000 boed. With only a handful of new development projects in the pipeline, the country is in dire need of fresh investment to reverse the impending decline in oil and gas output.

The significant number of expiring licenses are a vital opportunity that if used properly, can serve to revitalize the corporate landscape and inject a fresh lease of life into many of the blocks. However, the Energy Ministry, SKK Migas and Pertamina will need to align to ensure the continued survival of the E&P industry in Indonesia.

Related News ///

FROM THE ARCHIVE ///

Comments ///

comments powered by Disqus