Some $10 billion worth of potential upstream oil and gas output is at risk in Indonesia with 35 production-sharing contracts (PSCs) set to expire in the next decade.
“The lack of clarity on extensions, and the scale of production at risk, make expiring PSCs one of the biggest issues facing Indonesia’s upstream sector,” energy research company Wood Mackenzie said in its latest report Indonesia’s Expiring PSCs: $10 Billion Of Potential Upstream Value.
As I wrote earlier this year, Indonesian NOC Pertamina is unashamedly targeting many of the expiring legacy production contracts largely operated by the IOCs in an effort to boost its domestic output. The 35 expiring PSCs make up over 1 million barrels of oil equivalent per day (boe/d) of output says Wood Mackenzie.France’s Total and Japan’s Inpex, as well as US companies Chevron, Talisman and ExxonMobil all have blocks expiring in the next five years.
To help meet its long-term production target, Pertamina has set its sights on the expiring contracts. This is largely because they will be the cheapest barrels the company will ever produce, but also because they are generally the easiest to operate.
“Assets such as Offshore Mahakam, Corridor and Jabung would be of interest to Pertamina as these are material gas exporting projects with exposure to LNG and piped gas contracts,” Alex Siow, an Indonesian upstream specialist at Wood Mackenzie said.
The ConocoPhillips-operated Corridor and PetroChina-led Jabung Blocks connect to the lucrative Singapore and West Java markets, while the Total-operated Offshore Mahakam supplies LNG through the fully depreciated Bontang export plant.
But the future of PSCs remains unclear under a new oil and gas law being drafted by the government creating significant uncertainty for investors. Some 27 PSCs are due to expire over the next five years, representing 30% of Indonesia’s total production. Pertamina will receive first right of refusal on the blocks as the law aims to tighten the state’s grip on the upstream sector, much to the chagrin of the IOCs.
Still there will be opportunities for a variety of players, from experienced domestic players to new start-ups with new strategies, reckons Wood Mackenzie.
Given its financial and technical constraints, Pertamina could take on operatorship in cooperation with service companies. Taking up minority interests in more technically challenging projects will also allow it to develop the skills needed for its own assets as they near end-of-life, noted Siow.
Pertamina wants strategic partners that can help finance new projects and transfer knowledge, a spokesperson at the NOC told me. But the source added the company is working to strict timelines. “We don’t like to be delayed and we don’t want too many demands, just a quick final negotiation with potential partners as we need to focus on the job in the field, which is increasing production.”
Liquids production in the net-oil importer is expected to fall to a new low of 780,000 boe/d this year, down from some 1.5 million boe/d in the mid-90s. With only a handful of new development projects in the pipeline, the Opec-member is in dire need of fresh investment to avoid a looming energy crunch. Analysts estimate the country will have a supply shortfall of 2.5 million boe/d in 2025.
The expiring licences offer a vital opportunity that if used properly, can serve to revitalise the corporate landscape and inject a fresh lease of life into many of the blocks, said Wood Mackenzie. However, the Energy Ministry, upstream regulator SKK Migas and Pertamina will need to align to ensure the continued survival of the exploration and production industry in Indonesia, warned the energy research company.
But the government will also need to temper rising resource nationalism and urgently finalise the new oil and gas law, otherwise investors will continue to look elsewhere.
Source: Forbes