New Opportunities in Indonesia's Upstream Oil and Gas


By MarEx 2016-11-28 19:40:17

Wood Mackenzie has valued Indonesia's expiring oil and gas production licenses or production sharing contracts at close to $10 billion, highlighting opportunities for a range of operators.

Some 35 licenses account for over one million boe/d 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 boe/d in 2017) to mid-term (2.2m boe/d 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.

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

Enhanced oil recovery 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 boe/d. But the block needs over US$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.

Discovered resource opportunities 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 has substantial unexplored basins predicted to hold 43.7 billion barrels of crude oil, according to data from the country’s upstream oil and gas regulator, SKK Migas.

The Jakarta Globe reports that companies are, however, reluctant to fund exploration for new fields, which are mostly offshore because Indonesia does not have a dedicated law for oil and gas management.

Indonesia's liquids production is expected to fall to a new low of 780,000 boe/d. 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 is 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, says Wood Mackenzie. However, the Energy Ministry, SKK Migas and Pertamina will need to align to ensure the continued survival of the exploration and production industry in Indonesia.