Empty barrels mounting in Indonesia
The country's lurch towards economic nationalism, typified by Total's pending departure from the country's largest natural gas field, has hit the energy sector especially hard
For all of its past bravado, Indonesia’s state-run oil company Pertamina is now privately expressing serious reservations about its ability to operate Indonesia’s largest producing gas-field when French oil giant Total E & P’s contract expires in December.
“They realize that they are setting themselves up for failure,” says one oil and gas analyst familiar with Pertamina’s thinking. “It has become a poisoned chalice. The new management understands expectations have exceeded reality.”
The signs have been there for a while. With Pertamina only able to drill eight of a planned 19 wells in the 200-kilometer-long Mahakam block this year, it is already clear there will be a significant drop in production in 2018.
Last March, Mines and Energy Minister Ignasius Jonan offered to increase the Total’s participating interest in the East Kalimantan concession from 30% to 39% and also invited the company to continue as joint operator.
It was the first sign of government flexibility in contract negotiations with a major Western resource company and signaled rising official concern over a feared slump in revenues ahead of the 2019 legislative and presidential elections.
Total rejected the original 30% proposal and has yet to respond to the latest overture, which hints at a certain desperation as the French firm prepares to withdraw from a project it has run since the early 1970s.
Sources close to the company sense it won’t accept this offer either and say a decision on any new deal rests not with Pertamina management, but with the board of commissioners, the Mines and Energy Ministry and, ultimately, a nationalist Parliament.
There is a significant constraint, however. With the local East Kalimantan government taking a 10% interest in the block, going beyond 39% would mean Pertamina losing its 51% controlling stake.
The Mahakam’s fate is not the only concern. Now Finance Minister Sri Mulyani Indrawati has taken the lead, negotiations over a contract extension for Freeport McMoRan Copper & Gold, the country’s biggest miner, finally appear to be heading in a more compromising direction.
But three major gas projects – Chevron’s Deepwater Development in East Kalimantan, the perennially-delayed East Natuna venture in the South China Sea and Shell/Inpex’s Masela field in the Arafura Sea — all appear to be going nowhere.
US oil giant ExxonMobil recently pulled out of the East Natuna consortium and Shell and Inpex have gone quiet on the Masela project since the government’s inexplicable insistence on moving the processing facility from offshore to onshore.
Widely suspected to be based more on the value of pipeline contracts than the national interest, the government’s intervention raised new questions about its ability to attract the foreign capital needed to continue developing its natural resources.
The Mahakam is due to be taken over by Pertamina as part of a wider plan going back to the Susilo Bambang Yudhoyono administration for Indonesian interests to assume control of most of the country’s producing fields as current contracts expire.
Given the large capital expenditure involved and the maturing of the field, oil and gas experts have long said the under-funded Pertamina is incapable of maintaining production at acceptable levels.
That seems to have been borne out by its inability to mount a full drilling program in 2017, with industry sources describing the company as being in “disarray,” with a new leadership and multiple issues to resolve.
Total and Japan’s Inpex spent US$2.5 billion in 2015 to maintain production at 1.64 billion cubic feet of gas and 64,000 barrels of oil and condensate a day, compared with this year’s expected 1.53 billion cubic feet and 53,000 barrels.
Under the current contract, the two firms each hold a 50% operating interest, drilling as many as 100 wells per year and making an annual average of 10,000 well interventions, just to keep production from declining more than 10%-15%.
The government announced it was assuming control of the Mahakam in 2015, ending years of uncertainty and presenting Pertamina with the biggest technical and financial challenge of its 54-year life.
But while it will employ most of the experienced Indonesian work force, it was always going to need Total or another oil major to help operate a resource with reserves of 3.8 trillion cubic feet of gas and 131 million barrels of liquids.
Mahakam supplies 80% of the nearby Bontang LNG plant’s natural gas, but with all of Total’s North Asia contracts running out this year, the government must decide whether to sign new short-term deals or focus on the domestic market.
Much of Bontang’s output already goes to floating storage and regasification terminals in Jakarta and Lampung, and to a third onshore facility on the site of the old Aceh LNG plant in northern Sumatra — but at domestic rather than international pricing.
A fourth floating terminal is also planned for Cilacap on the south coast of Java as Indonesia seeks to increase the gas component in its energy mix from 20% to 30% over the next decade, reducing its dependency on oil from 42% to 20%.
The Mahakam has been managed by Total since production began in 1974, with a 20-year contract extension negotiated in 1997. The company had earlier proposed a sensible five-year transition period in transferring the block’s operations to Pertamina after 2017.
The fate of the Mahakam had long been at the center of a new wave of economic nationalism under which Pertamina and other local companies were given the task of taking over half of Indonesia’s expiring production contracts by 2025.
Exploration looks at dismal as ever. With oil and gas production falling, Indonesia has failed to attract its share of new global drilling, particularly in deep-water concessions where there is the best chance of significant new discoveries.
Oil production is now at 820,000 barrels a day, from 950,000 barrels in 2009. What was once the world’s biggest LNG exporter will become a net importer by 2022, though that is partly due to new domestic priorities.
Still, the number of wildcat wells in producing fields is declining and operational efficiency rates as one of the worst in the world, largely due to exploration time cycles being disrupted by bureaucracy and micro-management.
Analysts say exploration investment will continue to sink until Indonesia devises a commercial and regulatory framework that provides fiscal certainty over the anticipated life of a project and balances the fundamentals of risk and reward with new marketplace realities.