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Pertamina to take control of Mahakam once contract expires

Total and Inpex currently have a production sharing contract which will expire in 2017

Indonesia’s national oil company (NOC) Pertamina will officially take control of Mahakam, the country’s biggest oil and gas block, when French major Total and Japan’s Inpex see their production sharing contract (PSC) expire at the end of 2017. 

Energy minister Sudirman Said officially announced that Pertamina and local governments would have a 70% stake in the new contract, which will take effect in January 2018. Total and Inpex will have the remaining 30%. The division of the 30% interest between Total and Inpex is still being discussed, he added.

The appointment of the NOC as the operator of Mahakam illustrates Indonesia’s aspiration to take a firmer grip on the nation’s natural resources amid increasing calls from various factions across the archipelago for greater state control of its oil and gas fields. 

Policy makers in Jakarta are in the process of designing a new oil and gas law that is widely expected to deliver more power and privileges to Pertamina, much to the chagrin of the international oil companies that have made significant investments in southeast Asia’s largest producer. 

The Mahakam move is expected to be the first of many, as Pertamina targets 27 PSCs that are due to expire over the next five years. They represent some 30% of Indonesia’s total production. There will never be a cheaper, easier or faster way for Pertamina to expand its production profile. However, the NOC will be wary of blocks that are capital and technology intensive, as well as those in tricky operating environments. A case in point is the Natuna B field, with its high CO2 content. 

Estimated 2p reserves

Nationalists had called for the whole Mahakam block to be handed over to Pertamina and the government said in January that it planned to award 100% of the PSC to the NOC. But Sudirman told reporters: “We want to show our appreciation to the (current) contractors that have shown their commitment to invest.”

The block, which lies off East Kalimantan, is one of the major suppliers to the nearby Bontang LNG plant. It produces around 1.6bn ft³/d, or roughly 20% of Indonesia’s total gas output, in addition to 62,000 barrels of liquids. To keep production running at these levels, Pertamina will need to spend some $2.5bn each year, the NOC’s president director Dwi Soetjipto, said.

Dwi welcomed the government’s decision to give Total and Inpex stakes in the block after the formal handover to Pertamina in 2018, saying that it would ensure the continuity of production activities. 

Energy think-tank ReforMiner Institute deputy chairman Komaidi Notonegoro told the Jakarta Post that while the decision would be unlikely to affect the block’s production target, it would almost certainly make a substantial contribution to state revenues.

Still, Total has said it expects output from Mahakam at 1.4bn cubic feet (cf)/d in 2016, down some 12.5% from its targeted 1.6bn cf/d this year, as it curbs investment. Total’s spending is expected to fall by at least 35% to under $1.5bn in 2016 from a targeted $2.3bn this year. 

The lack of clarity on PSC expiry and potential extensions, as well as the uncertainty surrounding the new oil and gas laws, is hampering investment decisions at a time when Indonesia needs to stimulate upstream activity as oil production wanes, while gas output could follow suit. 

Oil production was down 3.5% in 2014 at 852,000 b/d, a far cry from the 1.11m b/d in 2004, and half of the 1.65m b/d peak seen in 1977. Demand is around 1.5m b/d. 

Gas production is forecast to reach 7bn cf/d in 2015, falling to around 6.3bn cf/d by the end of the decade unless new developments are sanctioned, data from energy research consultancy Wood Mackenzie show. Demand for gas is 4bn cf/d and expected to rise.

Clearly, Indonesia, home to one of southeast Asia’s fastest-expanding economies, faces a crippling energy crunch. The upstream oil and gas sector needs to provide 47% of total primary energy needs in 2025, or 3.7m barrels of oil equivalent (boe)/d. Analysts estimate a 2.5m boe/d shortfall of supply in 2025.

Yet production is intrinsically linked to the level of upstream spend and any reduction in investment will lead to higher levels of field decline. Indonesia’s upstream sector, despite being mature, still holds huge potential with 45% of its discovered resources yet to be produced – it has the region’s highest remaining reserves at around 28bn boe. It has huge tracts of unexplored deep-water acreage too.

Yet while Jakarta’s push to establish Pertamina as a national champion in its own backyard will certainly boost state coffers, it is unlikely to yield the energy independence that Indonesia craves. Ultimately, the market and resources are there, and in many places the infrastructure is established, but the operating environment and fiscal incentives are lacking.

It’s no surprise then that Indonesia’s upstream competitiveness continues to slide. The recently released Fraser Institute Survey 2014 ranked the nation at 130 out 156 countries. 

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