Indonesia Rig Count Update

I made a brief overview of Indonesian Rigs Count in my earlier post. Here is the latest update from the sources. It shows that unfortunately it goes down…. Latest Baker Hughes data: And from Energy Digger:

Source: EnergyDigger

News Update: Week 26-2013

This was a very hectic week for Oil and Gas in Indonesia. Quite naturally, last week’s announcement of removal of subsidies for fuel sparkled a big discussion about the state of energy in the country.

A very important issue was raised by Metronews on Thursday: National Security is at a vulnerable point. This opinion was voiced by Chairman of the Association of Drilling for Oil, Gas and Geothermal Indonesia (Aspermigas) Sirajuddin Effendi. He cited that currently of the total 1.4 million bpd of oil consumed, Indonesia is importing 1.1 million barrels bpd – most of it come from Middle East – an area prone to conflict. Of 800,000 bpd produced – 500,000 bpd are processed at six refineries owned by Pertamina; all other is processed in Singapore. The issue was discussed on Friday at public dialogue "Fuel Subsidy and Crime Constitution" in Hall Kartini, Jakarta. Former Chief of Staff of the Army Gen. Retired Ryamizard Ryacudu noted that the country’s natural resources are run 75-80% by foreigners and 2/3 of the fuel consumed in come from imports.  Pertamina’s representative told the audience that oil reserves will be finished in 11 years, provided that the current fuel consumption grows at 5% per annum.  The only way is to build new refineries – and the Government should better work with investors providing more incentives. In my previous post I  provided some data on the state of refineries in Indonesia and existing problems. This was widely discussed this week.

Kuwait, Saudi Arabia versus Government Financed Project

- Director of Investment Planning and Risk Management for Pertamina Afdal Bahauddin supports the idea of Government financing. This can be done through integration in downstream oil industry. Currently, refinery industry margin relatively low compared to other sectors of Oil and Gas. For refinery with a capacity of 200,000-300,000 bpd internal rate of return (IRR) is  6% - 8%. However, when integrating IRR may be more than 12%. This well pronounced in published this week Pertamina’s 2012 Annual Report: “It is recommended to speed up the proposal and implementation of new refinery constructions through the synergy between Pertamina and the government.”

- Ministry of Energy and Mineral Resources (ESDM) official confirmed that no progress has been made with both countries and suggested that Pertamina should conduct a worldwide tender to build refinery in Indonesia.

- Pertamina and Iraq executed MOU between the Ministry of Energy and Mineral Resources Minister of Iraq for  oil refinery to be built in  Indonesia with a capacity of 300,000 bpd. The feasibility study should be finished by the end of the year and the final decision will be made, including on the location. This would be partially funded from the State Budget - Rp 90 trillion. It is planned to practically discuss the issue by two sides in July nest year.

Further discussion was going on about Indonesian Shale’s potential

As I reported in my previous News Post, Indonesia is still far away from full utilization of shale gas reserves. Business Times, Malaysia, notes that the rate of depletion in other energy sources means Indonesia would have to look to its shale gas. But at this time only one contract has been awarded to explore 16.3 trillion cubic meters of potential shale gas reserves. TIME Magazine published a big article Indonesia Embraces Shale Fracking — but at What Cost? “Exploiting cheap and plentiful shale reserves is therefore very attractive — and not just for Pertamina. Chevron Pacific Indonesia already uses fracking in Duri, Sumatra — the country’s largest oil field — while Australia’s NuEnergy Gas has just begun hydraulic-fracturing operations at five new untested coal beds in West Java, and expects gas sales by the end of the year.” Environmental concerns, restrictive legislation, poor local governance, a lack of financial incentives for investors and inadequate infrastructure – these are major challenges in Indonesia.

Energy Tribune in its publication points to the fact that there are huge discrepancies in the announced volumes of shale gas: in 2012 Energy and Minerals Resources Ministry announced that Indonesia has estimated 574 Tcf of shale gas resources; on June 13 Edy Hermantoro, an upstream oil and gas distributor at the Energy and Minerals Resources Ministry said that the country had 1,000 Tcf; a new EIA report released June 10 doesn’t rank Indonesia in the top ten countries with technically recoverable shale gas.

 Red Tape Problems

In my last News Update I mentioned the Red Tape problems. This past week there was a definite movement in this direction. A special meeting was held at the office of the Coordinating Ministry for Economic Affairs in Jakarta on Thursday. As an example, there are 284 permits from the ministry of Economy, 40 from Minster of Mineral Resources, 51 from Ministry of Transportation, and 53 from local Government. SKKMigas revealed explained at the meeting that in one year they receive about 60,000 letters related to licensing of PSC.; also existence of 270 permits was explained.

It was reported that some specific suggestions were discussed

• Licenses from Ministries of Energy, Mineral Resources and Ministry of Public Works can be issued in one place
• Streamline permit process for investors from the usual 2 years to just a few days.

In another development, EDSM proposed this week a five-year tax holiday Production Sharing Contract (PSC) operators. One of the reason is that this is a very capital intensive process - requires an investment of $10 billion for one well. 

Projections for Indonesian Oil & Gas

"Indonesia Oil & Gas Report Q3 2013" from Business Monitor International make these observations:

• Oil and gas reserves will most likely be on a downward trend in the coming decade: oil reserves are expected to decrease from an estimate of 4.1bn barrels (bbl) of oil at the beginning of 2013 to 3.8bn bbl in 2017, falling further still to 3.6bn bbl by 2022. For gas, we expect reserves levels to be stagnant.
• Indonesia is a country where much potential continues to exist. If the country relaxes its nationalist stance on resources, there is considerable upside potential for both oil and gas reserves - greater drilling of its unexplored deepwater areas and its unconventional resources - coal-bed methane and shale gas. 
• We expect total liquids production to rise to 914,970b/d in 2014 and 921,690b/d in 2015; in the longer term we see oil output trending downwards to 870,540b/d in 2017 and hitting a low of 788,100b/d by 2022. 
• Supported by strong economic growth and artificially propped by fuel subsidies in the short-term, demand is set to increase from an estimate of 1.41mn b/d in 2012 to 1.60mn b/d in 2017, rising further still to 1.81mn b/d by 2021. With demand outstripping supply, the country's import requirement will continue to rise, from 455,200b/d in 2012 to 731,610b/d to 2017 and could further soar to 1.02mn b/d in 2021.

Aulia Karsani, Senior Vice President of Samudra Energy (one of the operators of Madura PSC) in his interview to InilahREVIEW  notes that Indonesia still has around 75% of untapped oil reserves. He claims that currently Indonesia produces 20% -25% of what is in the earth; this may be increased to 45% -50% with Enhanced Oil Recovery (EOR) in existing wells. As an example he cites that in 90-ies Duri Field production jumped to 70% with EOR.

Meanwhile, this week the working meeting at Commission VII of the House of Representatives was held in attendance of representatives of Ministry of Energy and Mineral Resources (ESDM), SKK Migas, Regulatory Agency for Upstream Oil and Gas (BPH Migas) and PT Pertamina. The subject was discussion of the macroeconomic assumptions of oil and gas sector on the 2014 draft State Budget. The Budget assumption is U.S. $ 100-US $ 115 for oil price. Lifting of oil is projected at 860-900 thousand bpd, and natural gas is projected at 1.23 to 1.25 million barrels of oil equivalent per day. It was also mentioned that the pace of EOR applications should increase -  oil lifting of 870,000 bpd can be boosted to 900,000 bpd by the end of this year.

Problems with Local Administrations

 Jakarta Post, on Monday raised the issue of intrusion of local administrations in oil and gas production. This summary table is produced:

As an example the paper quotes that in May, PetroChina Int. Jabung Ltd., entered in a dispute with officials from East Tanjung Jabung Regency in Jambi, Sumatra (that sealed-off access to 26 of 140 oil and gas). The administration wanted  the company to make financial donations. As the result, the loss of crude oil production was of 433bpd per day and gas output of 11.011 mmscfd. There is a need for the government same action. It was reported earlier that Rudi Rubiandini, Head of Oil and Gas SKK, in a rather strong manner warned local governments not to disrupt oil and gas operations.

 Pertamina's Picture

This week Pertamina released its Annual Report 2012.

“As a country with the 16th largest economy in the world, Indonesia has the potential to rank 7th largest in the world in the year 2030. In line with the increase of GDP per capita, in the next 20 years, Indonesia’s economy is expected to enter the stage of resource-intensive development. Energy security will be an issue of highly importance for Indonesia due to the increasing energy needs of approximately 5% per annum in the last 15 years”.

While this 600+ pagers document has a lot of interesting information, I will pinpoint some of it:

The report notes:

• Actual realized investments in 2012 amounted to US$3.13 billion or 128.28% compared to the amount in 2011 of US$2.44 billion
• Taxes and dividends paid by the company to the Government increased – in 2012 to Rp58.37 trillion, from Rp55.76 trillion in 2011
• In 2012, the Company posted its highest net profit in its history: US$ 2.76 billion, an increase compared to the year 2011 of US$ 2.41 billion
• Total crude oil production amounted to 71.76 MMBO in 2012, compared to 70.63 MMBO in 2011
• Total natural gas production amounted to 563.15 BSCF in 2012, compared to 558.60 BSCF in 2011
• Steam energy product actualization from the operation of geothermal business sector amounted to 67.72 million tons, equivalent to 9,298 GWh of electricity
• Findings of oil and condensate reserves of 108.70 MMBO, while new natural gas reserves amounted to 964.1 BSCFG
• Pertamina refineries processed 308.12 million barrels of crude oil in 2012, compared to 308.80 million barrels in 2011
• Total refinery output reached 238.76 million barrels of petroleum products as well as 23.56 million barrels of nonfuel products
• Gas sales reached 23,070 BBTU in 2012, compared to 10,337 in 2011 BBTU
• PSO (Public Service Obligation) fuel and non-PSO fuel distribution were recorded at 44.96 million KL and 19.92 million KL respectively
• Total non-fuel product sales amounted to 7.38 million Metric Tons.

This table summarized the activities:

The company, according to its 2012-2016 plan has two visions: “Agressive Upstream” and “Profitable Downstream”. The goal is:

• In Upstream:  to  increase production and reserves of oil and gas with intensification of the development of internal potentials (domestic) and external aggressive expansion (regional and global)
• In Downstream: to focus on improving operational performance and refinery margins as well as the implementation of a comprehensive marketing strategy through the implementation of cost leadership and product differentiation as well as shipping fleet rejuvenation and enhancement.

As many companies in the world have it, Pertamina is employing The Whistle Blowing System (WBS) -  for the reporting of violations related to practices of Corruption, Collusion and Nepotism ((KKN) and other unethical behavior. Here it is how it works:

 A good practice?????

News Update: Week 25-2013

This was usual busy past week, except the big event -  as of Saturday 22 June 2013, the price of Indonesia's subsidized fuel has finally been raised by 44% for gasoline and 22% for diesel. 

This lead to numerous speculations about the consequences and of course great level of dissatisfaction of population. It is the result of tremendous strain on the country’s budget due to oil imports, as well due to the pressure form international institutions (World Bank and IMF) requesting to cut down fuel subsidies. The goal of the Government is to reduce oil imports and oil consumption. Many analysts note that currently Indonesia is in a very embarrassing situation. The Fraser Institute noted in 2012 that the oil and gas law has led to the governance of oil and gas in Indonesia being the worst in Asia Oceania. Thus – exploration investment is going down, no major new discoveries are made. Interesting situation exists with Pertamina - one of the only government-designated operator, so by Law, it is required to get maximum profit – hence Pertamina is not interested in going into low margin business of building of new refineries.

This issue was raised by Liputan6 daily on Wednesday, when it published an interview with Executive Director of the Indonesian Resources Studies (IRESS) Coal Marwan. It seems very strange that since 1994 Indonesia did not build new refineries, and currently Pertamina owns 6 only: the total capacity of the refineries - capable of producing as much as 700,000-800,000 bpd. Meanwhile, the Indonesian fuel consumption has reached 1.5 million-1, 6 million bpd. Japan, Iran, Saudi Arabia and Kuwait are contemplating to build a refinery in the country, but nothing happens. Everyone is also watching how the things will progress with recent announcement that Azerbaijan wants to start refinery project with OSO Group. One of the other reasons of slowness, according to Mr. Marwan, is that some foreign companies, including Shell, are not interested in Indonesian refineries, as they are importing a lot into the country.

There were a number of developments with Pertamina this week:

- On Monday Jakarta Post published a big material that claims that Pertamina is vigorously campaigning to acquire oil and gas assets overseas, at the cost of its own dormant blocks at home. This was revealed by Rudi Rubiandini, the head of SKKMigas. Despite of grated privileges to form partnerships with third parties to develop those neglected fields, Pertamina did nothing. Those oil and gas fields are mostly located in Sumatra (Tanjung Tiga Barat field, Limau Barat field, Belimbing field, Limau Tengah field), in Riau (Lirik field, North Pulai field, Sago field). However, according to  Muhammad Husein, Pertamina Upstream Director,  there would be 24 oil and gas fields that the firm would offer to major oil field service companies such as UK-based Petrofac and China-based Daqing Oilfield Company Ltd.

- After the Business Forum in Jakarta (with Prime Minister of Papua New Guinea participating) PT Pertamina  and oil companies from Papua New Guinea, the National Petroleum Company of PNG (Kroton) Limited (NPCP), signed a memorandum of understanding to explore the possibility of joint business in the oil and gas sector in both countries.  In particular, liquefied natural gas (LNG) will be suoolied to Indonesia through three liquefied natural gas receiving facilities (FSRU Teluk Jakarta, Central Java FSRU, Regasification Facility Arun). However, gas supply may come in 6-8 years only, as many of the gas fields in in Papua New Guinea are still in the exploratory stage.

- The Government has turned on the green light to the state-owned national oil and gas Pertamina to replace Total E & P Indonesia in the Mahakam block; contract is expiring in 2017

 This week, in anticipation of fuel hike, there was a discussion about foreign companies operating in Indonesia. Merdeka Daily made this: Chevron and Exxon control national oil and gas activities. Concern is raised that foreign companies (85% of crude oil production) control oil and gas in the country. Chevron controls 47% of national oil and gas production. Pertamina controls only 16%.  Suara Karya published  Oil Bargaining discussing probability that foreign companies will move out of Indonesia. According to the paper, this is a threat in anticipation of expiration of PSC  in 2-3 years. In the next 8 years, there are about 29 oil and gas fields will be out of contract.

 It was reported that Indonesia plans to offer fewer oil and gas blocks for exploration in a bid to get investors who will be able to better meet their commitments. Indonesia may be able to offer only about 20 oil and gas blocks a year over the next five years. This compares with a total 42 blocks it offered in 2012, of which only six were awarded to foreign companies including Premier Oil, a consortium of Japan's Inpex and the UAE's Mubadala, Cooper Energy, Salamander Energy and Conrad Petroleum.

ExxonMobil Oil Indonesia will return two oil and gas exploration blocks to the government for failing to find oil and gas in the second field.  These are: Block Surumana and Mandar block in the Makassar Strait – the company has spent $ 302 million. According to SKK Oil, four other foreign companies are planning to return to the government to the oil and gas blocks.

Reduction of red tape in Oil & Gas. At the beginning of June SKKMigas Chief Rudi Rubiandini in his interview to TV-1 (which, BTW clearly outlines current SKK Migas strategy), mentioned his meeting with President of Indonesia and the raised issue of cutting down red tape. This week it was reported about the meeting between SKK Migas and Pertamina with participation of Minister of State Owned Enterprises (SOEs) Dahlan Iskan. As the result a working group was formed that will look into issues of increase of production and cutting red tape. It was noted, that current situation is bad: to increase oil production the company needs to get from Ministry of Transportation more than 20 licenses. Total number of permits for oil and gas business is 270 from 12 ministries.

A lot of attention was devoted this week to Eastern Indonesia.

The Role of Geosciences for Oil and Gas Discovery Seminar was held in Jakarta on June 19, and the issue of Eastern Indonesia was widely discussed. It was noted that the geosciences data is available, it is not  disseminated widely and openly; there is lack of integration between the data owned by each agency, for example between Director General of Oil, Gas SKK. Head of the Ministry of Energy Geology, Sukhyar, noted that in 2023 there would be a peak national gas production in the region. Airborne geophysical mapping during 2010-2012 in the region, found a potential 174 trillion cubic feet of gas and 86 billion barrels of oil. 

It was announced that Ministry of Energy and Mineral Resources and the House of Representatives shall make investor-friendly regulations that are specific to the Eastern part of Indonesia. The reason is that this area is completely different for the Western part. Some of things under discussions are tax holidays, import duty exemption for exploration, and suggestion to impose special taxes for deep-water operations, similar to Malaysia.

Discovery of oil and Gas in Eastern Indonesia are illustrated by this graph

Source: Sustainable development of oil and gas in Indonesia (1900-2012)

Jakarta Post claims that Shale Gas Still a Distant Ambition for Indonesia. This due to the following:

- High cost of shale gas exploitation due to Geographical conditions in Indonesia

- Cost of drilling per well for shale gas in Indonesia is estimated at $8 million (as compared to $2-$3 million per well in North America)

- No Government incentives for companies

- Lack of infrastructure: natural gas must be transported by pipeline -- combined length of the pipeline network under Pertamina and Perusahaan Gas Negara is  around 5,000 kilometers (as compared to 4 million kilometers of gas pipes in the United States).

Despite of all this, the government opened a tender for two areas of work (WK) shale gas through a direct offer (direct offer). These are Non-Conventional Oil and Gas Blocks (MNK) West Cape, Central Kalimantan, and Block MNK range, North Sumatra. Ministry of Energy and Mineral Resources received 70 proposals to develop shale gas and five of them have completed the preliminary studies. Meanwhile, Advisor to the Minister of Institutional Affairs and the Ministry of Energy and Mineral Resources Strategic Planning Wiratmaja Puja stated that  “We hope for the next year's massive shale gas exploration", citing the boom in the United States with shale gas.

Lion Energy (ASX: LIO) aims to be a key player in the emerging West Indonesia gas market. The company wants to introduce modern techniques to access unconventional tight gas and shale gas and shale oil Sumatra Basin