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Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 1
© Chris Newton, 28 March 2017
The Indonesian Upstream Oil and
Gas Business
Trends, Insights, Challenges & Opportunities
© Chris Newton, 28 March 20172
Todays Discussion
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 2
© Chris Newton, 28 March 20173
Indonesian Energy Overview
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
© Chris Newton, 28 March 2017
Indonesian energy facts
4
Indonesia, a former founding OPEC member, became a net oil importer in 2004 and will potentially become a net gas importer in the early 2020’s.
Massive coal exports means Indonesia remains a net energy exporter in energy terms but not in financial terms.
Key statistics:
» World’s largest coal exporter.
» World’s fifth largest LNG exporter after 3 decades as the world’s largest before being replaced by Qatar in 2006.
» World’s largest bio fuel producer
» Largest regional (SE Asian) gas producer and exporter.
» Second largest regional oil / products importer.
IEA Synopsis
• Amid dwindling oil and gas reserves and production, a lack of exploration, and ageing refineries, Indonesia is increasingly dependent on imported oil supplies and has become the second-largest oil importer in the region.
• The country is faced with a considerable bill to finance still subsidised end-consumer prices, which are a legacy of its times as a net oil exporter and political failure.
• Indonesia’s economic success, rising living standards, population growth and rapid urbanisation have increased energy consumption rapidly. IEA projections predict this trend to continue. Hence, energy security and meeting expected energy demand growth are the key challenges for Indonesia’s energy policy.
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 3
© Chris Newton, 28 March 2017
National Energy Plan sees energy demand more than doubling between 2013 and 2025
5
NEP-14 planning basics
• Planning horizon:
» 2025 and 2050
• Economy:
» Declining population growth, strong rise in GDP/capita
• Scenarios. Two:
» Business as usual (BAU)
» Efficiency.
• Main differences. Efficiency scenario has:
» Stronger reductions in energy elasticity and intensity driving lower consumption.
» Much greater uptake of renewables, particularly biofuels.
Source: MIGAS NEP14, Risco Energy analysis
Primary Energy Consumption
© Chris Newton, 28 March 20176
The Changing Role of Oil & Gas in the Economy
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 4
© Chris Newton, 28 March 2017|
As the Indonesian economy has grown the role of oil & gas has fallen, exacerbated by declining investment attractiveness & recent oil price falls
7
Oil and Gas Contribution to National Economy Oil and Gas Contribution to State Revenue
Source: Statistics Indonesia, BKPM, BP Statistical, skkmigas
© Chris Newton, 28 March 2017
Production is now gas dominated
8
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
KB
OE
PD
Series1 Series2
Oil and Gas Production
Source: skkmigas
Oil Gas
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 5
© Chris Newton, 28 March 2017
Indonesia is a substantial net oil importer
9
0
250
500
750
1,000
1,250
1,500
1,750
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
KB
OP
D
Indonesian Oil Production & Consumption
Production Consumption
Source: skkmigas
© Chris Newton, 28 March 2017
Domestic gas sales now 60% of total sales
10
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
MMscfd
Gas Production and Utilization
Domestic Pipeline Gas Domestic LNG (TBTUD) LNG Export
Pipeline Export Losses & Own Use
Source: MIGAS
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 6
© Chris Newton, 28 March 2017
2016 gas utilization trends
11
Export LNG29.36%
Export Pipeline Gas
11.55%
Domestic LNG6.17%
Industry21.92%
Electricity14.61%
Fertilizer9.58%
Petrochemical1.34%
LPG2.58%
Oil Lifting2.79%
City Gas0.04%
Transportation0.05%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2012 2013 2014 2015 2016
MM
scfd
Power Fertilizer
Petrochemical Other Industry
2016 Gas Utilization2012 - 2016
Domestic Gas Utilization Trends
Total = 6,989 BBTUD Total Domestic = 4,130 BBTUD (59.1%)
Source: MIGAS
© Chris Newton, 28 March 2017
Rising domestic demand potentially sees Indonesia become a net gas importer in the early 2020’s
12
Gas Supply and Domestic Demand Scenarios
Source: MIGAS, Risco Energy Analysis, Pertamina
0
2,000
4,000
6,000
8,000
10,000
12,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
MM
scfd
Existing Supply New Supply (Low)
New Supply (High) Domestic Demand (BaU Case)
Domestic Demand (Efficiency Case)
ExportsExports
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 7
© Chris Newton, 28 March 2017
Combined oil and gas production outlook
13
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
500
1000
1500
2000
2500
3000
3500
195
0
195
3
195
6
195
9
196
2
196
5
196
8
197
1
197
4
197
7
198
0
198
3
198
6
198
9
199
2
199
5
199
8
200
1
200
4
200
7
201
0
201
3
201
6
201
9
202
2
202
5
202
8
203
1
203
4
203
7
204
0
% G
as
KBOE
PD
Gas Oil Oil & Gas % Gas
Domestic Oil and Gas Production History & Outlook (From Existing Discoveries)
Source: skkmigas
© Chris Newton, 28 March 2017
Imports put the trade account under pressure
14
Oil & Gas Exports and Imports
US$ - RP Exchange Rate
Source: Bank Indonesia, MoF. Statistics Indonesia
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 8
© Chris Newton, 28 March 2017
Policy changes and lower oil price means lower energy subsidies
15
0
20
40
60
80
100
120
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Indo
nesi
an C
rude
Pric
e (U
S$/
Bbl
)
Sub
sidy
(U
S$
Bill
ions
)
Fuel Electricity ICP
Energy Subsidies
Source: Bank Indonesia, MoF. MIGAS
LPG now the main subsidised fuel although many x-subsidies remain
© Chris Newton, 28 March 201716
Major Upstream Trends
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 9
© Chris Newton, 28 March 2017
Licensing activity has fallen to historic lows as investors shun new blocks
17
Energy Subsidies
0
10
20
30
40
50
60
1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Nu
mb
er o
f B
lock
s
Indonesian Upstream Licensing Activity
KSOShaleCBMPertamina CC'sSCPSCJOBExtensionEORTAC
Source: MIGAS, Risco Energy Analysis
© Chris Newton, 28 March 2017
Number of active blocks is in decline and will contunue
18
5976 79 80
110132 141 155
172 179 187 183 170143
110
5154 57 59
59
6467
7375 75
79 8084
85
85
0
50
100
150
200
250
300
350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Number of Blocks
Active Blocks At Year End
Conventional Exploration Blocks Exploitation Blocks Non Conventional Blocks
Current
Source: skkmigas
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 10
© Chris Newton, 28 March 2017
Exploration activity and investment, the industry’s future, at decade lows
19
0
20
40
60
80
100
120
0
10,000
20,000
30,000
40,000
50,000
60,000
Wells Drilled
2D Line Km and 3D Km2 &
Exploration Expen
diture ($M x10)
Exploration Activity Vs Expenditure
2D Km 3D Km2 Wildcat Wells Appraisal Wells Exploration Expenditures (X10)
Source: skkmigas, Risco Energy Analysis
© Chris Newton, 28 March 2017
Development drilling is at 30 years lows
20
0
20
40
60
80
100
120
140
160
180
200
0
200
400
600
800
1,000
1,200
1,400
Exploration W
ells Drilled,O
il Price
& Active Exploration Blocks
Dev
elo
pm
ent
Wel
ls D
rill
ed
Exploration and Development Wells Drilled
Development Wells E&A (Conventional) Wells (Conventional)
ICP US$/ bbl Active Conventional Exploration PSC's
Source: skkmigas, Risco Energy Analysis
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 11
© Chris Newton, 28 March 2017
Indonesian exploration continues to under perform and is loosing global capital allocation share
21Source: Wood Mackenzie, Indonesian Petroleum Association
© Chris Newton, 28 March 2017
Both oil and gas reserves and resources are in decline. Proven gas nearly 5x proven oil
22
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1980 1985 1990 1995 2000 2005 2010 2015
Billions of Barrels
Oil & Condensate Reserve & Resource History
Proven Potential
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1980 1985 1990 1995 2000 2005 2010 2015
Billions BOE
Gas Reserve & Resource History
Proven Potential
Source: skkmigas, MIGAS
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 12
© Chris Newton, 28 March 2017
New developments declining, getting smaller and are gas dominated
23
0
500
1000
1500
2000
2500
3000
3500
4000
0
20
40
60
80
100
120
140
160
2003 2005 2007 2009 2011 2013 2015
Total A
dditions (M
MBOE)
Average Size (M
MBOE) & % Gas
New Development Approvals
Total Reserve Additions Average Size % Gas
Source: skkmigas,
© Chris Newton, 28 March 2017
1H 2016 new development statistics
24
1H 2016 Development Approvals
New POD's Approved Number 18Oil Reserves MMboe 45Gas Reserves MMboe 45Total Reserves MMboe 90Average Size MMboe 5.0Total Capital Investment US$M $1,500.0Average Investment US$ / Boe $16.64
Source: skkmigas, Risco Energy Analysis
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 13
© Chris Newton, 28 March 2017
Top 10 of 57 producing blocks responsible for 85% of oil production
25
0 50,000 100,000 150,000 200,000 250,000 300,000
37 Other BlocksPertamina - P. China Tuban
Citic SeramSaka Pangkah
Petrogas SalawatiMedco South Sumatra
Pertamina - Medco TomoriPertamina West Madura
Medco RimauBSP Central Sumatra
Petrochina JabungVico East Kal
Petronas KetapangConoco Phillips South Sumatra
Cevron NatunaCNOOC SE Sumatra
Pertamina ONWJTotal East KalPertamina EP
Exxon - Pertamina CepuCaltex Sumatra
BOPD
Oil Production By Block
Source: skkmigas,
© Chris Newton, 28 March 2017
Top 10 of 54 producing blocks responsible for 81% of gas production
26
0 200 400 600 800 1000 1200 1400 1600 1800
34 Other Blocks
Santos Madura
Medco Lematang
Santoa Sampang
Mubadela ‐ Ruby
Pertamina ‐ Talisman Jambi Merang
Petronas Muriah
Chevron Natuna
Pertamina West Madura
Pertamina NSO/ NSB
CNOOC SE Sumatra
Pertamina ONWJ
Vico East Kal
EMP Kangean
Premier Natuna
Petrochina Jabung
Pertamina ‐ Medco Tomori
Conoco Philips South Sumatra
Pertamina EP
BP Tangguh
Total Mahakam
MMscfd
Gas Production by Block
Source: skkmigas,
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 14
© Chris Newton, 28 March 2017
Oil price fall exacerbated by ICP – Brent differential increase
27
Brent and ICP Prices and Differentials
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Diff
eren
tial (
ICP
-Bre
nt)
US
$/B
bl
Brent and ICP (US$/ Bbl)
ICP Dated Brent ICP-Brent
Dis
cou
nt
Pre
miu
m
Source: MIGAS
© Chris Newton, 28 March 2017
Falling oil prices have narrowed the gap between domestic and export gas and LNG prices
28
0
20
40
60
80
100
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ICP
(U
S$
/ BB
L)
US
$/ M
Mbt
u
Indonesian Gas Price Trends
Domestic Pipeline Export Pipeline Domestic LNG Export LNG ICP
Source: skkmigas,
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 15
© Chris Newton, 28 March 2017
Declining investment plus cost cutting now driving down total expenditure
29
0
500
1000
1500
2000
2500
3000
3500
-
5,000
10,000
15,000
20,000
25,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Production (KBOEPD)
Exp
endi
ture
(U
S$
Mill
ions
)
Expenditure by Production Sharing Contractors
Exploration Development Production Administration Production
Source: skkmigas, Risco Energy Analysis
© Chris Newton, 28 March 2017
Government and contractor revenues have plummeted with oil prices
30
20
40
60
80
100
120
0
10
20
30
40
50
60
70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ICP
(U
S$
/ B
bl)
Ree
nue
(US
$ B
illio
ns)
Oil Prices and Revenue Split
Cost Recovery (CR) Net Contractor Share Indonesia Share Gross Revenue (GR) ICP
Source: skkmigas, Risco Energy Analysis
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 16
© Chris Newton, 28 March 2017
With cost largely fixed and revenue falling, cost recovery has become a political polemic
31
0
10
20
30
40
50
60
70
0%
10%
20%
30%
40%
50%
60%
70%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Gro
ss &
Ind
ones
ia R
eve
nue
(U
S$
Bill
ions
)
Rev
enue
Spl
it
Revenue Split
Gross Revenue (GR) Indonesia Share
Cost Recovery % of GR Contractor Share (post CR)
Indonesia Share / Gross RevenueSource: skkmigas, Risco Energy Analysis
© Chris Newton, 28 March 2017
2016 cost recovery by 15 largest producers
32
$9.4
$11.6
$16.1
$19.5
$19.8
$22.0
$22.0
$23.6
$26.6
$28.0
$30.2
$30.4
$31.9
$34.4
$36.0
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00
Exxon Cepu
COPI Corridor
Total Mahakan
Petrochina Jabung
Premier Natuna
Pertamina EP
Vico Sang Sanga
Caltex Rokan
Pertamina ONWJ
CNOOC SES
Chevron East Kal
EMP Kangean
Petronas Ketapang
Pertamina Madura
COPI Natuna
Cost Recovery (US$/ Boe sales)
2016 Cost Recovery /BOE for 15 Largest Producers
2016 Weighted AverageUS$18.26 / boe
Source: skkmigas,
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 17
© Chris Newton, 28 March 201733
Expiring PSC’s
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
© Chris Newton, 28 March 2017
PSC’s expire after their 20 year production period and there is no automatic extension right
34
Indonesian PSC’s have a 10 year exploration period and a 20 year exploitation period. PSC’ that went into production in the 1970 and 1980’s started to expire in the 1990’s The production sharing contract gives contractors no automatic right of extension. In the 1990’s as the first blocks expired most were renewed on favourable terms. As resource nationalism increased and the value in the expiring PSC’s was
recognised, government came under pressure to change the policy. A period of political indecision and uncertainty followed that drove under investment
in expiring blocks. New regulations now make it clear that the NOC, Pertamina, will have priority access
to expiring blocks. This is consistent with Pertamina strategy to add reserves, production, cashflow and
capability at home. These producing PSC’s are the lowest cost acquisitions Pertamina can make. New policy consistent with government policy for energy security and energy
independence. The key issues for Pertamina and GoI is that there is now no incentive for contractors
to maintain investment in expiring PSC and “blow down” becomes the best strategy for contractors.
The new Gross Split terms also do nothing to stimulation exploration investment.
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 18
© Chris Newton, 28 March 2017
Over the next decade 35 PSC’s will expire currently producing over 1.0 MMstboe/d
35
Indonesian Production by PSC Expiry
34 Blocks expiring between 2017 and 2025
• 2017 – 3 blocks• 2018 – 9 blocks• 2019 – 4 blocks• 2020 – 6 blocks
Source: Wood Mackenzie
© Chris Newton, 28 March 2017
The blocks expiring pre 2025 currently hold over 4 billion boe’s of producing reserves
36
0
200
400
600
800
1,000
1,200
Ge
ban
g (
JOB
-PN
/Cos
ta)
ON
WJ
(Per
tam
ina)
Ma
ha
kam
(T
ota
l)
Lem
ata
ng
(M
edc
o)
Tu
ban
(JO
B-P
N/P
etr
oC
hin
a)
Og
an
Ko
mer
ing
(JO
B-P
N/T
alis
man
)
Sa
nga
-sa
nga
(V
ico
)
SE
S (
CN
OO
C)
B B
lock
(E
xxo
nM
obi
l)
Te
nga
h (T
ota
l)
Att
aka
(C
hevr
on
)
No
rth
Su
ma
tra
Offs
hor
e (
XO
M)
Ea
st K
alim
an
tan
(C
he
vro
n)
Jam
bi M
era
ng (
JOB
-PN
/Tal
ism
an)
Ra
ja P
en
dop
o (J
OB
-PN
/Go
lde
n S
pike
)
Se
ram
No
n B
ula
(C
ITIC
)
Bu
la (
Ka
lrez)
So
uth
Ja
mbi
B (
CoP
i)
Ma
kasa
r S
tra
it A
(C
he
vro
n)
Bra
nta
s (L
api
ndo
)
Sal
aw
ati (
JOB
-PN
/Pet
roC
hina
)
Ma
lacc
a S
trai
t (E
MP
)
Sa
law
ati
Ke
pa
la B
uru
ng
(P
etr
oC
hin
a)
Ro
kan
(C
hevr
on)
Ben
tu (
EM
P)
Se
lat
Pa
nja
ng (
Su
gih
)
Tra
raka
n (
Me
dco
)
CP
P (
PH
E-B
SP
)
Tu
ngka
l (M
on
tD'o
r)
Se
ngka
ng
(E
nerg
y E
qu
ity)
Jab
ung
(P
etr
oC
hin
a)
Rim
au
(M
edc
o)
Co
rrid
or
(Co
noco
Ph
illip
s)
Ba
ngko
(P
etr
oChi
na)
Mu
ria
h (P
etr
ona
s)
2P R
eser
ves,
MM
BO
E 2nd Ext
1at Ext
2015 2017 2018 2019 2020 2022 2023 20252021
PSC Expiring Pre 2025 and 2015 Reserves
Source: skkmigas, Risco Energy Analysis
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 19
© Chris Newton, 28 March 2017
Current value in PSC’s expiring over the next decade exceeds US$10 billion
37
Current Value in Expiring PSC’s
ONWJMahakam
SESSanga Sanga
Rokan
JambiMerang
Makassar
Muriah
CorridorJabung
Pangkah
Sengkang
Source: Wood Mackenzie
© Chris Newton, 28 March 2017
Status of PSC expiries to date
38
Pertamina Priorities
• Material reserves, production and cashflow
• Operating capability• Growth• Synergies with existing
operations
Less Attractive
• Lacks materiality• Cashflow negative
/development Capex• Limited development
capability• No clear synergies
Source: skkmigas, Petromindo, Risco Energy Analysis
Block Partners Expiry StatusDate Oil (KBOPD) Gas (KBOEPD)
ONWJ Pertamina
EMP
Kufpec
Jan‐17 36 26 Awarded 100% to Pertamina.
Other JV partners could negotiate with
Pertamina on a B2B basis.
First Gross Split PSC
Parners unlikely to participate
Mahakam Total
Inpex
Dec‐17 63 285 Awarded 100% to Pertamina.
Other JV partners could negotiate with
Pertamina on a B2B basis.
Transition arangements and Pertamina pre
investing
Parners unlikely to participate
Lematang Medco Apr‐17 11 Awarded to Medco
Lack materiality for Pertamina
Sanga Sanga BP eta al Aug‐18 15 39 BP, major shareholder and operator sold out
to PGN in 2017
PGN Ppsitioning for PSC extension
Aceh Block B and
NSO
Exxon Oct‐18 19 Exxon sold out to Pertamina in 2015
Sanga Sanga &
East Kalimantan
Saka and
Chevron
Aug 18
& Oct 18
15 & 19 39 & 83 To be awarded to Pertamina and integrated
with Mahakan Block Operations
Tuban, SES, Ogan
Komering, NSO
block, Attaka &
Tengah.
Petro
China,
CNOOC,
Chevron,
Pertamina
2017 ‐
2018
> 30 >150 To be awarded to Pertamina
2016 Production
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 20
© Chris Newton, 28 March 201739
M&A Trends
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
© Chris Newton, 28 March 2017
Upstream M&A activity remains subdued
40
0
5
10
15
20
25
30
35
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Nu
mb
er in
Yea
r
Assets Changing Ownership
Number of Deals
Transactions Involving Indonesian Oil & Gas ReservesAnnual Deal and Asset Frequency
Source: Chris Newton Indonesian M&A Transactions Database
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 21
© Chris Newton, 28 March 2017
Volumes transacted remain gas dominated
41
0%
20%
40%
60%
80%
100%
0
500
1,000
1,500
2,000
2,500
3,000
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
% G
as in
Tra
nsac
ted
BO
E's
(3
year
mov
ing
aver
age)
MM
BO
E's
Tra
nsa
cted
Indonesian Oil and Gas 2P Reserves Transacted
Oil & Condensate (MMSTB) Gas (BOE) %Gas
© Chris Newton, 28 March 2017
Aggregate transaction values off 2015 lows
42
0.0
20.0
40.0
60.0
80.0
100.0
120.0
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Dat
ed B
rent
oil
Pric
e (U
S$/
BB
l)
US
$ M
illio
ns
Annual Aggregate Transaction Values
Dated Brent
Source: Chris Newton Indonesian M&A Transactions Database
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 22
© Chris Newton, 28 March 2017
Transaction metrics driven by oil prices and asset life cycle
43
$0
$20
$40
$60
$80
$100
$120
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
$10.0
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Bre
nt
US
$ / B
bl
US
$ 2P
/ B
OE
Weighted Average Annual Tranaction Metrics US$/2P BOE
US$/2P Boe Oil Price ($/Bbl)Source: Chris Newton Indonesian M&A Transactions Database
© Chris Newton, 28 March 2017
Asian and local companies the dominant acquirers
44
0%
20%
40%
60%
80%
100%
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
% o
f Tot
al D
eals
by
Asi
an a
nd L
ocal
Acq
uire
rs
Indonesian Transactions by Acquirer
Asian Acquirers (Includes Local) Local Acquirers
Source: Chris Newton Indonesian M&A Transactions Database
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 23
© Chris Newton, 28 March 2017
Existing industry participants are dominating the M&A market
45
0%
20%
40%
60%
80%
100%
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
% of Total Indonesian Acquisitions by New Entrants
Source: Chris Newton Indonesian M&A Transactions Database
© Chris Newton, 28 March 2017
Buyers geographically concentrated while internationals exiting
46
Major5% Foreign NOC
6%
IOC7%
NA Indi5%
Eur Indi7%
Regional Oil & Gas Co
21%
Local Company (Includes
NOC)49%
Acquirers - 2010-2016
Major7%
Foreign NOC5%
IOC12%
NA Indi11%
Eur Indi16%
Regional Oil & Gas Co
21%
Other5%
Local Company (Includes
NOC)23%
Sellers - 2010-2016
Source: Chris Newton Indonesian M&A Transactions Database
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 24
© Chris Newton, 28 March 2017
Oil-gas mix and development status are key value drives next to margins and upside
47Source: Chris Newton Indonesian M&A Transactions Database
Indonesian 2P/ BOE Transaction Values by Product Type and Asset Maturity(2010- 2016
© Chris Newton, 28 March 201748
Fiscal & Regulatory Changes
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 25
© Chris Newton, 28 March 2017
Lack of regulatory clarity, consistency & certainty remains an impediment to investment
49
Key recent regulator changes
Introduction of Gross Split PSC
• An effective “Tax-Royalty” regime with no cost recovery to replace PSC in expiring and new blocks.
Multiply changes to Domestic Gas Pricing Policy
• With falling oil prices and infrastructure constraints, gas has become less competitive and government is trying to increase gas affordability.
Changes to abandonment / restoration obligations
• Old contracts have no abandonment obligations as the State owns the assets. Retrospective changes to old PSC’s being drafted.
Changes to GR79 (2010) on cost recovery and other taxes
• Changes planned as GoI recognizes tax impositions impeding investment. • MoF remains the problem, and changes likely to dissapoint.
Pending New Oil & Gas Law
• Long awaited and now being drafted by parliament for promulgation in 2018. Needs to balance populism, contract sanctity and need for foreign investment.
© Chris Newton, 28 March 2017
The gross split PSC terms are applicable to new contracts and contract extensions
50
Changes Investor Pros Investor Cons
• Cost recovery and production sharing replaced by what is effectively a regressive tax royalty regime.
• Base revenue split to Contractor is Oil 43% and Gas 48%.
• Incremental additional splits of up to 16% available based on field costs / complexity.
• Incremental split based on oil price realisations. +/- 7.5% based on oil price above of below base of US$70-85 / bbl
• No cost recovery could mean lighter handed regulation and greater contracting flexibility leading to lower cost structure
• Potentially greater operating and procurement flexibility will drive efficiency and lower costs
• Greater incentive for cost effectiveness.
• Terms adjust with oil price• DMO oil priced at market.• 20-30% cost savings for
offshore oil exploration potentially improve full cycle exploration economics
• Regressive fiscal system that taxes revenue and not profits.
• High “royalty rate” means contractors have to lower cost structure in existing producing assets by 30% to achieve the same outcome as existing fiscal terms.
• Tax royalty regime where there remains material uncertainty on a host of tax issues
• Increased fiscal deterrence means more fields will remain undeveloped.
• Onshore and Deepwater exploration unattractive even with deep costs cuts as revenue share and payouttimes just too long.
• Is a regulatory shift from micro management to light handed regulation achievable!
Terms very unlikely to attract investors or stimulate reinvestment in expiring PSC’s
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
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Domestic gas pricing controls increased and are way short of the market driven pricing necessary to promote supply
51
Changes Investor Pros Investor Cons
Presidential decree 40/ 2016• Adjusted priorities for gas
allocation into downstream value add such as fertilizer, petrochemicals and steel.
• Cap gas price a US$6.0 MMbtu for priority industries by adjusting government share and keeping contractors whole
• Improved competitiveness of domestic gas should drive demand
• Implementation uncertainty and complexity frustrating all participants
• Not always achievable• Investors are not being left whole• Erosion of the value of a long term
GSA given ministerial price ”reviews”
• MEMR regulation 11/2017• Regulates domestic gas and
LNG prices for power generation, prioritises domestic gas over imports and regulates when and how imports can be done
• Move towards oil price indexation
• Increasingly linkage of domestic markets to international markets
• Gas price can exceed caps if import prices higher than 11.5% FOB
• Gas price capped at 8.5% of ICP at wellhead or 11.5% of ICP at plant.
• Pipeline gas price discount vs domestic LNG
• Gas prices always capped at a regulated return on individual field development economics
Unnecessarily complex, bureaucratic & prejudicial to domestic pipeline gas vs domestic LNG but ultimately exposes domestic market to international prices
© Chris Newton, 28 March 201752
Upstream Opportunities and Challenges
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
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© Chris Newton, 28 March 2017
Multiple opportunities for those with the skills, insight, patience and relationships to manage the challenges.
53
Opportunities Challenges
• Upstream oil and gas supply imperative to support economic growth, energy security and energy independence.
• Mid and downstream infrastructure investment for petroleum product, crude gas / LNG import, storage, transmission, processing & distribution.
• Growing demand for CNG and LNG infrastructure in transportation sector to replace imported petroleum products.
• Funding of undercapitalised local and regional companies, with good assets.
• Counter cyclical upstream investment leveraging declining service sector costs and diminishing buy-sell spread in M&A.
• Massive investment needs for gas in power generation and crude oil refining.
• Low cost operators to exploit late life production and opportunities with new gross split PSC’s
• Low cost abandonment specialists
• Investing with a government that recognises the necessity of enhanced investment competitiveness while often doing the opposite in the face of competing priorities around short term revenue needs and resource nationalism.
• Pervasive regulatory uncertainty and more to come until new oil and gas law and regulations finalised .
• Poor coordination between Ministries regulating oil and gas activities.
• Navigating the over regulated domestic gas market problems while positioning for international gas market convergence.
• Downward pressure on gas prices, even in signed contracts.
• Will upstream regulator really relinquish command and control and micro management mind set for promised flexibility and efficiency in new fiscal regime?
© Chris Newton, 28 March 201754
The Downstream
Energy Overview
The Changing Role of Oil & Gas in the Economy
Major Upstream Trends
Expiring PSC and implications for all stakeholders
M&A Trends
Fiscal and Regulatory Changes
Upstream Opportunities and Challenges
The Downstream
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 28
© Chris Newton, 28 March 201755
0
200
400
600
800
1,000
1,200
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Mst
b/d
Kl *
100
0
Consumption by Fuel & Total Imports
Gasoline Automotive Diesel Kerosene Fuel OilIndustrial Diesel Aviaton LPG Total Imports
With 50% of petroleum product consumption imported there is a strong desire for additional refining capacity and storage
Source: MIGAS
Petroleum product consumption falling after subsidy removal eliminates smuggling incentive
© Chris Newton, 28 March 201756
Downstream petroleum investment requirements
Operational Storage
• Increase operational storage to 30 days from current 22 days
• Products, LPG and crude oil storage investment needed
• US$8 billion needed asap
Energy Buffer Reserve
• Add 30 day reserve buffer from zero currently to enhance supply security
• Products, LPG and crude oil storage investment needed
• US$9 billion needed by 2025
Additional Oil Refining Capacity
• Petroleum products consumption >2x current refining capacity
• Additional 1.2 Million bopd refining capacity• 2 new grass roots
mega refineries• Expansion of excising
5 refineries• New mini refineries• US$20 + billion
Source: Migas, Synergy, QEnergy
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 29
© Chris Newton, 28 March 201757
Gas infrastructure road map sees US$48 billion investment needed by 2030
Total Investment NeedsPipelines
12.0Liquifaction
26.0CNG2.0 Total
US$ 48.7BillionRegas
6.1Distribution
2.2LPG0.4
Source: MIGAS
© Chris Newton, 28 March 201758
Cumulative Infrastructure Investment Requirement (2016 – 2030)
Gas infrastructure road map detailed requirements
Source: MIGAS
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
© Chris Newton, March 2017, Singapore 30
© Chris Newton, 28 March 2017
Backup
Where are we in the Oil Price Cycle?
© Chris Newton, 28 March 201760
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
Cha
nge
from
sta
rt o
f pric
e co
llaps
e
Months from Start of Price Collapse
Brent Oil Price Cycles 1986, 1997, 2008, 2014-16
1986-1988 1997-2000 2008-2011 2014-2016
We are 32 months into a major supply side shock
Cycle Supply Side
Shock
Supply Side
Shock
DemandSide
Shock(AFC)
DemandSide
Shock(GFC)
Source: EIA, Risco Energy
Indonesian Oil & Gas Industry Trends, Insights, Opportunities & Challenges
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© Chris Newton, 28 March 2017