Indonesia Oil and Gas

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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

For the f rst 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 Indonesia’s 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 def cit of 78 million barrels which deepened

the country’s reliance on oil imports. With around

60 percent of Indonesia’s 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 Indonesia’s 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 f ve years, and until exiting the

organization in 2009 Indonesia represented the only Southeast Asian mem-

ber of OPEC.

The odd juxtaposition of Indonesia’s 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 aff uence of the world’s fourth largest population and a

6.37 percent growth in Indonesia’s 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 suff cient 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 f rst step must be for the population to face reality. He saw the removal of subsidies

as the f rst 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


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 Indonesia’s state-owned oil and gas research orga-

nization Lemigas explained:

“There were several technical problems: most

f elds are brown f elds 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, simplif cation 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 Indonesia’s national oil production comes from

mature f elds in the West of the archipelago, and therefore Lemigas has

worked extensively with Chevron Pacif c 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 f ooding [Chevron’s EOR program on their

giant f eld 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 f elds and the

industry has been spurred on by the Abadi f eld discovery by INPEX on

the Masela block, echoing its giant gas f eld 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 f rst f oating LNG plant in the world. International

companies with substantial means and technological expertise therefore

still have much to gain from Indonesia’s sizeable dowry.

Eastern Promise

An alternative way of looking on the world’s largest archipelago is to

see it instead as the largest maritime nation and although Indonesia’s

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-

try’s upstream industry:

“Oil and gas companies should note that

there are currently three major paradigm shifts

occurring in Indonesia’s oil and gas industry

which present new opportunities. The f rst is

the movement of production from the West,

where most of Indonesia’s 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


Picking the Hanging Fruit

Whilst offshore potential draws many of the larger companies, Jossy

Rachmantio, chief executive off cer of Mitra Energia, subsidiary of Lon-

don-listed junior, Sound Oil, sees a rich crop of onshore opportunities

emerging from Indonesia's past regulatory def ciencies 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 conf gure the bidding strategy to f lter 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 Rachmantio’s 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 Indonesia’s

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 Indonesia’s 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 Indonesia’s largest international producers

including Norwegian deepwater specialist, Statoil.

In 2012 Niko Resources is launching what is expected to be Indone-

sia’s largest ever offshore exploration program, having secured a rig

contract from Diamond Offshore for four years, the longest in Indo-

nesia’s 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

f eld discoveries on the Northwest Shelf of Australia and the nearby

f elds 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 off ces 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


can be found practically every type of hydrocarbon energy resource ever

lifted. Whilst Indonesia’s 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 f fth 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 world’s top coal

exporter and ranks 4th in terms of global coal reserves.

The country’s energy mix does not even stop with hydrocarbons.

Given Indonesia’s positioning on the world’s most geologically active

zone, “the ring of f re,” Indonesia is also endowed with 40% of the

world’s 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 f nally acknowledged the need to think

differently about Indonesia’s 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 f rst 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 Indonesia’s energy policy

is being redrafted. They are laying out a 2050 roadmap centered on

domestic energy security and diversif cation out of Indonesia’s tradi-

tional hydrocarbon paradigm. He explained:

“Indonesia needs to improve the eff ciency 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 signif cantly, especially geothermal, solar,

hydro, and bio fuel.”

The diversity of Indonesia’s 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 oil’s exportability have

become less signif cant. 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 Indonesia’s 2025

energy diversif cation strategy f ve 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 world’s 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


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 f nd. 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 off cial 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 geothermal’s capacity to provide 28,000

megawatts of power to the domestic market

including the 35 percent of Indonesia’s 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

prof tability for the sector. Given this greater

prof tability, Parker identif es 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 insuff cient gas

transportation infrastructure drives up opera-

Contributing to Indonesia’s 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


“Price is our best competitive advantage, we are very f exible on that

aspect because we can adapt to the needs of the companies. We always

try to know what their budget is and we f nd solutions to accommodate

it, such as f nding 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

Indonesia’s energy security. Legowo regards coal bed methane (CBM)

as especially interesting, stating that last year Indonesia launched its " rst

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 Indonesia’s future power supplies and

it tallies with Indonesia’s present political strategy of using energy in an

ef" cient 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 Indonesia’s " rst 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 “con" dent 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

Indonesia’s 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 pro" ts 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 pro" tability.

Soekoesen Soemarinda-

general manager SPC

Mahakam Hilir Pte.

Sammy Hamzah, president

& CEO Ephindo

1210ogfj_64 64 10/5/12 4:12 PM


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 signif cant 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 Indonesia’s 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,

Indonesia’s downstream regulator is therefore planning an extensive

program of downstream infrastructure projects under Indonesia’s Mas-

ter Plan – an economic plan launched by President Susilo Bambang Yud-

hoyono in 2011 for Indonesia’s economic development, f eshing out his

vision to make Indonesia a top ten economy by

2025. Sommeng mentions a couple of projects:

“Indonesia requires better ref neries and proj-

ects are underway to construct three new ref n-

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 Indonesia’s 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 Indonesia’s downstream market following the

market liberalization enshrined in the 2001 oil & gas law is Vopak, the

world’s 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

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Its managing director in Indonesia, Mark Noord-

hoek Hegt commented on Vopak’s 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 f ows in Indonesia. The logistic infrastructure has to

become more eff cient to service the downstream fuel market."

The World-Class Domestic Producer

Indonesia’s 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 Pertamina’s 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 Pertamina’s 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-

sia’s 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 Soemarno’s successor, who is globally

the " rst 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


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 Indonesia’s oil and gas construction association said that

he can “see a signif cant 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 Indonesia’s 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 fulf ll 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 Indonesia’s 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

regassif cation 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 Ref neries) 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

f eld on Indonesia’s 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 Kenny’s presence in Indonesia was f rst developed

thanks to their breakthrough project for BP’s 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 Inpex’s 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


Leaders of Indonesia’s oil and gas industry

recognize this need to go international indeed

R. Priyono, chairman of BP MIGAS, Indonesia’s

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 Indonesia’s future production and carries a great national

responsibility to explore and develop these f elds”, 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 Pertamina’s domestic role, taking it from having

25 percent rights to all new PSCs to having f rst 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


Suharto’s 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 Indonesia’s House of Repre-

sentatives stated: “Through the process of Indonesia’s democratiza-

tion new stakeholders have entered the fray, and they are demanding

their fair share of resources, benef ts 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 Indonesia’s 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-

nesia’s largest oil discovery of the past decade, the Banyu Urip f eld

on ExxonMobil’s 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

Indonesia’s most challenging projects with 70 percent CO2 content,

prompted Pertamina to seek international expertise f rst with Norway’s

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

Indonesia’s 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 f ve. 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 f rst

to run an in-f eld 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 f rst

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

Indonesia’s energy must be used for the maximum benef t 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


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 Indonesia’s energy focus will likely be directed inwards for

the coming years, there is at least one region which will keep its

eyes f xed 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 Indonesia’s national gas production, having occupied the

top spot since it began production in 1968, is French company, Total

E&P Indonésie. Total’s 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 f elds 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 conf dence to the investors

and provide attractive terms to promote the

development of f elds and exploration.

In the second half of the decade the

PSCs of several IOCs will expire, includ-

ing Total’s 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 company’s

ongoing priority is to maintain a high production level from this f eld

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 f nancial returns due to project

slippage.

Kuntoro Mangkusobroto, the head of the Presidential Delivery

Unit, the Indonesian equivalent of the White House’s West Wing, is

responsible for overseeing the progress of the countries’ national pri-

orities as implemented by the ministries, resolving bottlenecks and

managing the President’s 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 conf ict

Kuntoro Mangkusubroto,

head of Presidential

Delivery Unit

1210ogfj_72 72 10/5/12 4:13 PM


Like a well rehearsed understudy waiting in the wings, Batam has

always sought to share the limelight. McDermott f rst pioneered

investment in Batam back in 1970 and Scott Cummins, senior VP &

GM Asia Pacif c feels that Batam was instrumental in McDermott’s

expansion in the APAC region which now contributes USD 1.9

billion in revenues, over half of McDermott’s global turnover. He

described the benef ts of Batam:

“there are huge logistics savings brought through Indonesia’s

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 Pacif c (APAC) region.

In 2011, McDermott’s 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


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 client’s needs."

However, the export-led growth model

for Batam is under review. Indonesia’s 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, Batam’s 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


an inevitable back and forth which means that tenders take on aver-

age three to f ve months longer than before to complete. Weather-

ford’s 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 Chevron’s 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 f nd 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 f uid 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 signif cant growth in the services market. Chevron alone will

invest USD 7-8 billion in deepwater f elds Gehem and Gendalo, Inpex

is looking to invest USD 4.9 billion in its f oating 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 oilf eld

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 operator’s

ability to pass its risks onward.”

Measures such as the procurement regulations PTK007 introduced

over the last f ve years draw the most f re 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


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 f nancing and the smaller ones bring

the specif ed 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 diff cult for foreigners, instead of trying to be completely

autonomous, they need to build and use local networks f rst.”

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

diff cult to start up a new enterprise to the

detriment of local f rms and investors.”

Intsock: “Norwegian companies have com-

petencies that can be of great value here in

Indonesia. They can bring benef cial 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 Indonésie in Balikpa-

pan, French company, SPIE Oil and Gas was approached to provide

expertise and staff replacements. SPIE’s director in Indonesia, Samir

Abbes explains that the human resources challenge, was more acute

in Indonesia because of a growing respect for the country’s 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 f nd 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 signif cant 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


Final Perspectives

The mood in Indonesia’s 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 Indonesia’s 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 f eld 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 f nd 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 Indonesia’s largest training facility within the

next f ve years in order to support Indonesia’s 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 Indonesia’s higher

value niche industries such as geothermal and CBM.

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Samir Abbes, Spie Oil

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1210ogfj_77 77 10/5/12 4:13 PM

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