Georgescu. Journalists: James Waddell, Herbert Mosmuller. Contributors: Marine Neveu, Solne Pignet, Aleksandra Klassen, Nala Nouraoui. Report Publishers: Crystelle Coury, Diana Viola. For exclusive interviews and more info, plus log onto www.energy.focusreports.net or write to contact@focusreports.net RE-ENERGIZING THE ARCHIPELAGO INDONESIA Wayag Island, a series of uninhabited islands, rises out of the most biodiverse waters on the planet, Raja Ampat, West Papua, Indonesia. Courtesy of Niko Resources. Photo credits Agustiar Hamdani F or the frst decade of the 21st century, the ques- tion troubling Indonesia's investors was: "Why is the country not growing as fast as the BRICS?" Yet, as Indonesia accelerated its growth to 6.37 per- cent in Q2 2012, and BRICS nations averaged out at 4.18 , that question has largely been muted. Satisfy- ing the energy demand of this fast growing economy is hot on Indonesia's agenda and the issue facing investors now is how to invest in this complex, often challenging and multifarious energy market. www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 55 advertisement 1210ogfj_55 55 10/5/12 4:12 PM 56 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com Facing Up to Reality An unfavorable portrait of Indonesias oil industry in 2012 would depict reserves falling faster than in any other Asian country, dropping 1.9 billion barrels since 1991 to just 3.89 billion barrels. Oil production would fare no better in this portrait with the country straining to reach a 900,000 bpd threshold, down from 1.7 million bpd back in 1980. Last year Indonesia faced a domestic sup- ply defcit of 78 million barrels which deepened the countrys reliance on oil imports. With around 60 percent of Indonesias energy being govern- ment subsidized and a global Brent price consis- tently over USD 100 per barrel, the subsidy bill soared to USD 28 billion which almost negated the USD 30 billion Indonesia receives in oil export revenues; in 2012 the subsidy bill is projected to climb to USD 32.6 billion. President Susilo Bambang Yudhoyono cited the problem directly in March: The short-term energy issue which has now become the center of public attention is the skyrocketing global crude oil price, establishing the subsidy issue as a priority challenge for the government to address in 2012. This portrait of an industry in decline clearly looks out of place next to a mantelpiece adorned with Indonesias historic achievements in the oil and gas industry. Indeed the discovery of com- mercial quantities of crude oil in Sumatra just over 100 years ago led directly to the formation of Royal Dutch Petroleum, now Royal Dutch Shell. Indonesia was the pioneer of the produc- tion sharing contract (PSC) model in the late 1960s which made the country an instant hit with the international supermajors. Moreover, the country pioneered the LNG export markets only losing its number one posi- tion in the last fve years, and until exiting the organization in 2009 Indonesia represented the only Southeast Asian mem- ber of OPEC. The odd juxtaposition of Indonesias past and present states may be com- prehensible to industry experts given the combination of what went wrong: a natural oil reserve decline, a lack of exploration activity and slippage in production schedules; and what went right: rapidly rising energy demand due to the growing affuence of the worlds fourth largest population and a 6.37 percent growth in Indonesias economy. The trouble is that the new portrait is little understood by the population itself which continues to see Indonesia as a great world oil power in spite of reality. These persistent notions are politically paralyzing. In March this year, after the Indonesian government had scheduled to raise prices for subsidized fuel from USD 50 cents to USD 67 cents starting on 1st April, over 12 thousand citizens and trade union members preempted the price hike, taking to the streets of Jakarta in protest with a further 81 thousand demon- strating in the regions. These civil manifestations were suffcient for the government to back down on its proposed subsidy cuts, though few policy makers doubt the necessity of removing subsidies. According to Dr. Subroto, a charismatic elder in the Indonesian oil and gas community, former min- ister of energy of Indonesia (1978-87) as well as being the longest serving secretary general of OPEC (1988-1994) the people must now be freed from their illusions. He says, One of the biggest steps henceforth is to tell the population that Indonesia is not a great oil power anymore. The population is still under the illusion that Indonesia is oil rich, therefore we need to be more honest with the people. The recently deceased minister of energy and mineral resources, Widjajono Partowidagdo, con- curred that the frst step must be for the population to face reality. He saw the removal of subsidies as the frst step in creating a more balanced energy strategy, believing that freeing up subsidy money would allow investment in more fruitful energy sources and would stop cheap fuel prices constraining the development of alternative energies. Prof. Dr. Subroto, chairman BIMASENA 1210ogfj_56 56 10/5/12 4:12 PM 58 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com Something Old, Something New, Something Boosted, Something Blue In 2011 Indonesia missed its oil production target of 945,000 barrels by 42,000 barrels, on the back of a ten-year decline in oil production. Yanni Kussuryani , head of Indonesias state-owned oil and gas research orga- nization Lemigas explained: There were several technical problems: most felds are brown felds in which production is declining, there were project delays resulting from planned/unplanned shut down as a result of repairing production facilities and there were delays in receiving drilling permits Production will increase only as a result of intensive explor- atory drilling activity, simplifcation of the drilling permits, speeding up the plan of development (POD) programs, and the application of enhanced oil recovery (EOR) technology on old wells. Bedeviled by technical issues and heavy investment requirements, the question arises: why should any company choose to settle down with Indonesia? Since 1965 Lemigas has been answering that question, tak- ing on the role of matchmaker for the private sector. Lemigas has been directing these international suitors to explore areas of untapped poten- tial and assisting companies in their development programs. Currently 87% of Indonesias national oil production comes from mature felds in the West of the archipelago, and therefore Lemigas has worked extensively with Chevron Pacifc Indonesia, Pertamina EP and Total in preparing EOR chemical injection plans and feasibility studies. Kussuryani points out that Almost 20 percent of current production comes from EOR Duri steam fooding [Chevrons EOR program on their giant feld located on Sumatra, West Indonesia]. Owing to rapid but unsustainable extraction in the past, around 60 percent of Indonesia's oil is still contained in these mature reservoirs, and there is consequently a great opportunity to boost production from these reserves. In recognition of this potential, BP MIGAS recently imposed a mandatory requirement for EOR spending for all PSCs. However, the main buzz currently surrounding the Indonesian upstream industry is less connected with oil than with the potential for giant new offshore gas reserves in the unexplored East of the country. Roughly 80 percent of new offshore discoveries are gas felds and the industry has been spurred on by the Abadi feld discovery by INPEX on the Masela block, echoing its giant gas feld discovery in adjacent North West Australian continental shelf the Ichthys project. Lemigas is now cooperating with Inpex on the Masela block which could become the frst foating LNG plant in the world. International companies with substantial means and technological expertise therefore still have much to gain from Indonesias sizeable dowry. Eastern Promise An alternative way of looking on the worlds largest archipelago is to see it instead as the largest maritime nation and although Indonesias strong agricultural past places a land-centric prism on its industrial mind-set, a succession of large gas discoveries offshore in the East of the country is drawing the major oil and gas players seaward. Ministry of Energy and Mineral Resources (ESDM) director general of oil and gas, Evita Legowo, outlined the major shifts now occurring in the coun- trys upstream industry: Oil and gas companies should note that there are currently three major paradigm shifts occurring in Indonesias oil and gas industry which present new opportunities. The frst is the movement of production from the West, where most of Indonesias traditional oil and gas deposits lie, to the East, which is a highly prospective region for future production. The second paradigm shift is the movement of production from onshore to offshore deposits and even deep-water E&P operations. The third paradigm is the shift from oil production to gas production. Offshore production is naturally a high-risk, high-expenditure busi- Dra. Yanni Kussuryani, head of Lemigas Safety Begins Here. Courtesy of Niko Resources Evita Legowo, director general oil and gas Ministry of Energy and Mineral Resources 1210ogfj_58 58 10/5/12 4:12 PM 60 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com Picking the Hanging Fruit Whilst offshore potential draws many of the larger companies, Jossy Rachmantio, chief executive offcer of Mitra Energia, subsidiary of Lon- don-listed junior, Sound Oil, sees a rich crop of onshore opportunities emerging from Indonesia's past regulatory defciencies which resulted in undercapitalized projects undertaken by often inexperienced E&P players. The key to success in Indonesia is targeting distressed assets and if you run statistics on the tendering rounds from 2003 up until now you see a high volume of acquisitions made between 2004 and 2006. In terms of the quality of investment made during this period you see a lot of small cap companies with no records and no technical background acquiring assets. The Indonesian government was not experienced enough at the time to confgure the bidding strategy to flter companies in terms of qual- ity. This created a lot of horse-trading with high bids and it became a numbers game. This created a lot of assets which were over-capitalized in terms of commitments and on this basis one can calculate how long it would take for these assets to become distressed. He continues explaining that between 2003 and 2007 service costs quadrupled which meant that many small cap companies were no longer able to fund their work programs and wells fell victim to underinvest- ment. In Rachmantios eyes these trends have left plenty of hanging fruit for the picking. Switching to a Balanced Diet When Jero Wacik, the new minister of energy and mineral resources (ESDM), was appointed to his position in October 2011 the President assigned him one straightforward mission: to establish Indonesias energy security. However, such benign simplicity belies the enormity of the ordeal facing the minister. The behemoth of domestic energy con- sumption looks set to triple in size by 2030 having grown 11 percent in 2011 alone. Wacik, who recently had to revise down his 2012 oil lifting target from 930,000 bpd, to just 881,000 bpd has recognized the futility of satisfying the beast with an oil industry beset by years of declining production. However, oil is by far not the only crop on Indonesias fertile territory. The Indonesian archipelago spans the equivalent distance of Florida to California and sequestered in and amongst its complex of 17,500 islands ness which limits the number of players who can compete to the medium and large international oil companies and this limited com- petition is partly what attracts companies when domestic players are increasingly favored in land-based tenders. This is an environment which is also being increasingly incentivized for investors. Offshore frontier blocks are now offering greater produc- tion shares for contractors and tax breaks are being incorporated for offshore construction, further sweetening the deal. MIGAS signed 11 new PSCs in the twilight of 2011 which saw offshore blocks going to international players like Hess, BP, Inpex, Statoil and Niko Resources. Of the companies which have been building up their presence in this sector, Canadian junior, Niko Resources has been the most aggressive in the Indonesian offshore market currently operating 15 PSCs, own- ing a working interest in an additional seven non-operated blocks, and partnering with some of Indonesias largest international producers including Norwegian deepwater specialist, Statoil. In 2012 Niko Resources is launching what is expected to be Indone- sias largest ever offshore exploration program, having secured a rig contract from Diamond Offshore for four years, the longest in Indo- nesias history. President director and general manager, Eko Lumadyo explained the strategy underling these ambitious plans stating that the focus will be on the East of the country: Regarding the transition towards the East, the majority of our concession areas are located in Eastern Indonesia and Niko Resources has certainly been expanding in this region. The reason for this direction is simply because East- ern Indonesia basins are under-explored basins and offer an opportunity for major discoveries. Across these blocks Niko Resources will pay particular attention to areas which are geologically analogous to major feld discoveries on the Northwest Shelf of Australia and the nearby felds in Papua areas. However, Lumadyo is under no allusions that the greatest challenge will come from operating in the East of the country far away from the current oil and gas support infrastructure and from their offces at the moment. He stated, In case of an emergency it is necessary to have technical support facilities and safety measures in situ. These are the elements we are working on at the moment. Eko Lumadyo, president and general manager Niko Resources 1210ogfj_60 60 10/5/12 4:12 PM 62 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com can be found practically every type of hydrocarbon energy resource ever lifted. Whilst Indonesias declining oil reserves now place the country 28th in the world, it is up at 13th place in natural gas reserves - around 48.74tscf - and its unconventional deposits are even more impressive comprising an additional 453tcf of coal bed methane (CBM) - placing Indonesia ffth in global rankings - and 334.5tscf of shale gas. Indone- sia is therefore a rich country in conventional and unconventional gas. It should not be forgotten that Indonesia is also the worlds top coal exporter and ranks 4th in terms of global coal reserves. The countrys energy mix does not even stop with hydrocarbons. Given Indonesias positioning on the worlds most geologically active zone, the ring of fre, Indonesia is also endowed with 40% of the worlds geothermal energy potential. Indone- sia also has possibilities in hydroelectricity, bio fuels, solar energy and even nuclear, albeit controversial. That Indonesia thus far has not made full use of its rich resources is a source of bemusement to Suryo B. Sulisto, chairman of the Indonesian Chamber of Commerce (KADIN). He said, It is the biggest irony that Indonesia is sitting on top of some of the most abundant energy resources in the world and yet cannot provide energy security to its population. In his opening address to the 36th Indo- nesian Petroleum Association (IPA), Minister Wacik fnally acknowledged the need to think differently about Indonesias diverse sources of energy. Wacik declared that his target was now not only to increase oil lifting to over one million bpd by 2014 but that he was shifting the policy paradigm from oil lifting to energy lifting thereby bringing other energy resources within fold of state budget calculations - gas lifting of 1.3bboe will for the frst time to be included in the 2013 budget. Chief advisor to Yudhoyono and secretary general of the National Energy Council, Lobo Balia, elaborates on how Indonesias energy policy is being redrafted. They are laying out a 2050 roadmap centered on domestic energy security and diversifcation out of Indonesias tradi- tional hydrocarbon paradigm. He explained: Indonesia needs to improve the effciency of its energy sector and diversify our energy sources with new, unconventional and renewable energy as well as carbon capture storage. The share of coal bed meth- ane (CBM) and shale gas will increase within the energy matrix. Indone- sia will dramatically cut its use of diesel power plants. In the longer-term future we are going to use other resources than fossil fuels. The use of renewables will increase signifcantly, especially geothermal, solar, hydro, and bio fuel. The diversity of Indonesias energy resources offers a rich smorgas- bord of feedstock to satisfy the ever deepening hunger for energy in a country steadfastly growing at over six percent year on year. The switch in policy focus from feeding external markets to feeding the domes- tic market also means that the advantages of oils exportability have become less signifcant. Alternative energy sources within the energy basket offer a great opportunity to deliver power at a local level. A Hot Topic Under Presidential Decree No. 5/2006 and within Indonesias 2025 energy diversifcation strategy fve percent of consumption should be met by geothermal energy. The Ministry of Energy and Mineral Resources has set a 2015 target of 4,000 megawatt geothermal produc- tion, up from 1,400 today. CEO of Australian-based Panax Geothermal, Kerry Parker explains that the attraction of the Indonesian geothermal sector is not just the fact that Indonesia has 40 percent of the worlds geothermal potential. Parker says that, Indonesia has taken the right approach in that geother- mal is not an addendum to a clean energy policy or a renewable energy Searching for alternative energy in North Sumatra. Courtesy of Panax Geothermal B. Sulisto, Chairman of the Indonesian Chamber of Commerce (KADIN) Dr. M. Lobo Balia, secretary general of the National Energy Council 1210ogfj_62 62 10/5/12 4:12 PM www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 63 tor overheads. In some cases the high cost of developing gas infrastruc- ture will provide impetus for greater partnerships and tie-ins to exist- ing infrastructure. Australian junior E&P company, AWE operates three blocks in Indonesia which are all at the exploration stage, however one of these blocks, Atlas 1, lies close to an existing gas discovery on the Bulu Block, with a different operator. President and general manager of AWE, Herry Wibiksana explains that: The distance [from the Atlas 1 block] to the discovery in the Bulu block is only 25km so we are hoping for a similar fnd. If there is another discovery on Atlas 1 then we would propose to develop this prospect simultaneously with the Bulu block operated by our partner in order to reduce costs by building a shared pipeline and minimize the risk of the project. As a result of this emphasis on price reduction, Oscar Widiatmoko, the founder of Surya Manikam the offcial representatives of German Netzsch Pumps and American Peerless products saw a growing opportunity in rental markets. He explained that policy, but rather geo- thermal is considered as a broader energy security issue. Parker explains that Indonesia is now looking beyond the old hydrocarbon paradigm, having real- ized geothermals capacity to provide 28,000 megawatts of power to the domestic market including the 35 percent of Indonesias 245 million-strong population which currently exists without electricity. Geothermal energy faces many similar chal- lenges to oil and gas relating to local authority permits, land regulations and dealing with land owners holding often spurious registration documents. But although these delays have grown in scope with the decentralization of governance, Parker found local government to be supportive of Panax Sokoria project recog- nizing the potential of geothermal energy to end their power shortages. Parker also saw the economics improving: Many of the earlier geothermal projects had unfavorable tariffs but this is now improving. There is a USD 9.7 cents/Kwh minimum price which may be increased improving overall proftability for the sector. Given this greater proftability, Parker identifes host of opportu- nities outside of Java and Sulawesi for small geothermal stations supplying local popula- tions and industrial projects located far from existing energy infrastructure. Gas on a Budget Providing cheap gas is easier said than done on the complex archipelago where insuffcient gas transportation infrastructure drives up opera- Contributing to Indonesias growth and prosperity 6 Battery Road #35-05 | Singapore 049909 | Phone: +65 65333210 | Fax: +65 65333211 Kerry Parker, managing director Panax Geothermal Herry Wibiksana, president and general manager AWE Oscar Widiatmoko, owner PT Surya Manikam 1210ogfj_63 63 10/5/12 4:12 PM 64 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com Price is our best competitive advantage, we are very fexible on that aspect because we can adapt to the needs of the companies. We always try to know what their budget is and we fnd solutions to accommodate it, such as fnding local suppliers that are less expensive." Putting CBM on the Fast Track to Development Indonesia's gas potential has energy leaders like director general of oil and gas, Evita Legowo seeing it as the main tool for guaranteeing Indonesias energy security. Legowo regards coal bed methane (CBM) as especially interesting, stating that last year Indonesia launched its frst CBM to power project and that on top of the 39 CBM contracts already signed and she was looking for 15 more in 2012. She stated: The gas pressure for CBM is less than that of conventional gas but this means that it can produce over a longer stretch of time. CBM is therefore the best gas for Indonesias future power supplies and it tallies with Indonesias present political strategy of using energy in an effcient and sustainable way. However, the CBM industry in Indonesia is young and according to Sammy Hamzah, CEO of Ephindo, a domestic pioneer of the industry, it faces the problem of having a larger footprint than oil and gas while undergoing the same administrative processes. Nonetheless, Hamzah remained optimistic, saying that on Indonesias frst CBM to power proj- ect, local authorities were actually very easy to convince of the value of CBM given its potential to close the supply gap and end power short- ages in the city. Hamzah is confdent that the domestic gas market will grow in its attractiveness for unconventional plays like CBM. Hamzah went on to explain that East Kali- mantan and South Sumatra were the coal rich regions of Indonesia holding 60 percent of Indonesias CBM potential and that the interest- ing feature of the region was its proximity to the THE NOT-FOR-PROFIT GAS COMPANY As gas looks set to play an increasing role in Indonesian power supply, potential investors are weighing up the economics. Soeko- esen Soemarinda, former senior vice-president of Pertamina, now the Indonesian general manager of Singapore Petroleum Com- pany, a part of PetroChina, explained: Private companies have always been concerned that domestic gas prices will be too low to make gas sales attractive. Investors will compare domestic and export (LNG) gas prices and the price right now for the domestic market is around 5 USD per unit. However the export price stands around 9 USD. For gas production in East Kalimantan, close to the Bontang LNG facility the lure of higher international LNG prices is prompting many conventional and unconventional producers to set up shop. However Soemarinda advises investors to forget profts and focus on Indonesia's domestic needs with potential rewards of gaining greater acreage from the government. In his eyes they should look to reduce production costs to create proftability. Soekoesen Soemarinda- general manager SPC Mahakam Hilir Pte. Sammy Hamzah, president & CEO Ephindo 1210ogfj_64 64 10/5/12 4:12 PM www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 65 Bontang LNG facility allowing CBM to be channeled into export markets in CBM-LNG conversion. He even saw this as an opportunity for Indone- sia to overtake neighboring Australia in CBM-LNG exports, as Australia will need several years to construct this infrastructure in Queensland and is subject to signifcant environmental issues. Hamzah said: With this in mind, Indonesia can be right on top of the global CBM production list and I believe 2012 will be an important year for Ephindo and this industry. Building Connections The new paradigm for Indonesias energy strategy is to utilize energy to feed its domestic industries and generate GDP growth rather than to generate export revenues. Andy Sommeng, Chairman of BPH Migas, Indonesias downstream regulator is therefore planning an extensive program of downstream infrastructure projects under Indonesias Mas- ter Plan an economic plan launched by President Susilo Bambang Yud- hoyono in 2011 for Indonesias economic development, feshing out his vision to make Indonesia a top ten economy by 2025. Sommeng mentions a couple of projects: Indonesia requires better refneries and proj- ects are underway to construct three new refn- eries producing 250,000 barrels per day. It is better than to continue importing fuel because of the value created by providing employment and security of supply in Indonesia. By 2025 Indonesias energy matrix will depend not just on oil and gas but also on nuclear, coal, geothermal, wind, wave, and solar energy. Indonesia needs as many specialist companies who can provide these new forms of energy to consumers as possible. One of the international downstream players that started to develop infrastructure projects in Indonesias downstream market following the market liberalization enshrined in the 2001 oil & gas law is Vopak, the worlds market leader in tank storage. The company has started con- struction of a fuel terminal in Jakarta and a chemical terminal in Merak. Andy N. Sommeng, chairman BPH Migas 1210ogfj_65 65 10/5/12 4:12 PM World's largest independent storage provider for oil, gas and chemical products, with close to 400 years of trust and reliability. Vopak Terminal Jakarta Phone: +62 21 43904002 | www.vopak.com Vision: Achieving the availability and distribution of oil base fuel throughout the territory of the Republic of lndonesia in order to maximize people's prosperity and welfare. Mission: To conduct regulation and supervision on the implementation of the appropriate, fair and transparent business competition mechanisms for availability and distribution of the oil base fuel and to improve domestic use of natural gas. OL and GA8 DOWN8TREAM REGULATORY AGENCY BPH MlGAS BUlLDlNG Jl. Kapten Tendean No. 28, Jakarta Selatan 12710, lndonesia Tel. +62-21-521-2400, 525-5500 Fax +62-21-525-5656, 525-0319 Http://www.bphmigas.go.id 66 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com Its managing director in Indonesia, Mark Noord- hoek Hegt commented on Vopaks vision: When entering a market it is crucial for Vopak to understand who will be the players of the future. In Indonesia both international oil companies and national oil companies showed interest, which automatically sparks our interest in setting up infrastructure. Indonesia is bringing more fuel into the country. We expect that there is ample room to improve the supply chain and logistics of the import and distribution fows in Indonesia. The logistic infrastructure has to become more effcient to service the downstream fuel market." The World-Class Domestic Producer Indonesias oil and gas industry has for the past ten years been based on Law No. 22 of 2001 on Oil and Gas which still serves as the foundation for the upstream industry. One of the fundamental tenets of this law was the removal of Pertaminas responsibility for regulation thereby downsiz- ing its scope of operations. This measure was in part designed to make Pertamina more competi- tive and capable of competition on a global level. Former CEO of Per- tamina, Ari Soemarno who was behind Pertaminas strategic vision to become a world-class oil company by 2023 explained to us that before his tenure was up he had attempted to negotiate a takeover of Indone- sias second largest domestic producer, Medco, thereby gaining access to assets in Libya. Although the Medco takeover proved unsuccessful it was part of a drive to take the company international and to some extent it has been continued by Soemarnos successor, who is globally the frst female CEO of an NOC: Karen Agustiawan. In May 2012, Agus- tiawan was in Kazakhstan negotiating with the Kazakh national oil com- pany (KNOC) where according to Agustiawan: "Pertamina and KNOC will study the possibility for exploration, development and production of hydrocarbons at various locations, domestic and overseas, including in Kazakhstan. Mark Noordhoek Hegt, managing director Vopak Indonesia B.V. 1210ogfj_66 66 10/5/12 4:12 PM 68 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com FIVE CEOS GIVE THEIR PERSPECTIVE ON BUILDING INDONESIA'S ENERGY INFRASTRUCTURE In 2012 around USD 4.7 billion is projected for investment in energy related construction in Indonesia. Pandri Prabono, chair- man of Indonesias oil and gas construction association said that he can see a signifcant change occurring in 2012 in compari- son to the last few years. The future of infrastructure projects has become a lot more concrete and clear-cut. Consequently growth predictions are high and possibly as much as ten percent. But where will this infrastructure investment be directed? Bambang Gyat, director of Indonesian engineering company ENERKON, which worked on the South Sumatra-West Java pipe- line, a jewel in Indonesias energy infrastructure, saw that 2012 promises to be a big year for the energy-related construction industry as all the stakeholders from government to private com- panies now recognize that energy infrastructure is the key priority for both the development of Indonesia and increasing produc- tion. One can observe this push particularly in relation to Indo- nesian gas infrastructure. In fact, according to Gyat, 2012 will offer growth beyond the capacity of local engineering compa- nies stating that: Currently local EPC contractors or indeed local engineering consultants and project management companies cannot fulfll the new projects being offered by the market. Gyat explains that the expansive market eliminates tough competition among local engineering companies meaning that the main chal- lenge is simply convincing chief contractors and operators of their capabilities. Steven Budisusetija, former president director of Tripatra, one of Indonesias top three EPC companies alongside IKPT and Rekayasa Industries, concurred that he saw demand increasingly coming from the downstream sector in the form of FRSUs and regassifcation terminals given that the archipelago makes pipe- line infrastructure mostly uneconomic. His successor Joseph Pan- galila stated that: "With more future development in offshore deep-water proj- ects, downstream projects (LNG and Refneries) and mine and minerals processing, Tripatra has been preparing itself for these markets. Tripatra has started bidding for projects in this market segment with partner(s) in the form of consortia or joint operations" The growth in the construction market has already resulted in a tripling of the company's backlog between 2010 and 2011. Tripatra was also invited by Exxon- Mobil to participate on the Banyu Urip feld on Indonesias Cepu block. Provid- ing a degree of local know-how in han- dling this notoriously challenging project in regard to permitting issues, Tripatra has now created a corporate affairs unit to better support the project in dealing with the external conditions created by local government and local communities. Therefore where the company may require further development from a technical per- spective, local knowledge provides them with an advantage in major projects. Whilst opportunities are plentiful for standard EPC contracts, the technical challenges of new upstream offshore proj- ects promise what James Tsang, operations manager of Wood Group Kenny Indonesia, sees as a "strong demand for special- ized oil and gas engineering, including subsea and pipelines. Wood Group Kennys presence in Indonesia was frst developed thanks to their breakthrough project for BPs Tangguh LNG facil- ity. After being convinced of the value of this market the com- pany grew roots and expanded rapidly since then to become the leading subsea engineering company in Indonesia focusing on special materials. Tsang now sees a second wave in the growth of the market which was, kick started by Chevron with Gendalo Gehem, but there are other deepwater developments coming up including Inpexs Abadi Field, ENI Jangkrik and Terang Sirasun. Tsang sees growth across the SEA region and highlights Indone- sia as a center of engineering excellence for other regions. Pandri Prabono, chairman GAPENRI Joseph Pangalila, president director PT Tripatra Engineers and Constructors James Tsang, president director PT Wood Group Kenny 1210ogfj_68 68 10/5/12 4:12 PM www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 69 Leaders of Indonesias oil and gas industry recognize this need to go international indeed R. Priyono, chairman of BP MIGAS, Indonesias upstream regulator said that: Pertamina will only improve by becoming more ambitious. The famous boxer, Muham- mad Ali, became the greatest boxer and heavy- weight champion of the world because his sparring partner was always bigger and stronger than he was. This spirit must be brought to Pertam- ina, who must look internationally for their sparring partners and look to aggressively acquire blocks outside of Indonesia. However, Priyono insists that this internationalization must come after its national responsibilities have been met. He stated that Pertamina will be the backbone of Indonesias future production and carries a great national responsibility to explore and develop these felds, but that the company must become more aggressive in developing their domestic assets. In 2012 ESDM has much touted the possible revision of the 2001 law. The Indonesian government has now set a 2025 target of 50 percent production coming from local companies which apart from domestic producers, Medco and Energi Mega Persada, essentially means a much greater responsibility for Pertamina. A redrafted oil and gas law would therefore likely increase Pertaminas domestic role, taking it from having 25 percent rights to all new PSCs to having frst right of refusal on all R Priyono, chairman BPMIGAS Discussing deepwater subsea projects in Jakarta - courtesy of Wood Group Indonesia 1210ogfj_69 69 10/5/12 4:12 PM 70 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com Suhartos authoritarian regime Indonesia is now a stable democratic country. Under Yudhoyono's leadership the country's 33 regional governors became democratically elected and whilst the fear of bal- kanization has largely been laid to rest, previous inequities in resource management meant that a side effect of this democratization pro- cess has been the decentralization of oil and gas governance. Satya Yudha, member of Commission VII of Indonesias House of Repre- sentatives stated: Through the process of Indonesias democratiza- tion new stakeholders have entered the fray, and they are demanding their fair share of resources, benefts and investments. Yudha points out that in the past central government has not always been the best arbiter of what is required to meet local energy needs highlighting that thanks to the central- ized system areas such as East Kalimantan (an area around the size of New Mexico) on the island of Borneo is responsible for 54 percent of Indonesias gas production, and yet the whole region including its capital city Sangatta suffers from rolling electricity blackouts. On the other hand, there have been prominent cases of key national oil and gas projects undermined at the regional level. Indeed, Indo- nesias largest oil discovery of the past decade, the Banyu Urip feld on ExxonMobils Cepu block, from which ESDM targets 165,000 bpd by 2014, was originally due to start production in 2012 but because of permitting issues at the regional level, was pushed back two years. Such regional involvement in energy governance inevitably creates bottlenecking for the producers and the service industry alike with operators facing a complex web of local stakeholders and suppli- new blocks prompting the company to take a greater share of domestic production. The question is whether Pertamina is ready for such responsibility in technical capacity terms. Developing the East Natuna block, one of Indonesias most challenging projects with 70 percent CO2 content, prompted Pertamina to seek international expertise frst with Norways Statoil and then with Total. Pertamina is also locked in extensive negotiations with Total regarding a potential 51:49 partnership on the Mahakham Block in East Kaliman- tan, although these are stalling on the fact that Pertamina wants opera- torship. Indonesia's NOC has a steep learning curve ahead of it in the domestic market and it has domestic challenges, capacity building and new responsibilities to attend to before stepping onto the world stage. A Teenage Revolution Samudra Energy is one of the runner-ups among Indonesias E&P companies and very close to the top three, according to its CEO Frank Inouye. He sees a major role for juniors in actu- ally driving forward innovation in the industry. Samudra Energy holds seven assets in Indo- nesia, out of which it operates fve. The majority of these assets are located in central and south Sumatra. For the last two years Samudra Energy has been piloting a chemical enhanced oil recovery scheme, a technique that is just now just starting to be applied in Indonesia. Players such as Chevron and Medco are looking at the technique as well, but I would argue we were the frst to run an in-feld pilot study, Inouye said. He continued: A lot of the new ideas on exploration and technol- ogy, on how to squeeze a little bit of extra oil out of the existing areas, will come from the smaller players. Historically the majors are the frst to enter new areas, such as deep water and/or adopt new technology ideas but I believe this is changing and the entrepreneurial spirit of many smaller companies, such as Samudra, is challenging this tradition. Allocating Resources - a Splitting Headache Article 33 of the Indonesian constitution drafted in 1945, states that Indonesias energy must be used for the maximum beneft of the Indonesian people but who decides this? 14 years after the fall of Frank Inouye, chief executive officer Samudra Energy Satya Widya Yudha, member Commission VII DPR- RI 1210ogfj_70 70 10/5/12 4:12 PM 72 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com with the regulations of the central government. We have to rectify this, and today almost 10,000 of those 12,000 regulations have been resolved, Mangkusubroto explained. Betting their Batam dollar on growth Whilst Indonesias energy focus will likely be directed inwards for the coming years, there is at least one region which will keep its eyes fxed on the horizon. Tucked just below the southern tip of Singapore lie the Indonesian islands of Batam, Riau and Karimun. Although Singapore has traditionally held the regional position as a strategic hub and headquarters for many companies in the marine construction and engineering industries, the city state suffers from a fundamental lack of space and human resources, which drives up operating costs. MADAME PROUST: IN SEARCH OF EXTRA TIME Bulwark of Indonesias national gas production, having occupied the top spot since it began production in 1968, is French company, Total E&P Indonsie. Totals president director and general manager in Indonesia, Elisabeth Proust, has recently been nominated as head of the Indonesian Petroleum Association and Focus Reports caught up with her to discuss the strong yet challenging position of IOCs in Indonesia. How do you see the main challenges for an IOC in Indonesian production today? Indonesia faces a strong need to accelerate the development of proven felds not yet in production and exploration to bring new reserves. In order to achieve this, the uncertainties both in the regu- latory frameworks, in the stability of the contracts and in the future pricing mechanisms for gas must be eliminated. The conditions for performing exploration work-programs must also be improved with rationalization of the regulations on local con- tent in order to create a better match between the requirements and what is actually feasible. These various issues have had a negative impact on the develop- ment of oil and gas projects and have slowed down production in Indonesia. The government must give confdence to the investors and provide attractive terms to promote the development of felds and exploration. In the second half of the decade the PSCs of several IOCs will expire, includ- ing Totals Mahakham Block. In a climate of Indonesian production being increas- ingly offered to domestic companies, how is this affecting your investments on the block? The Mahakam block has been the primary reason why Total is the number one gas producer in Indonesia. As such, the companys ongoing priority is to maintain a high production level from this feld and Total still performs exploration and developments to achieve this. In terms of current activity the company is at the peak of its operations. Last year, Total drilled 125 wells when we had initially intended to drill 110 and every year we increase our investment bud- get last year it stood at USD 2.3 billion. Total is investing with the assumption of a positive outcome beyond 2017. However, soon Total will need to have an indication of the terms and conditions of its possible participation in the block after 2017. Elisabeth Proust, presi- dent director & general manager TOTAL E&P ers achieving lower than expected fnancial returns due to project slippage. Kuntoro Mangkusobroto, the head of the Presidential Delivery Unit, the Indonesian equivalent of the White Houses West Wing, is responsible for overseeing the progress of the countries national pri- orities as implemented by the ministries, resolving bottlenecks and managing the Presidents Situation Room. Two things were ignored at the time when the decision was made to decentralize: the capacity of the local government to manage their own region, and how local regulations would be issued. In the past twelve years almost 12,000 new local regulations were issued, and the majority of them are in confict Kuntoro Mangkusubroto, head of Presidential Delivery Unit 1210ogfj_72 72 10/5/12 4:13 PM www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 73 Like a well rehearsed understudy waiting in the wings, Batam has always sought to share the limelight. McDermott frst pioneered investment in Batam back in 1970 and Scott Cummins, senior VP & GM Asia Pacifc feels that Batam was instrumental in McDermotts expansion in the APAC region which now contributes USD 1.9 billion in revenues, over half of McDermotts global turnover. He described the benefts of Batam: there are huge logistics savings brought through Indonesias strategic location and proximity to fast growing oil and gas produc- tion in countries like Australia. The Batam facilities have steadily expanded through investment over the last 40 years thanks to the availability of land and labor. This expansion has allowed McDer- mott to attune to the increasing scale and complexity of projects in the Asia Pacifc (APAC) region. In 2011, McDermotts workforce in Batam peaked at 9,000 employees and although the cyclical demands for labor rise and fall, we have a very strong base level of engi- neers, 98 percent of whom are Indonesians. This high level of local participation makes the operation very competitive at the same time as providing jobs for Indonesia. Even though McDermott has now estab- lished a new manufacturing base in China, Batam will continue to represent the regional Scott V. Cummins, senior vice president & general manager Asia Pacific, McDermott McDermott's North Ocean 102 is a fast-transit, dynamically positioned subsea construction vessel 1210ogfj_73 73 10/5/12 4:13 PM 74 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com hub for the company. McDermott's Umbilical, Riser, Flowline (URF) for INPEX-operated Ichthys LNG Project is their largest order inter- nationally and will see the Batam facilities fabricating 16,000MT of subsea equipment from early 2013. Assessing the growth of offshore and subsea projects in APAC and McDermott's involvement in projects from Inpex's Ichthys URF and Chevron's Gorgon project in Australia and Chevron's Gendalo-Gehem and Inpex- led Masela LNG in Indonesia, Cummins sees his Batam facilities as "well positioned to deliver on our clients needs." However, the export-led growth model for Batam is under review. Indonesias over- all economic success is now more predi- cated on a growing domestic market which has been sheltering it from the vagaries of the global slowdown. As an export-ori- ented region, Batams investment growth has fallen behind the rest of the country. The region is consequently changing strat- egy having initiated a 2011-2015 roadmap designed to develop their activities towards logistics and transshipment industries. Asroni Harahap, deputy for supervision of the Batam Indonesia Free Zone Author- ity (BIFZA) explained that Indonesia is now turning towards transshipment. Given that the country can claim the same strategic position as Singapore on the major ship- ping routes between China, India and the Middle East and go one better on price and human resources, he sees this direction as vital for the region's economic future: The transshipment port project, designed to become operational in 2015, is a key element in our new economic strat- egy. Lying on the same shipping routes as Singapore, Batam can become a transship- ment hub for the region and although geo- graphically close to Singapore the limited land availability in Singapore represents a limit on capacity and drives up the cost of transshipment creating opportunities for Batam. A Deceptively Challenging Asroni Harahap, Deputy Chairman BIFZA 1210ogfj_74 74 10/5/12 4:13 PM www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 75 an inevitable back and forth which means that tenders take on aver- age three to fve months longer than before to complete. Weather- fords own success in tenders for completion dropped from 28.8 per- cent to four percent from 2010 to 2011 simply as a result of changes in PTK 007. Harvey said that the Q4 activity spike expected from Niko Resources and Chevrons West Seno projects should act as the foundation for a few relatively strong years, but further down the line the PSC expiry for Total in 2017, Chevron in 2018 and Conoco Phillips in 2020 will cause a dip in the market as equity is transferred to new owners. Asked why Weatherford continued to invest in the market Harvey replied the govern- ment is engaging us to address our concerns, to shed light on the problems and fnd solu- tions When you consider the opportu- nity for change in Indonesia, you appreciate that the country offers vast potential for the growth of business. Many high-quality service and equipment providers to the Indone- sian oil & gas industry also have to deal with is the slow adoption of new technology. Swedish Alfa Laval, which develops heat transfer, separation and fuid handling technologies, knows the issue all too well. Andre Tjhai Tjin Fung, managing director of Alfa Laval in Indo- nesia explained that as is the case with the oil & gas industry in many other countries, it takes the industry in Indonesia time to adopt new technologies, and this can indeed be a challenge to innovative equip- Supplier Market Ostensibly the Indonesian service market looks buoyant with projec- tions of USD 21 billion investment in the oil and gas sector in 2012 driving a signifcant growth in the services market. Chevron alone will invest USD 7-8 billion in deepwater felds Gehem and Gendalo, Inpex is looking to invest USD 4.9 billion in its foating LNG platform on the Masela block and Total staked out USD 2.3 billion on its Mahakam block last year. And yet despite this growth opportunity, according to survey of 502 industry executives quoted by the IPA, Indonesia fell three places to 114th out of 135 countries in terms of its oil and gas investment climate. Robert Harvey, president director of oilfeld services company Weatherford, bemoaned that in spite of a record turnover for his com- pany last year their return on investment was the lowest in the region. The trouble, accord- ing to Harvey, is that There are too many punitive disincentives present in the govern- ment regulated tendering process. The main problem is that the pro- cess enables operator supply chains to manipulate the penalties of sanction points to their advantage. There also exists the operators ability to pass its risks onward. Measures such as the procurement regulations PTK007 introduced over the last fve years draw the most fre from service companies. PTK007 privileges local service companies in contracts with a 35 per- cent minimum even when that becomes impracticable and results in McDermott Indonesia's fabrication yard on Batam island Robert Harvey, president director Weatherford Andre Tjhai Tjin Fung, managing director Alfa Laval 1210ogfj_75 75 10/5/12 4:13 PM 76 energy.focusreports.net October 2012 Oil & Gas Financial Journal www.ogfj.com INVESTMENT PERSPECTIVES A question to Chris Wren from the British Chamber of Commerce, Andrew White from the American Chamber of Commerce, Nicolas Cambefort from International French Chamber of Commerce and Industry and Ananda Idris, from Intsok Indo- nesia, on doing business in Indonesia. Would you give your perspective on the main opportunity and challenge for compa- nies from your country operating in Indone- sia's energy industry? IFCCI: Advantage: French companies present in Indonesia are complementary, the big ones bring the fnancing and the smaller ones bring the specifed expertise and know-how. Chal- lenge: the recent regulations encouraging domestic and national companies over for- eign ones might have reduced the optimism to invest in the long-term in Indonesia. British Chamber: "The UK is back on the map as being a provider of quality technology In the list of British energy companies growing and investing in Indonesia I would mention BP and Premier Oil. Regarding smaller players, Busi- ness is very diffcult for foreigners, instead of trying to be completely autonomous, they need to build and use local networks frst. American Chamber: American companies have the best technology and processes, and most importantly they do what they say and stand by their commitments. Clean energy is one area where there is tremendous oppor- tunity. However, current regulations make it diffcult to start up a new enterprise to the detriment of local frms and investors. Intsock: Norwegian companies have com- petencies that can be of great value here in Indonesia. They can bring benefcial knowl- edge and change certain processes such as in deepwater drilling, in EOR, or creating the gas value chain. However, their prices and costs are high. Norwegian companies are used to operating at very high cost in the Norwegian Sea, but I do not think that it is realistic to expect to operate at the same costs in Indonesia." successful business in Indonesia. This is why last year we achieved a very important milestone in that regard with the decision to acquire a major share in a local company called IKPT. We are a global company, but we like to act local. A Talent for Service Where supplier costs are being squeezed, one resource which con- tinues to carry a high value in the industry is people. On the back of a decade-long EPC partnership with Total E&P Indonsie in Balikpa- pan, French company, SPIE Oil and Gas was approached to provide expertise and staff replacements. SPIEs director in Indonesia, Samir Abbes explains that the human resources challenge, was more acute in Indonesia because of a growing respect for the countrys engi- neers. Abbes said: ment providers like Alfa Laval. This situation is mainly due to long decision making processes that involve comprehensive approval & licensing. To overcome this challenge, they must involve many parties to fnd out when our new technologies can be implemented. Regulations like PTK007 force international suppliers to engage in localizing strategies. One of Japan's leading EPC companies, Toyo Engineering is doing just that. Jae Yong Choi, Chief Representative of TOYO Engineering in Jakarta, comments on their recent moves: Localizing is one of the priorities of our strategy. We have built excellent relationships with local companies over time. We believe that harmonizing with the local enterprises is the most signifcant key factor to conduct Andrew White, manag- ing director American Chamber of Commerce Chris P. Wren, chief executive officer, British Chamber of Commerce Nicolas Cambefort, vice president project construction Total & vice president Indonesian French Chamber of Com- merce and Industry Ananda Idris, oil and gas advisor Intsok Jae Yong CHOI, chief representative Toyo Engineering 1210ogfj_76 76 10/5/12 4:13 PM www.ogfj.com Oil & Gas Financial Journal October 2012 energy.focusreports.net 77 Final Perspectives The mood in Indonesias oil and gas industry is a little somber given the lack of major discoveries for over a decade, falling oil produc- tion levels and troublesome transitions from the domestic takeover of expiring PSCs to local content clauses. Yet, having placed energy security as a key focus in Indonesias policy framework and in view of the ravenous domestic market for energy as well as the diversity of resources in the energy basket, Indonesia offers up an archipelago of energy opportunities. Whilst in the past Indonesia might have envied membership of the so-called BRICS nations, the sight of nearby neighbors India and China beginning to lose puff might inspire Indonesia to instead iden- tify more with the MIST nations (Mexico, Indonesia, South Korea and Turkey) whose steadier movement to the front of the feld looks set to be a feature for the coming years. Indonesia now hopes to keep pace with more sustainable energy. From 2003 to 2007 it was easy to fnd local people to work on these projects. Local con- tent was not a major issue at the time. How- ever, from 2008 onwards many oil and gas companies especially from the Middle East came to Indonesia to recruit Indonesian spe- cialists to work on their projects in the Middle East, Malaysia, Singapore, Kazakhstan and even in Europe. SPIE, which provides training and expertise services, now sees an opportunity to establish Indonesias largest training facility within the next fve years in order to support Indonesias major transitions in energy projects. Abbes explained that there are a limited number of training facilities in Indonesia with many of them utilizing obsolete equipment. SPIE which now has 665 employees doubled its growth between 2010 and 2011 and through its planned training center intends to explore the opportunity to provide for Indonesias higher value niche industries such as geothermal and CBM. SOLUTION PROVIDER to the Oil and Gas producon And Processing Industries
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