Opportunity to acquire equity in Indonesian Oil and gas fields

Opportunity to acquire equity in Indonesian Oil and gas fields

by iangadot

Indonesian Oil Concessions

Without fanfare or headlines reverberating around the world Indonesia is garnering itself a bright future as the leading economy in South East Asia under the charismatic leadership of President Joko Widodo, the former Governor of the nation’s capital Jakarta. The president, known as Jokowi, has an unsullied reputation as a ‘clean’ politician with no tinge of corruption.

Indeed Widodo’s meteoric rise from furniture businessman to president of the world’s third-largest democracy – and the first to come from outside the political or military establishment – was widely seen in 2014 as a watershed moment for Indonesia. In the intervening years he has streamlined bureaucracy,

As Governor of Jakarta Jokowi increased local government transparency by unleashing e-budgeting and e-purchasing. As president he once eschewed the official jet and took an economy class seat on Garuda Airlines to the high school graduation of a son in Singapore.

He has lifted much of the restrictions on foreign investment in Indonesia and cleared the way to stimulate growth in the 250 million plus nation.

Energy and oil is a clear component on Indonesia’s economic growth aspirations. But all is not as clear as it seems:

Indonesia was an early (1962) member of OPEC, the oil producing cartel dominated by Saudi Arabia. However as the country has turned into a net importer of oil it lefthe cartel t in 2009, briefly returning at the start of 2016 only to be suspended in November last year.

As the state oil company Pertamina edged into a middle man role leaving actual exploration and production largely to Production Sharing Contract and Technical Assistance Contract partners,   the country saw crude oil output peaking at around 1.7 million barrels per day in the mid-1990s. With few significant oil discoveries in Western Indonesia in the past 10 years, production has fallen to roughly half that as fields have matured and died. The management recently said it aims to increase total output to 438,000 barrels per day up 42% on 2016’s total of 308,000 bpd.

Company spokesperson, Wiandap Pusponegoro also said that most of the increase will come from acquisitions in Russia, Iran, and Iraq. That the Russian oil major is confident enough to enter a 45-55% joint venture with Pertamina is an indication of how serious the bona fides of Pertamina are now taken.

Rosneft and Pertamina last year agreed on a wide-ranging cooperation covering the construction of the first new refinery for 22 years in Indonesia at the core of a new petro-chemical complex and Pertamina buying into Rosneft producing fields in Russia.

The US$13.8 bn refining and petrochemical complex is to be located in the eastern part of Java and will process around 300,000 barrels of oil per day (bpd), making it a crucial element of the country’s drive to produce more petroleum products locally. The crude supply to the refinery will come from Rosneft, which views the project as an important part of a strategy aimed at achieving a stronger presence in the oil products market of the Asia-Pacific Region.

Rosneft and Pertamina also laid the foundation for cooperation in the area of joint development of offshore fields. The companies signed a Memorandum of understanding for cooperation in respect of the Northern Tip of Chayvo Field (Sakhalin Island) which gives Pertamina the right to buy up to a 20% share stake in the project. Another agreement signed in October by Igor Sechin, the Rosneft CEO gives Pertamina the right to buy into the heavy oil producing Arctic field of Russkoye with a 37.5% stake.

Commentators said the Implementation of the project will allow Rosneft to acquire a new international partner for developing a capital intensive project in Russia. Rosneft will carry out operational control of the proposed joint venture.

Commenting on the agreements reached, Igor Sechin said, “The signed documents cover key business dimensions of our companies, demonstrating an integral cooperation between Rosneft and Pertamina. The reached arrangements present an outstanding example of a high quality business dialog between the two world energy leaders. I am confident that we will keep up the pace of the development of our partnership for the benefit of our companies and both countries”.

According to Indonesia’s Ministry of Energy and Mineral Resources, existing proven reserves of crude oil in Indonesia will last around 23 years. Most oil production is carried out by foreign contractors under production sharing contracts arrangements. Chevron Pacific Indonesia, subsidiary of Chevron Corporation, is the largest producer of crude oil in the country, accounting for around 40 percent of national production.

Despite several oil & gas contractors in Indonesia reducing their drilling activities due to low oil prices, there is expectation of a rebound as several large Indonesian oil fields are to become operational. The Banyu Urip oil field in East Java, part of the Cepu block, is the largest oil reserve (containing around 450 million barrels of oil) that Indonesia is yet to exploit and which can contribute significantly to Indonesia’s oil production volume. This USD $2.5 billion project in which Exxon Mobil and Pertamina hold a 45 percent stake each through subsidiaries came online in 2015. Production is estimated to reach a peak rate of 165,000 bpd in 2016.

Furthermore, the Bukit Tua oil field (part of the Ketapang block in East Java, operated by Petronas Carigali) came online in March 2015.

The Indonesian government still has high hopes to restore the power of its oil sector as the country still contains large oil reserves, and oil demand (in particular domestic) is increasing. Meanwhile, the oil industry remains a lucrative industry (although prices have hit severe lows in 2015). However, it will require serious effort from all stakeholders, including the Indonesian government, to achieve production quantities of more than one million barrels per day again (an ambitious target that is still desired by the government).

According to Richard Gorry, director at consultant JBC Asia, “What has changed in Indonesia is that they have a new government there and a new regime and this creates opportunities.” Gorry said.

Indonesia’s private sector is eager to help towards these targets. Shabel Sukma Persada (SSP), is an Indonesian Limited Liability Company (PT) established in 2014 by a group of experienced Indonesian oil executives. It is seeking investors to acquire 100% of the assets of a Technical Assistance Contract on the already producing Bravo field in Sumatra The CEO, Pak Budiono, a former VP Exploration with ExxonMobil Indonesia says they need US $12-14 million which will yield $17 million profit to the investor over five years. The IRR is projected at 43%.

Another field SSP is seeking to acquire is the Phoenix field which is under exploration and is subject to a Production Sharing Contract until 2040. Mr. Budiono wants to raise up to US$ 20 million to acquire a 70%stake in the field, projecting an IRR of 59%.Phoenix is a gas and oil field and PSS’ plan is produce gas, adding oil production one year later.

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