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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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