Indonesia - · PDF fileThe BP-led Tangguh LNG project in Papua – Indonesia’s third LNG ... construction and set to commence production by 2009

IndonesiaEnergy reportApril 2008

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April 2008 Oil & Gas Financial Journal • www.ogfj.com www.focusreports.net 69

This supplement was produced by Focus Reports LLC. For more

information and exclusive interviews, log on to www.focusreports.net.

Project Director: Ines M NandinText and research: Robert Murillo

IndonesiaAfter 100 years of oil and gas

activity, Asia’s only member of

the Organization of Petroleum

Exporting Countries (OPEC) and inventor of the

Production Sharing Contract (PSC) finds its oil

and gas sector at a crucial turning point. Indone-

sia, a pioneer and a long-time leading exporter

in the LNG market is certainly not a newcomer

on the international scene. Yet, after years of

internal and external challenges and fundamen-

tal transformations, in 2004 the country became

a net importer of oil for the first time in its

history as increased domestic consumption was

met with falling production. But the time has

come to set in motion a change in the country’s

energy basket, with the objective of re-balanc-

ing the share of its oil and gas sectors and to

allow for new sources of power from biofuels to

geothermal through to possibly nuclear energy

to find their place in the country’s future.

Once a net exporter of petroleum, Asia’s only OPEC member seeks to increase production and to diversify its energy sector by generating power from other energy sources such as biofuels and geothermal.

Shaping a competitive

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70 www.focusreports.net April 2008 Oil & Gas Financial Journal • www.ogfj.com

“Indonesia is strategically located between two oceans and

continents that are of vital importance in today’s energy geopolitics,”

says Purnomo Yusgiantoro, Indonesia’s Minister of Energy and Mineral

Resources. “Oil from the Middle East must pass through Indonesia

before reaching the Far East markets, and the country is also well

connected to fast-growing giants China and India and energy-rich Aus-

tralia. Moreover, Indonesia itself is an important energy producer, with

substantial production of oil, gas and coal.”

Minister Purnomo recognizes the

challenges Indonesia’s energy sector

is facing but believes his country still

is in a favorable position.

Production of oil and condensate

in the period 2001-2004 declined

year on year due to a natural

maturing of its producing oil fields

combined with a slower reserve

replacement rate and years of

decreased exploration and invest-

ments. In 2006, oil production was

around 400 million barrels of oil

equivalent (boe), while the domestic

demand was up to 500 million boe,

forcing the country to import 100 million boe to cover the deficit.

This situation has continued into 2007 and is likely to intensify in

the years to come, due to booming domestic demand and a lack of

significant oil and gas discoveries in the country. Considering soaring

oil prices and the Indonesian government’s generous fuel subsidy –

despite recent reductions – this could constitute a heavy burden on

the state budget.

Nevertheless, Minister Purnomo is quick to point out that invest-

ment in E&P activities has picked up over the last several years, and he

believes that has a lot to do with the passing of new laws and regula-

tions for the sector.

“Our investment estimate for the total year 2007 is of about US$18

billion in the O&G sector, and there are already US$44 billion commit-

ted for projects over the coming years” he adds. As most of Indone-

sia’s oil and gas production comes from aging brown fields, a good

deal of the investments will have to be made in developing enhanced

oil recovery (EOR) in order to maintain production levels or to avoid a

rapid decline.

Achieving the government’s production objectives for the coming

years will also require the exploration and development of new fields

in Indonesia’s frontier regions. The President of the Indonesian Geolo-

gists Association (IAGI), Achmad Luthfi, echoes other experts’ view

that the country is still very prospective geologically for oil and gas

discoveries in its many unexplored basins.

“Everyone knows about the oil and gas fields developed in western

Indonesia, but geology shows that the future lies in exploring eastern

areas, including deepwater basins,” says Mr. Luthfi, who is also Deputy

Chairman for Planning of BP Migas, Indonesia’s upstream regulator. Of

the estimated 60 oil basins in Indonesia, only 22 have been extensively

explored, and this has been carried out mostly in western parts of

the country (the bulk of oil reserves are located onshore and offshore

central Sumatra and Kalimantan). The government hopes that eastern

parts of the country and deep sea areas may contain sizeable oil

reserves, which is why it is actively

encouraging exploration and devel-

opment activities in regions like

South Sulawesi and Papua.

Indonesia’s place within OPEC

may well depend on the country’s

capacity to increase oil output in

order to at least stop the growing

rate of reliance on imports for its

domestic energy needs. Indone-

sia’s current Governor for OPEC,

Maizar Rahman, had to go to great

lengths in 2005 in order to convince

disgruntled sectors of the political

landscape that it still made sense for a country that had become net

importer of oil to remain a part of OPEC and have to make the annual

contributions associated to it.

In the end, the government decided to remain in the oil cartel

primarily for political and strategic reasons and because, according to

Mr. Rahman, the other OPEC members expressed their support for

Indonesia’s continued presence in the organization.” It is important for

them to have diversity in its membership,” affirms Mr. Rahman, adding

that the traditional role as mediator that Indonesia has played is highly

appreciated by its members.

Towards a new energy mixAs the country’s oil production has decreased in recent years and

imported fuel has become more expensive, Indonesia has attempted

to shift towards using its vast natural gas resources for its own power

generation needs. Gas reserves at approximately 187 trillion standard

cubic feet (tscf) are equivalent to three times the country’s oil proven

and probable reserves of 8.9 billion barrels. Moreover, natural gas

is becoming a more competitive source for energy generation as

fuel subsidies are gradually phased out. Minister Purnomo and the

Indonesian government are confident about Indonesia’s gas potential

“because the reserves are there, what is essential is obtaining the

massive investments necessary for the infrastructure projects that will

make it all possible.”

Important new LNG projects are in development in the country.

The BP-led Tangguh LNG project in Papua – Indonesia’s third LNG

project after those in Bontang and Arun – is in advanced stages of

construction and set to commence production by 2009. Its two trains

are expected to produce at least 7.6 million metric tons of LNG per

year, enabling Indonesia to service new markets like China and the

United States. A fourth, though smaller, LNG project is under construc-

tion in Sulawesi and will be operated by state-owned Pertamina and

Medco, an emerging Indonesian oil and gas company.

In light of these projects and the country’s long history and exper-

tise in LNG, the government is considering the construction of LNG

receiving terminals in Java, by far Indonesia’s most populated and

industrialized island, in order to address domestic energy needs.

The government has set the priority for domestic use of natu-

ral gas, while at the same time trying to respect the share of gas

exported, currently over 50% of the total production, to its main mar-

kets of Japan, Korea, and Taiwan. How this policy will have an impact

on Indonesia’s leadership on exports of LNG is anybody’s guess, and

Purnomo Yusgiantoro, Indonesia’s Minister of Energy and Mineral Resources

Maizar Rahman, Indonesia’s current Governor for OPEC

PerRed_OGFJ_0804 1 3/10/08 5:00:46 PM

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it is being closely monitored by emerging producers such as Qatar,

Australia, Malaysia, and Algeria.

While oil and gas remain the primary source of energy for Indo-

nesia’s growing population and developing economy, with 52% and

29% respectively of the total energy mix, an even more fundamen-

tal policy shift is taking place towards other forms of power. The

Indonesian government has elaborated a target scenario for the

energy basket in 2025 in which oil falls to only 20% of the blend,

coal more than doubles its contribution to account for 33%, gas

edges up slightly to over 30% (though in absolute terms this means

a substantial increase), and geothermal and biofuels each contribute

with about 5% of the total amalgam. The remaining 7% would be

completed by a combination of biomass, hydro, solar, coal liquefac-

tion, and possibly nuclear energy.

These energy consumption targets were one of the main ele-

ments established by the New Energy Law passed by the govern-

ment in 2007, which constitutes Indonesia’s first effort to provide

a general framework for managing the country’s energy resources.

The new law also creates a National Energy Council that will be

responsible for establishing a concerted energy policy among the

main instances within the government.

William Deertz, leader of

international auditor PriceWater-

houseCoopers (PwC) Indonesia’s

Energy, Utilities and Mining

(EU&M) practice, sees this devel-

opment as a “positive step for

the country’s resource sector as it

will put into place a structure for

ensuring appropriate optimisation

of its natural resources.” He adds,

“The establishment of concrete

energy consumption targets for

the economy should provide

policy-makers a framework when

assessing alternative policies.”

Fine-tuning the regulatory frameworkThe basic premise underlying the oil and gas industry in Indonesia is

established in the Constitution of the Republic of Indonesia promul-

gated in 1945. Article 33 states that “all the natural wealth on land

and in the waters is under the jurisdiction of the State and should be

used for the greatest benefit and welfare of the people.”

The Production Sharing Contract (PSC) originated in Indonesia

in the 1960s and has been the most common type of oil and gas

development contract in the country. The PSC agreement – based

on the general concept that the contractor bears all risks and costs

of exploration until commencement of commercial production, and is

then entitled to cost recovery and a split of production revenues – has

been exported to oil and gas producing countries around the world.

In late 2001 a “New Oil and Gas Law No. 22/2001” (Law No. 22)

was promulgated which, although it maintained the PSC model as

the basis of oil and gas development, mandated the deregulation

of the upstream and downstream sectors, including Pertamina’s

monopoly over oil distribution and marketing of fuel products. Law

No. 22 authorized the establishment of an implementing agency

called BP Migas for upstream activities and a regulatory agency

called BPH Migas for downstream activities to assume Pertamina’s

regulatory roles. BP Migas took over Pertamina’s upstream regula-

tory functions and management of oil and gas contractors. BPH

Migas was charged with assuring sufficient natural gas and domestic

fuel supplies and the safe operation of refining, storage, transporta-

tion, and distribution of petroleum products.

The impact of this significant restructuring of the institutional

framework on the sector’s development has been mixed, notes

Deertz: “. . .with the issuance of Law No. 22 expectations were

high in the industry for renewed growth, however, this enthusiasm

was soon tempered by the fact that it took almost three years for

the related implementing regulations to be issued. During the

intervening period until the implementing regulations were issued

investment levels in the upstream

sector dropped significantly, how-

ever, over the past several years

investment levels have started to

rebound.”

Making sure this rebound trans-

lates into a sustained recuperation

of the oil and gas sector is one of

the main tasks of Luluk Sumiarso,

head of the Directorate General of

Oil & Gas (Migas). Since Minister

Purnomo appointed him to this key

position in 2006, Luluk has focused

on putting things in order and veri-

fying that the recent developments

in the oil and gas sector comply

with the country’s laws. In this regard, a comprehensive investor

guide has recently been edited and a new forum bringing together

all of the oil and gas sector’s stakeholders is being created.

“When I arrived to Migas, I found that each group within the oil

and gas sector had been going in its own direction, like meteors in

the sky or ‘broken pearls’ from the famous Indonesian drama series.

It resembles an orchestra made up of good musicians, but each

one playing at their own rhythm. They needed a director general to

facilitate and help co-ordinate the music,” states Luluk. By open-

ing the doors of Migas to the stakeholders in order to listen to

their concerns and suggestions and by encouraging the creation of

the Indonesian Oil & Gas Society, he is looking to “put the broken

pearls back together.”

A vital partner in this enterprise

is the Indonesian Petroleum Asso-

ciation (IPA) which is preparing its

annual convention for May 2008,

under the theme “Meeting Energy

Challenges through Co-operation.”

Roberto Lorato, President of IPA

and also Managing Director of Eni

Indonesia LTD, the local branch of

Italy’s energy giant, points out that

this flagship event is not simply

an exhibition of the association’s

members, but rather “a public

William Deertz, leader of internation-al auditor PriceWaterhouseCoopers (PwC) Indonesia’s Energy, Utilities and Mining (EU&M) practice

Luluk Sumiarso, Director General MIGAS

Roberto Lorato, President of IPA

ConEne_OGFJ_0804 1 3/10/08 4:43:08 PM

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forum and debate on the main issues that affect the industry in

Indonesia, from the business environment to corporate social

responsibility.” Besides having all the main industry players present,

the convention also counts on the participation of the highest level

of government officials.

Indonesia’s investment climate: the calm after the storm.Oil and gas sectors are highly sensitive to internal political and

economic changes and this has particularly been the case of

Indonesia. Over the last 10 years, the country has undergone a

transformation from an authoritarian regime into a presidential

democracy, has battled related secessionist pressures, endured

the full effects of the Asian financial crisis, been at the center of

bird flu and severe acute respiratory syndrome (SARS) outbreaks,

suffered several radical Islamist terrorist attacks, and faced natural

disasters such as the devastating December 2004 tsunami. All of

these events created an image of instability and insecurity that

put off investors. As a result, the Indonesian economy has lagged

behind for several years, particularly when compared with some

of its high performing neighbors. Fortunately for Indonesia, the

hard times seem to be over.

Recent economic indicators are showing that this huge economy

is confidently bouncing back under the current reform government of

President Susilo Bambang Yudhoyono, which has focused on improv-

ing the fundamentals and creating better conditions for business.

Recent economic indicators estimate growth in 2007 and 2008 at well

above 6%, and both inflation and interest rates seem under control.

Foreign direct investment is increasing, and consumer confidence is on

the rise. Major rating agencies such as Moody’s and Standard & Poor’s

have been raising the country’s credit ratings over the last several

years.

James Castle, founder and direc-

tor of local advisory firm Castle Asia,

is a seasoned businessman and ana-

lyst who has experienced Indone-

sia’s booms and busts first-hand for

more than 30 years. In his view, “In

2008, Indonesia has finally moved

beyond the 1998 financial crisis,

although it remains a watershed

and traumatic event in the country’s

history. The economy is now looking

forward, with only a few residual

problems remaining.”

Regarding the gray clouds

over the global economy and its

effects on Indonesia, Castle is reassuring: “Despite a potential global

economic slowdown, forecasts still call for domestic growth of at least

6%, a good year. Indonesia is in a good situation and is helped by the

strong global commodities cycle, as an exporter in many different com-

modities from agricultural to mineral, not just oil and gas,” he says.

Testament to Indonesia’s commitment to improve the business

environment is the active role assumed by BKPM, the government’s

investment service agency responsible for foreign investment pro-

motion, which has six international offices around the world. It has

recently overseen the writing of a

new Investment Law passed in April

2007 that eliminates many of the

barriers that previously hindered

foreign investment in the country.

Muhammad Lutfi, head of BKPM,

actively supported the new law,

which allows for a reduction in

bureaucratic processes, increases

anti-corruption measures, guaran-

tees equal treatment for overseas

and local investors, and decentral-

izes investment through regional

one-door integrated services.

Responding to such investor concerns as enduring corruption and

the added complexity arising from Indonesia’s decentralization, Lutfi

affirms, “we have adopted a zero tolerance policy regarding corrup-

tion and are also making efforts to create a uniform organization all

throughout Indonesia with the local investment agencies. In addition,

we strive to make the investment process smoother and more efficient

by eliminating bureaucracy, thus turning 30 years of red tape into a

red carpet for investors.”

In reference to the oil and gas industry, Mr. Lutfi highlights the

major business opportunities in Indonesia’s downstream sector, given

the current deregulation process, a population of over 230 million and

a growing economy. Moreover, he says, “whereas in the past energy

would follow the industries, today the trend is going towards the

industry following the energy to their source. In this context, Indonesia

is ideally placed to grow substantially its business in the refining and

petrochemicals sector.”

In addition, Indonesia needs a variety of land and sea transporta-

tion and storage modes to meet future fuel distribution needs. This

includes depots and new transit terminals as well as depots for aircraft

and gas refuelling stations by private companies. With regard to the

upstream sector, there are many investment opportunities such as the

development of unexplored oil and gas basins, using secondary recov-

ery technology, applying enhanced oil recovery (EOR), and developing

marginal oil fields.

Local eminence Dr. Subroto, a former Minister of Energy and Secre-

tary General of OPEC, considers that things in Indonesia are moving

in the right direction but acknowl-

edges that the country has to con-

tinue cleaning up its act at home in

order to become a preferred place

of investment again. In his view,

“once the Indonesian government

truly overcomes the perception of

political and legal uncertainty, there

will be no need for road shows to

lure investors as they will come run-

ning by themselves to take advan-

tage of the numerous opportunities

in the energy field. They are already

there on the sidelines eagerly

observing and waiting for improve-

ments on these critical issues.”

James Castle, founder of Castle Asia

Muhammad Lutfi Chairman of BKPM

Dr Subroto, co founder of BIMASENA, former Minister of ESDM and former Sec. Gen. of OPEC

COSL_OGFJ_0804 1 3/10/08 4:49:09 PM

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Pertamina: rebuilding Indonesia’s national championWhen Ari Soemarno assumed the position of President and CEO of

Pertamina in 2006, his condition was that he would have his hands

free to truly transform the company. He was taking the top job in Per-

tamina, Indonesia’s National Oil Company (NOC), just as its transition

period was finalizing, following the fundamental changes introduced

by the 2001 Oil & Gas Law. In 2003,

Pertamina officially went from

being a state oil and gas enterprise

governed by its own law to a state-

owned limited liability company

(Persero). In theory, this meant

that Pertamina is to be treated as

any other oil and gas company in

Indonesia. Pertamina’s monopoly in

the downstream market persisted

up until early 2006, whereas in the

upstream sector the company was

already immersed in the competitive

Exploration and Production (E&P)

market since 2005.

This statutory transformation was a part of an effort by the govern-

ment to establish a competitive and efficient NOC for Indonesia. For

decades, Pertamina held complete control of the country’s down-

stream activities and, in upstream, it acted on behalf of the govern-

ment in the signing of PSC’s for the exploration, development, and

exploitation of blocks in the country. It basically became regulator and

supervisor of the oil and gas industry for the Indonesian government.

The company grew in size but was riddled with corruption and inef-

ficiency, and unable of developing upstream capabilities of its own.

“Our foremost challenge today is to modify the culture, mindset,

and management style that are all an inheritance of the past,” says Ari

Soemarno. This is a monumental task for a company with more than

18,000 employees and such a long history of its own, but it is seen as

a necessary first step in order to get Pertamina moving in the right

direction.

In addition to changing the way the company sees itself, Pertamina

is making strides to improve its image among ordinary Indonesians.

To this end, the company has launched marketing campaigns and is

revamping its retail fuel stations where it is facing competition for the

first time from major foreign players such as Royal Dutch Shell and

Malaysia’s Petronas. For Ari Soemarno, the feedback is encourag-

ing, “The public is already taking notice and gradually changing their

perception of Pertamina.”

Of course, becoming a competitive oil and gas company involves

much more than polishing your image, and Pertamina’s directors have

been concentrating on transforming the business structure accord-

ing to its new role in both upstream and downstream activities. This

includes improving procedures related to transparency and financial

reporting, for example, in order to have a company “that is ready and

able to operate like a publicly traded company by 2009,” explains Ari

Soemarno. In addition, Pertamina is taking other measures in 2008

to become more competitive, such as selling non-core business units

and negotiating with the government in order to be able to reinvest a

greater proportion of profits.

Exploration and production: shopping for foreign know-howAlthough Pertamina is the second-largest producer of oil and gas in

Indonesia, after Chevron (in oil) and Total (in gas), its production levels

still lag behind those of other comparable NOCs. In order to grow

in reserves and production, it is pursuing an aggressive strategy that

combines tendering for new blocks, acquisitions, and implementing

EOR technology in its numerous but ageing fields. Well aware of both

its strong points and limitations, Pertamina points out the advantage

that international oil companies looking for a local player could find by

partnering with a local firm that has a deep knowledge of the country

and can facilitate the often arduous paperwork involved with doing

E&P business in Indonesia.

A prime example of Pertamina’s

upstream cooperation with majors

is the ExxonMobil-managed Cepu

field in East Java, estimated to have

reserves of 600 million barrels and

projected to attain a peak produc-

tion of 160,000 bpd. Other joint

ventures in the E&P field include

collaborating with companies such

as Petronas, Shell, and StatoilHydro.

The choice of new partners and

blocks reflect Pertamina’s determi-

nation to obtain offshore expertise,

as stressed by Sukusen Soemarinda,

Pertamina’s Corporate Senior VP for Upstream: “Through these alli-

ances, Pertamina is looking to acquire the necessary knowledge, tech-

nology, and capital to be successful in deepwater operations. Our goal

is to eventually be able to run those kinds of projects by ourselves.”

Pertamina has its hands full in Indonesia with land permits covering

an area of about 35 million acres and many new projects, yet the NOC

is already quite active in overseas markets where it is developing 20%

of its business. With interests mostly in exploration blocks in Malaysia,

Libya, and Qatar, Pertamina expects to see substantial growth from

its overseas assets within the decade. Partnerships with Lukoil and

Petroecuador could also have Pertamina venturing into new markets in

Russia and South America in the near future.

Ari Soemarno,President and CEO of Pertamina

Sukusen Soemarinda, Corporate Senior VP Upstream Pertamina

control room 055 Pertamina

CitSer_OGFJ_0804 1 3/10/08 4:45:20 PM

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Preparing for the cavalry in downstreamPertamina still largely dominates the domestic market in Indonesia’s

downstream business, although it is beginning to face competition at

different levels, including storage and retail. It owns and operates the

country’s nine oil refineries located throughout the Indonesian archi-

pelago, which have a total installed capacity of just over one million

bpd. Even though a large majority of the refined product is allocated

to the domestic market, Indonesia still has to import about 300,000

bpd to meet demand.

With tight refining margins and few incentives to build new refiner-

ies, Pertamina is focusing on revamping some of its facilities in order

to produce more high-value-added products. The main examples

are the Balikpapan refinery, which will be completely transformed to

refine sour crude, and the Cilacap refinery, which is being upgraded

in partnership with Japan’s Mitsui & Co. In addition, Pertamina has

established a US$200 million joint venture with the Korean company

SK which will improve and increase the company’s lubricant output,

further consolidating its position in the Asian market.

Though not interested in developing greenfield refineries at the

present time, Pertamina sees itself as an ideal partner for private

investors who have been showing interest in the sector. According to

Pertamina’s Corporate Senior VP for Refining, Suroso Atmomartoyo,

new players are “likely to turn to Pertamina for cooperation since

we are the only company with deep knowledge and experience in

Indonesia’s refining sector. In fact, Pertamina is open to establishing

synergies with other players interested in new refining projects, and

would be able to provide support

in terms of operations, administra-

tive tasks, and distribution in the

domestic market.”

Regarding Pertamina’s de facto

monopoly in the distribution of

subsidized fuel, with about 3,000

petrol/gasoline stations, Suroso

affirms, “in the near future, once the

subsidy has been phased out, BPH

Migas will assume its full responsibil-

ity by tendering the market among

all the interested players. For the

moment, foreign companies are not

able to comply with the strict requirements for subsidised fuel sale,

but this is likely to change soon. In 2008 Pertamina remains the sole

distributor of subsidized fuel, but we are preparing for the inevitable

arrival of competition in this enormous market.”

Despite its strategy to divest non-core business units, Pertamina

has decided to keep its geothermal activities and is also involved

in the development of coal bed methane (CBM). The government

sees CBM as potentially one of the country’s main alternative energy

sources of the future. To attract investors, the government is offering a

segment that is different from oil and gas contracts, depending on the

areas and particular conditions. Pertamina is working on a CBM pilot

project in South Sumatra with Shell and the support of the Indonesian

Research and Development Center for Oil & Gas Technology (LEMI-

GAS). Moreover, Australia’s Santos, a major CBM player in its domestic

market, is engaged in high-level discussions with the Indonesian

government on opportunities for partnership on that front.

A decade of efforts rewardedSantos entered Indonesia in 1997, but it was not until nearly 10 years

later that the company saw its exploratory efforts turn into produc-

tion and revenues. In late 2006, Santos’ first production in Indonesia

began flowing at the Maleo gas field, an event all the more important

because it represented the company’s first offshore field operated

overseas. In September 2007, Santos hit another milestone in Indo-

nesia when its second producing field, Oyong, was inaugurated by

Indonesian President Yudhoyono.

Eko Lumadyo, President and General Manager of Santos Indo-

nesia, was visibly excited about these new times. “Our Jakarta office

has now been turned into a full exploration and production opera-

tion. As a result, the organization here is forging a strong identity and

the people are motivated to continue working hard for even further

achievements,” he said.

Santos’ core assets are its oil and gas production in Australia, where

it is the country’s largest domestic gas producer and supplier. How-

ever, expansion into the Southeast Asia region has been established

as one of the five key drivers of growth for the company. Indonesia

plays a central role in Santos’ aspirations to become one of the lead-

ing energy companies in the region. Santos has been moving fast and

is already considered an important player in Indonesia’s petroleum

sector, thanks not only to its growing production but also a continued

interest in exploration and synergy with other companies.

Kilang Cilacap plant

Suroso Atmomartoyo, Corporate Senior VP Refining Pertamina

Santos Maleo Field platform

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For Lumadyo, “Santos’ size gives

us a competitive advantage, in

terms of being more dynamic and

able to make quick decisions. This

gives us an edge in evaluating and

taking opportunities in contrast with

bigger companies that have to go

through much longer and complex

processes. At the same time we

don’t have the same capacity as the

super majors to take on some of the

big risk projects. However Santos

is ready and able to embark on

frontier-area exploration in Indone-

sia if we consider it a good opportunity.”

Well aware of the vast potential lying in the deep seas of Indonesia,

Santos has established partnerships with companies such as Anadarko

Petroleum and Petronas for deepwater exploration and is already

operator of the block in the offshore Kutei basin.

LNG is also a significant area of focus for Santos, which is currently

exporting LNG from Darwin in northern Australia and progressing on a

number of LNG projects abroad. Though there are no concrete plans

for LNG development in Indonesia for the time being, the Kutei basin

is strategically located near Indonesia’s Bontang LNG facilities and

could eventually supply gas to it in the future.

Santos has already become a key partner of the Indonesian govern-

ment, which strongly favors increasing the role of gas in the country’s

overall energy mix. Santos is focusing its production and sales in the

densely populated and industrial area of East Java, where it is supply-

ing gas from the Maleo field to state-owned natural gas transporter

and distributor PGN and will sell the gas from the second phase of

Oyong directly to a local power company.

“Our production has come very timely for the government,

because [they are] facing gas shortages and increasing costs due to

high oil price,” says Lumadyo. “Through this gas supply, Santos is

contributing to cleaner and less expensive energy in Indonesia.”

StatoilHydro, which opened an office in Jakarta in 2007, sees

significant ecologically-minded business opportunities in Indonesia.

The company is looking to combine the need for reduced carbon

emissions with the E&P activities through carbon capture and storage

(CCS), including CO2 injection for EOR.

“Indonesia has large amounts of gas flaring that could be turned

into a means of meeting growing

demand for gas in the domestic

market,” says Tor Fjaeran, Presi-

dent Director of StatoilHydro in

Indonesia. “In addition, LNG and

ammonium plants in the country

are producing carbon emissions

that can be captured, stored, and

potentially used for EOR. The

question marks are still numerous

surrounding this technology, but our

company believes that towards the

future linking climate change to E&P

can be a business opportunity.”

Eyeing deep downWhile the viability and scope of these applications will not be clear

for years to come, what is more certain is that StatoilHydro’s arrival

in Indonesia illustrates how all eyes are on the country’s unexplored

deepwater areas. This strategic entry into the competitive Indonesian

upstream market came just as the Norwegian oil and gas compa-

nies Statoil and Hydro merged, forming the world’s largest offshore

operator. Fjaeran explains that, although the country has been on the

radar screen for a long time, there was a feeling that the most likely

prospects had already been awarded to other companies.

“We considered that the company would have only managed to

pick up small pieces, which were onshore or in shallow delta areas,”

says Fjaeran. “This all changed when the government announced the

Santos Oyong Field

Eko Lumadyo, President and General Manager of Santos Indonesia

Tor Fjaeran, President Director of StatoilHydro in Indonesia

Santos_OGFJ_0804 1 3/12/08 1:25:54 PM

•••••••

•


opening up of new deep offshore blocks for E&P. This meant that

our company could have access to immature basins with potential for

large discoveries in deepwater, where our expertise lies.”

Despite the differences between Norway and Indonesia, Fjaeran

believes the challenges faced by their respective oil and gas compa-

nies are not that different. On a more personal note, he adds that “I

like to work on the areas where the industry and business meet soci-

ety, and there is definitely a lot of that here in Indonesia. I enjoy being

here because it is a new place with a completely different setting, yet

at the same time it feels familiar because you meet the same compa-

nies and people with similar backgrounds as in any other country’s oil

and gas industry.”

In his view, Indonesia’s more than 100 years’ experience in oil and

gas offers many lessons to be learned for a relatively young industry

such as Norway’s oil and gas industry, which, although technologically

very advanced, has fewer than 40 years in the business.

For the moment, StatoilHydro is working on the Kuma and Karama

PSCs, two exploration blocks in relatively deep water that were

awarded in 2007. Winning these exploration licenses has been critical

for StatoilHydro because they allowed the company to finally establish

itself as a player in Indonesia’s oil and gas sector. Seismic acquisition is

set to take place in early 2008, and drilling should begin in 2009.

In Kuma, StatoilHydro is partnering with operator ConocoPhillips

with a participating interest of 40%, while in the Karama block Statoil-

Hydro is working with local NOC Pertamina with a 51% interest.

The relationship with Pertamina goes back to the signing of a

Memorandum of Understanding (MoU) between the two companies

in September 2006, allowing for potential alliances on exploration

and production in Indonesia. For Fjaeran, it is a natural fit because

“Pertamina has an extensive knowledge of Indonesia’s subsurface,

including offshore areas, and also knows the business climate, has

experience operating in the country and has close relations with the

authorities. All of these aspects are of great benefit to a company

like StatoilHydro, which is a new player in Indonesia. In addition, for a

partially state-owned company like us it just makes sense to cooper-

ate with other NOCs because we can better understand each others’

issues,” notes Fjaeran.

For Pertamina, the coalition brings benefits in terms of acquiring

technology and expertise in offshore operations.

StatoilHydro’s interest in Indonesia does not stop at deepwater

exploration and production. Another area of great interest is moving

further down the gas value chain, given the company’s long and wide

experience being operator, producing, transporting, and selling gas

products. Though nothing concrete has been decided in this regard,

Fjaeran has high hopes that there will be opportunities to get into the

gas business in the country. Similarly, StatoilHydro is intent on further

developing its LNG capabilities on a global scale and Indonesia’s

expertise in this field makes it a prospective place for partnership.

Indeed, StatoilHydro is already benefiting from Indonesian LNG know-

how through a group of engineers from PT Barak, which is helping

start up LNG facilities in northern Norway.

Elephant hunters on the looseThough StatoilHydro took its time to make the leap into Indonesia,

the super majors have played a defining role in the country’s oil and

gas sector since Dutch colonial times. Today, Chevron single-handedly

contributes to almost 50% of the country’s oil production. ExxonMobil

is working to bring the huge Cepu block onstream and is negotiating

the terms for developing the world’s largest gas field in the Natuna

Sea, while British Petroleum (BP) is leading the huge Tangguh LNG

project in Papua.

Despite these examples, most analysts are quick to point out that

overall investment from the oil giants in Indonesia has been declining

for many years now. The possible explanations are multiple, but to

a large extent this situation is a natural result of the oil and gas cycle

in which the majors start looking elsewhere once a country’s “easy”

discoveries have been made.

According to Richard L. McAdoo,

President and CEO of US-based

Continental Energy Corp. and a

long-time resident in Indonesia,

“in the latter stages of a country’s

productivity cycle, the smaller

companies eventually take over

since the majors have moved on to

greener pastures. Considering that

this is the point where Indonesia

finds itself today, and that there are

still vast unexplored areas, I believe

that the opportunities are huge for a

company like Continental.” Indeed,

Indonesia’s prospective geology and open upstream sector make it an

attractive setting for small- to medium-sized companies like Continen-

tal, which refers to itself as an “elephant hunter.” Record high oil prices

and booming energy demand from Asia certainly do not hurt either.

Continental is placing its bets on the Bengara-II block off the coast

of oil and gas rich East Kalimantan. “The Bengara-II block contains the

last great unexplored delta, the Bulungan Delta, of serious size in East

Kalimantan. The block is only 20 to 30 kilometers away from Tarakan

Island, which has been producing oil since 1906. The Bulungan Delta

is about a third the size of the Mahakam Delta in the adjacent Kutei

basin, which has provided company-maker discoveries for several

oil companies,” says McAdoo. In 2007, the company carried out an

aggressive drilling campaign and submitted a development plan to

the Indonesian authorities.

Emboldened by the success of its first major institutional placement

with Australia-based Macquarie Bank, Continental is expanding its geo-

graphical horizon by looking into the possibility of acquiring blocks out-

side Indonesia, particularly in the Middle East. Nevertheless, the focus

remains on Indonesia, a country which McAdoo is passionate about,

and he goes to great lengths to get others to share his excitement.

“There is a misconception in the USA, to a lesser degree in Europe,

and surprisingly to me, in the Middle East, that Indonesia is not a safe

place to invest,” says McAdoo. “Having been here for a very long

time, many other foreigners and I know that this is not the case. There

are huge positives which I try to accentuate, like for example the fact

that the Indonesian government has never defaulted on a PSC and

there has never been an instance of nationalization like in Venezuela or

Mexico. Taking all this into account, coupled with a well-trained oil and

gas work force, good oil field infrastructure, large unexplored areas

and attractive geology, these are compelling arguments in Indonesia’s

favor.”

Richard L. McAdoo, President and CEO of Continental Energy Corporation.

BKPMRev2_OGFJ_0804 1 3/26/08 4:35:36 PM

•••••••

•


“Everyone is now looking to eastern Indonesia as the future of

exploration, but these frontier areas imply a great deal of risk and

high costs which can only be assumed by the big oil companies,” says

Santosa.

Besides oil and gas, Star Energy is active in geothermal develop-

ment, a sector in which the company made its incursion in 2004 when

it acquired the Wayang Windu power generation project. Estimates

suggest that Indonesia may have up to 40% of the world’s geothermal

reserves, or the potential to produce nearly 28,000 MW, yet the seven

plants currently operating only produce a total of 850 MW.

Pertamina is another important player in this field, with rights over

15 geothermal concessions yielding a potential of 8,480 MW (equiva-

lent to 4,390 MMBOE), though current installed capacity is of only 162

MW. Star Energy’s Wayang Windu has a capacity of 110 MW, but is

embarking on expansion works in order to get capacity up to 400 MW

by 2011.

For Santosa, whether it is regarding E&P of oil, gas, or geothermal,

the key for a small company’s success in the industry is the human ele-

ment. Many of Star Energy’s employees come from big oil companies

where the corporate structure can make for a long process in terms of

professional growth.

“With us, they felt that they have the chance to realize their full

potential, because we give them greater opportunities and responsibili-

ties,” says Santosa. “Thanks to this we have a very motivated team that

knows that whenever the company does well they are also going to see

the benefits.” Human resources are of crucial importance in Indonesia at

the moment, taking into account the constant threat of a “brain drain”

of local oil and gas professionals towards better-paying countries.

Central government meets regional players to explore new O&G paths; an innovative modelFor this reason, developing local capacities in the oil and gas industry

has been a long-time concern for the Indonesian government. Domes-

tic service providers are given preferential treatment under the BP

Migas tendering system in order to help them compete with foreign

firms and public institutions such as LEMIGAS have been involved

with enhancing Indonesia’s R&D level in oil and gas for decades. A

new form of government participation at the local level is now taking

place directly in upstream development, following the increasingly

important role given to regions with regard to the management of

their resources.

In 2002, Caltex’s right to develop the Coastal Plains Pekanbaru

(CPP) block located in Riau province expired and after much contro-

versy was not renewed by the Indonesian government. Instead, local

state-owned company Bumi Siak Pusako and Pertamina formed a

new joint venture, BOB CPP, charged with maintaining production

and development of the ageing block. This partnership represented

an unprecedented model of central and regional government enti-

ties coming together to develop oil exploration and production in

Indonesia.

According to BOB CPP’s General Manager, Slamet Wibisono, “in

this moment BOB CPP is seen as many local governments as an exam-

ple of what they can achieve in becoming operators of their own O&G

resources. As PSC agreements approach their expiry dates, regional

players are looking into ways of taking over certain shares of interests

Local players get a foot on the E&P ladderForeign players are not the only ones getting in action on Indonesia’s

E&P. In fact, over the last decade, the country has witnessed the emer-

gence of important local oil and gas companies such as Medco, Energi

Mega Persada, and Star Energy. The combination of low oil prices

and the relative decline of the majors’ activities in Indonesia opened

windows of opportunity in marginal fields for smaller companies, with

leaner cost structures and an extensive knowledge of the country’s

petroleum sector.

Supramu Santosa, founder and

former CEO of Star Energy, states

that timing has also been a key

factor for new local players enter-

ing the E&P business. Only three

months after creating the company

in 2002, ConocoPhillips decided to

sell its interest in the Kakap Natuna

PSC to Star Energy since the scale

of production was no longer inter-

esting to them and it would start

declining fast. Fortunately for Star

Energy, oil prices quickly began ris-

ing and stable production at Kakap

Natuna was maintained.

“We were lucky to have started out at a very low moment of oil

prices, just before the boom began,” admits Santosa. “Today the situ-

ation is very different because the possibilities of acquiring producing

fields at a reasonable price are very low. New companies are having a

harder time because they probably have to start out with exploration

which is expensive and risky.”

This was not the case for Star Energy, whose first acquisition not

only established it as a producer, but also gave the company the finan-

cial strength to expand its asset base. Nonetheless, Kakap Natuna’s

production has started to decline, so the company is aiming at new

discoveries in the three exploration blocks acquired over the last

several years. Star Energy’s strategy is to concentrate on proven basins

in the western part of Indonesia which, although extensively explored

already, still hold potential for small players.

Supramu Santosa, founder and former CEO of Star Energy

LKF-H-0126 - Star Energy

StaEne_OGFJ_0804 1 3/11/08 10:46:10 AM

•••••••

•


owned by foreign companies. Of

course, before the local government

can take upon the operation of a

block, it has to show it is in capacity

to handle the responsibility.”

Indeed, this proves to be a chal-

lenging task when, as in the case of

the CPP block, the fields are mature

and new primary oil discoveries are

highly unlikely. Although the joint

venture was able to maintain Cal-

tex’s production levels initially after

taking over operations, production

has dropped from approximately

36,000 bpd at that time to 25,000 bpd in 2007.

However, Wibisono believes that over the coming years produc-

tion level could be doubled if BOB CPP manages to successfully apply

EOR techniques to the operations.

“We realize that the techniques our fields require are very

advanced, which is why BOB CPP is working together with partners

like LEMIGAS and also inviting foreign companies who could provide

us with proven technology for enhanced oil recovery.” he says. As

there is also exploration taking place in the block, BOB CPP’s produc-

tion could reach even higher levels if new discoveries are made.

Furthermore, the company is preparing itself to be internationally

competitive, foreseeing a possible expansion overseas in the future.

The dragon has arrived... and intends to stay A sign of the times, Chinese companies have been increasingly making

their mark on the Indonesian oil and gas sector over the last several

years. Upstream giants Petrochina and CNOOC have established

their position in the E&P industry and are aggressively expanding

their assets and operations in the country. This trend is only likely to

intensify towards the future as China’s economy keeps growing at near

double-digit rates and domestically-produced resources are insuffi-

cient to keep up with the soaring energy demand.

In this context, Indonesia is seen as a strategic partner for the

Chinese government with whom relations are going through a positive

moment, particularly on energy issues. Moreover, China’s heightened

importance in the global economy is prompting Chinese companies to

seek growth overseas in order to become internationally competitive,

world class firms.

A clear example of this trend is Beijing-based CITIC Group, which

is investing for the first time in the oil and gas sector abroad through

its energy sector holding company CITIC Resources (based in Hong-

Kong). Already involved in the raw materials business in areas such as

coal and aluminum, CITIC Resources has recently decided that it was

a good moment to expand the company’s portfolio of activities into

oil and gas overseas, and Indonesia represents the company’s first

international venture.

As Tang Zhongfu, President of the fully owned subsidiary CITIC

Seram Energy Limited (CSEL) explains, there are many good reasons

why Indonesia was chosen as the first overseas oil and gas destination.

Slamet Wibisono, BOB CPP’s General Manager

BOBCPP_OGFJ_0804 1 3/10/08 4:57:39 PM

••••••••••••••

•

April 2008 Oil & Gas Financial Journal • www.ogfj.com www.focusreports.net 87

“First of all, there is the PSC

mechanism which is an Indonesian

creation and thus very mature in the

country. It is a system that makes

us feel comfortable to invest in Indo-

nesia because it is very clear and

transparent,” says Zhongfu. “The

second reason why we have chosen

Indonesia is because it serves as a

good platform for CITIC Resources

to expand its business portfolio,

thanks to the large amount of oil

companies working in this country

as PSCs. Being active here allows

us to share experiences with them and be well informed about new

business opportunities. Thirdly, Indonesia is one of the main LNG pro-

ducers in the world, which makes the potential for gas development,

especially offshore, very interesting,” he says.

CSEL officially entered the Indonesian upstream petroleum market

when it completed acquisition of a 51% majority interest in the Seram

Island Non-Bula PSC. A notable aspect of this move is that CSEL

also became the operator of the block, which marks a change in the

group’s strategy for oil investments from passive holdings to an active

involvement. Nonetheless, this is by no means a new task for CSEL’s

management, which has gathered much experience over the years

operating in companies such as Petrochina.

In 2007, the block’s production was at about 4,200 bpd and the

announced objective is to maintain those levels and increase overall

production in Indonesia through the development of existing interests

in other blocks and possibly through acquisitions. In this regard, CSEL

entered into a non-binding MoU with Kuwait Foreign Petroleum

Exploration Company (KUFPEC) over closer cooperation in exploring

oil and gas business ventures in Indonesia and other countries.

“Citic Resources sees this first project as a platform, so depending

on how good the results are, we will probably go after other business

opportunities in the near future,” concludes Zhongfu.

Chinese supporting industry comes along for the rideChinese service providers are also taking advantage of their coun-

try’s strong economy and high levels of investment in its manufac-

turing base to target growth in overseas markets. Chinese Oilfield

Services Limited (COSL) is one of the main players in this group,

with over 30 years’ experience in its domestic market. COSL is also

a familiar face in international markets where it has been active

for over 10 years, particularly in drilling rigs and different offshore

business lines. COSL’s initial strategy for international expansion

was based on working exclusively with Chinese E&P players such as

CNOOC and Petrochina, which are already established abroad.

This was also the modus operandi for COSL when it first came to

Indonesia five years ago, when it began assessing the potential of

the country’s large population and rich natural resources. Consider-

ing it has passed its first phase of its business development in Indo-

nesia, COSL has taken a significant step forward by working with

international majors such as ConocoPhillips, Chevron, and others.

Benefiting from decades of establishing relations with large

international oil and gas companies in China’s domestic market,

COSL is aiming at becoming a preferred upstream service provider

for companies around the world.

In Indonesia, “COSL has devel-

oped a strong relationship with

Pertamina and prefers to establish

partnerships with companies of

different sizes and profiles. At this

stage in our Indonesian strategy,

all companies have the same

importance,” says President Direc-

tor of PT COSL Indo Zi Shilong. So

far, COSL’s most important busi-

ness lines in Indonesia are drilling

and well services. But the company

intends on bringing its transporta-

tion and seismic services to the

country by 2009, thereby offer-

ing the full range of its capabilities to the Indonesian oil and gas

industry. In effect, COSL’s goal is to become involved in Integrated

Project Management in Indonesia, servicing the entire project life

cycle.

“We perform this activity in China, extending beyond drilling to

transportation, seismic and other services. COSL’s advantage is its

ability to perform services over the whole life of the oilfield, from

beginning to end,” states Shilong.

Thus far, COSL is satisfied with the business environment in

Indonesia and upbeat about future opportunities to continue grow-

ing. Stressing the cultural similarities and good relations between

China and Indonesia, Mr. Shilong acknowledges the great effort

that the Indonesian government has put on increasing its oil pro-

duction and is confident that this will translate into an even greater

demand for oil services.

Although the oil boom has generated a global shortage in

oil-related equipment and Indonesian projects must therefore

compete with those in other O&G producing regions around the

world, COSL has committed to expand its business and increase

investment in Indonesia over the coming years.

“COSL has offered the local oil and gas community reason-

able cost and comprehensive service. We strongly believe that the

existence of COSL in Indonesia will be mutually beneficial to our

countries,” says Mr. Shilong.

Zi Shilong, President Director of PT COSL Indo

Field Facility Citic Seram

Tang Zhongfu, President Director CITIC Seram Energy Limited (CSEL)


I n late 2005 Pricewater-

houseCoopers Indonesia (PwC)

in cooperation with the Indo-

nesia Petroleum Association (IPA) under-

took an industry survey to gauge industry

participants’ views on the competitiveness

of the Indonesian upstream oil and gas

sector (an updated survey is in process and

is expected to be published May 2008). The

survey found that industry participants were

generally very favorable on the geological

prospectivity of the country, in particular the

Eastern basins, which remain largely unex-

plored. In addition, survey participants were

very positive on the PSC fiscal regime since

it was well understood by both regulators

and industry players.

Survey participants were also quick to

point out many of the challenges confront-

ing the Government of Indonesia (GOI) as

it tries to deregulate the oil and gas sector

and make it a world-class industry to propel

Indonesia’s economic growth into the 21st

century. In particular, one area of concern

related to inter-ministerial coordination. In

the newly deregulated environment created

by the New Oil and Gas Law No. 22/2001,

there are now more GOI stakeholders that

industry players need to deal with. Often

at times these stakeholders have different

interpretations of the prevailing regulations

and their associated scope of responsibility.

Survey participants rated harmonizing

conflicting laws and regulations (including

timely issuance of implementing regulations

after new laws are introduced) and improv-

ing teamwork and coordination among

the various GOI stakeholders as having

the biggest potential impact to improv-

ing the investment climate for the energy

sector. Since the issuance of this survey

there have been many public forums where

the GOI stakeholders and industry players

have shared views on the issues and ways

forward.

In addition, the Coordinating Minister of

the Economy has formed a committee to

address the lack of coordination and team-

work amongst the different ministries and

departments of the government, although

the progress to date has been slower than

many stakeholders would like. Despite

this fact, the GOI stakeholders have been

receptive in listening to industry players and

taking measurable steps to improve the

investment climate in the energy sector. As

such, there is reason for optimism.

Is the glass half empty or half full?While not wanting to downplay the many

challenges impeding Indonesia’s economic

growth and in particular the competitive-

ness of its oil and gas sector, one needs to

recognize the many difficulties confronting

the GOI stakeholders.

Indonesia is a geographically large coun-

try spread out over 13,000-plus islands with

many diverse cultures and ethnic groups.

Because of this diversity there was a real

danger early in the post-Suharto era for

the country to “Balkanize.” Fortunately this

has not happened and in large part can be

attributed to the Regional Autonomy Law

passed by the government, which shares

more powers and economic rewards with

the provincial and local governments.

However, this has created new chal-

lenges for companies operating in the oil

and gas sector such as local government

involvement in land acquisition, approvals of

plans of development, along with the impo-

sition of new local taxes which are generally

prohibited by the contracts issued by the

central government. The central govern-

ment has been reactive in addressing these

sorts of issues as they arise and facilitating

solutions.

When assessing the competitiveness

of the Indonesian upstream oil and gas

sector an investor needs to consider many

variables. We have highlighted some of the

positive and negative trends impacting the

sector in the below table:

Positive TrendsIncreased acreage being tendered, •

much with improved fiscal incentives

Increased political and social stability•

Direct tendering of acreage now pos-•

sible

Posting of bonds for initial contract •

commitment now required to encour-

age active exploration

Clear GOI vision and target for oil pro-•

duction of 1.3 million BOPD by 2009

Recent renewal of duty and import tax •

exemptions for exploration activities

Development of a national energy •

policy with concrete energy use targets

Significant reduction in fuel subsidies, •

which has allowed monetization of

some stranded gas reserves

Negative TrendsIncreased cost recovery challenges and •

continuing uncertainty over upstream

taxation

Continued lengthy bureaucracy for •

approving Plans of Development,

Work Programs, and AFE’s

Operating costs per barrel on upward •

trend due to maturing fields

Continued lack of coordination among •

the various GOI stakeholders in resolv-

ing industry issues

Regional governments and local com-•

munities have impeded expeditious

development of certain projects

Considering Indonesia’s complexity

and the recent political and economic

transformations, the country has fared fairly

well and is heading in the right direction.

Industry players tend to agree with this

view but mention the speed of progress as

their single biggest frustration in Indonesia.

Potential investors need to recognize that

operating in the Indonesian oil and gas sec-

tor presents many challenges but the upside

financial opportunities can be significant.

Reason for OptimismMany economists project Indonesia’s GDP

growth to average between 6% and 7%

over the next several years. However, with

the right leadership and policies, there is no

reason not to expect a 9% to 10% growth

rate.

PricewaterhouseCoopers Indonesia is

cautiously optimistic as to growth opportu-

nities and is projecting a 15% CAGR over

the next five years for its own business. For

investors that are willing to see through the

country’s challenges, the opportunities that

await could be a hidden gem.

William DeertzPricewaterhouseCoopers

IndonesiaInvestor Insight Into Indonesia’s Oil & Gas Sector

•••••••

PWC_OGFJ_0804 1 3/10/08 5:07:39 PM

PerPro_OGFJ_0804 1 3/10/08 5:02:41 PM

email: [email protected]

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Indonesia - · PDF fileThe BP-led Tangguh LNG project in Papua – Indonesia’s third LNG ... construction and set to commence production by 2009