Gas Development Master PlanSteering Committee Meeting – 28 March 2013Draft Policy Note 2 : Impediment to Developing Gas Reserves

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Outline

• Overall gas balance

• Infrastructure as an impediment

• Other impediments

• CBM

• Fiscal terms

• Potential for subsea wells

• Recommendations

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Overall gas balance

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Overall gas balance 2012-25

0

2.000

4.000

6.000

8.000

10.000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

MM

SCFD

NERACA GAS BUMI INDONESIA 2012-2025

CONTRACTED DEMAND COMMITTED DEMAND POTENTIAL DEMAND EXISTING SUPPLY PROJECT SUPPLY POTENTIAL SUPPLY

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Infrastructure

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NAD region example – wrong operator, wrong technology, wrong fiscal terms

Jau field

(ENI)

• 200 bcf

• 600-650

m water

depth

• 45km

from NSO

platform

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The tendering process…

• Kepodang offshore field on the Muriah licence originally discovered in the 1980’s in 230 feet of water. The licence was taken over by Arco in 1999 who signed a memorandum of understanding with PLN for supply to the Tambak Lorok combined cycle power in Semarang The 1060MW Tambak Lorok power station was completed in 1998 and can run on diesel or gas

• Petronas of Malaysia took over the licence in 2005 and signed a gas sales agreement with PLN to supply 145 MMSCFD of gas for ten years. Petronas were intending to construct a 200km pipeline from the field to shore. However the private company Bakrie and Brothers had won the tender to construct a main pipeline from Kalimantan to Java.

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The tendering process…

• Bakrie successfully argued in 2009 that as the planned Kepodang line would run in parallel to the line and that they had the licence for that route that they, rather than Petronas should provide the offshore transportation of the gas and operate it as Phase 1 of their longer pipeline system. Eventually in 2012 an overall development plan was agreed which incorporated Petronas developing the field and Bakrie providing the offshore transportation.

• Petronas is developing the field at a total cost estimated as $545 million. Production is now planned to start in October 2014. Bakrie are constructing the pipeline at a cost of around $175 million.

• The project has effectively been delayed by three years due to the lack of resolution of the transportation issue. The Petronas production sharing agreement was to expire in 2021. As a consequence of this the government extended the production sharing agreement to 2025.

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Jawad Barah region – the cost of failure running Tampak Lorok 1000 MW on diesel

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Pertamina Gundih fields – a technical problem

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The technical problems

• Pertamina onshore gas development taking place which illustrates some of the technical problems in some Indonesian gas fields. Three fields are to be developed through a central processing plant (CPP) .

• However the fields contain around 21% carbon dioxide which is reduced to 15% once the fields are processed through the CPP. It is then required to inject the carbon dioxide in a suitable reservoir.

• Recent study indicated that one reservoir was not completed sealed and could result in carbon dioxide leakage. The other potential reservoir was of insufficient size to store the required amount of carbon dioxide. At this stage, therefore, there is no technical solution to the safe disposal of the carbon dioxide.

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Jawa Timur region – successful developments

• Access to pipeline infrastructure

• Large reserve basis

• Productive wells

• Access to large customer base

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Tirang Sirasun Batar

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BD Gas field development

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Kalimantan – supply shortage?

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Kalimanatan – the problem of contract expiry and new technology but CBM has a role

• The existing supply shows a very steep decline. However there is still significant potential for additional recovery in the existing Tunu field. However this additional recovery would require significant additional investment in new platforms and wells. As the licence expires in four years time, this will not allow recovery of this investment by the current owners.

• There is a huge potential through the development by Chevron of five gas fields in very depth water called the Indonesia Deepwater Development. The Bangka field in 3,200 feet of water would be tied back to the existing west Seno Floating Production Unit.

• There is significant potential in the longer term for coal bed methane (CBM) projects to be further developed in Kalimantan with initial production having started in 2011

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Mahakam licence…

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Chevron Deepwater Development

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CBM commitment wells

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CBM impediments

The main impediments to the successful development of an Indonesian CBM programme appear to be the following:

• An number of the blocks have been awarded to companies without the financial, technical or operational capacity to carry out the work programme commitments

• There is limited availability of purpose build CBM drilling rigs with conventional rigs being expensive to use and there is a shortage of coring and formation evaluation services

• Land use applications are slow to be resolved and access to some areas (such as forests) is difficult

• There is no dedicated government authority for CBM and the recent constitutional court ruling has further delayed the provision of such an authority

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Indonesian fiscal terms – the model field

• The field that is modelled is similar to the offshore Kepodang gas field currently being developed by Petronas in the Muriah block off Central Java.

• The hypothetical field is around 180 km from shore and is in water depths of 70 metres and has reserves of 400 bcf.

• The field has a central processing platform and wellhead platform.

• Total capital investment including exploration is $645 million

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Profit sharing

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Government take comparison

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Subsea wells

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Policy Recommendations

• The continued delay in the completion of the Kalimantan-Java pipeline has contributed to a gas shortage in Java. It has also prevented the development of fields on the route of the pipeline meaning that expensive oil rather than gas has been used in a major power plant. The Government should undertake an immediate investigation into the failure of the tender process in getting this pipeline constructed.

• The Government has failed to develop a workable policy on how to deal with contract expiries. As Indonesia was the first country to use PSC arrangements it is not surprising, therefore, that it is the first country to have to deal with their expiry. The failure of the Government to deal with this issue has led directly to a reduction in development with a resultant reduction in gas production. Resolution of this issue should be an immediate requirement of the Government

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Policy Recommendations

• The major companies are particularly strong in delivering complex massive developments. However they are weak in developing smaller incremental reserves adjacent to their major developments. The Government should consider re-licensing undeveloped discoveries to independent international companies as well as to local companies with sufficient technical and financial resources.

• There appears to be a lack of use in modern technology such as subsea wells in Indonesia. The Government should consider setting up a specific technical institute to support the development of this type of work.

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Policy Recommendations

• Although in general the Consultant has found that Indonesian fiscal terms are regionally competitive it should consider where appropriate in offering better terms for particularly difficult projects such as those involving gas with a high CO2 content.

• The Consultant is proposing that a dedicated Government authority for CBM be set up both to support this emerging industry but also to resolve development issues