STRIVING for a COMEBACK PAGE 20 INDONESIA APRIL 2016 Acknowledgements

BLUEPRINT FOR THE NEW PERTAMINA page 8 MINI-LNG: PLAYGROUND FOR INNOVATION page 42 FORTHCOMING SHALE BOOM? page 38

STRIVING FOR A COMEBACK PAGE 20 INDONESIA APRIL 2016 Acknowledgements

Energy Boardroom would like to thank:

Dr Subroto, Founder and President of BIMASENA Wianda Pusponegoro, VP Corporate Communications, Pertamina M.I. Zikrullah, Deputy Chairman of SKK Migas Pandri Prabono-Moelyo, Commissioner of Indika Energy Satya Widya Yudha – Vice Chairman of Commission VII Craig Stewart, President of Indonesian Petroleum Association (IPA) Akbar Rivai, Director of Sagatrade Murni Bambang Widarsono, Director of Lemigas

As well as all the companies we have met for their steadfast support, assistance and enthusiasm. IINDONESIA OIL & GAS Blueprint for the new pertamina Interview 8 CONTENTS —April 2016 2 ACKNOWLEDGEMENTS 5 PREFACE 6 HYDROCARBONS SNAPSHOT Production, Trade & Revenues / Timeline & Infrastructure 8 BLUEPRINT FOR THE NEW PERTAMINA INTERVIEW Dwi Soetjipto, Pertamina President Director & CEO 10 LEVERAGING FULL E&P POTENTIAL INTERVIEW Dr. Syamsu Alam, Pertamina Upstream Director Striving for a 12 TPP: OPPORTUNITY OR THREAT? FEATURE comeback Fault lines of the debate Cover Story 14 REFINERY DEVELOPMENT MASTERPLAN (RDMP) 20 INTERVIEW Rachmad Hardadi, Pertamina Refining Director 16 TRANSITIONING TO GAS INTERVIEW Dr Wiratmaja Puja, Migas Director General 20 STRIVING FOR A COMEBACK COVER STORY 22 Rediscovering prowess on the world stage 23 A defining moment for Indonesia’s lead energy protagonist 23 Looking beyond the land of superlatives 24 Tearing down walls 26 Voices from the inside Betting big on 26 Reawakening the specter of Resource Nationalism deepwater 27 Re-thinking CBM for an Age of Austerity Interview 28 An Evolving Cast of Actors 36 29 Brand Indonesia’s champions – local manufacturing comes of age 31 Making fit for fifty 33 Eastern flair– how Asian investors cracked the Indonesian market 34 Betting on Gas

35 He who dares, wins 36 MERGERS, ACQUISITIONS AND SHAKE-UP INTERVIEW Craig Stewart, Ophir General Manager The Inside Oil&Gas is produced by Focus Reports Ltd. 38 UNCONVENTIONALS INTERVIEW Kim Morrison, CEO LION ENERGY Project Director: Louis Haynes 40 INFRASTRUCTURE AND CONSTRUCTION FEATURE Report Publishers: Mariuca Georgescu & Louis Haynes BIG-TICKET INVESTMENTS Project Coordinators: Simona Simeonova, Roxane Höck 42 MINI-LNG APPLICATION INTERVIEW Johan de Saeger , Editorial Coordinator: Jannes Peemöller, Nicholas Laane ENGIE chief representative Graphic Design: Carmen Reyes 44 BONDED LOGISTICS PARKS & SUPPLY CHAIN For exclusive interviews and more info, please log onto EFFICIENCY INTERVIEW Asok Kumar, President Director www.energyboardroom.com or write to [email protected]. of PT Schenker Petrolog Utama Copyright: All rights reserved. No part of this publication maybe reproduced in 46 COUNTER-CYCLICAL BUSINESS STRATEGIES any form or by any means, whether electronic, mechanical or otherwise including INTERVIEW photocopying, recording or any information storage or retrieval system without Eric Herman, Puma General Manager prior written consent of Focus Reports. While every attempt is made to ensure the 48 THE ARCHIPELAGO DIMENSION FEATURE accuracy of the information contained in this report, neither Focus Reports nor the authors accept any liabilities forerrors and omissions. Opinions expressed in this Complexity of movements report are not necessarily those of the authors. STAY IN TOUCH: @energyboardroom www.energyboardroom.com

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4 Indonesia Oil & Gas April 2016 www.energyboardroom.com INDONESIAPREFACE

Preface

Long disregarded by international investors as ‘forgotten giant’ can belatedly awake from its Asia’s “great underachiever”, Indonesia still stru- slumber and whether such a feat can be actually ggles to fulfill its enormous potential despite a realized remains hotly contested. Looking beyond sprawling population of 260 million and consi- the hype and reformist rhetoric, this report seeks derable natural bounty of coal, gas and oil re- to lift the lid on the state of play of the country’s serves. Rent-seeking, bureaucratic inertia, insular hydrocarbons industry. We survey the new cons- patronage-driven politics and protectionist ten- tellation of actors grappling with a commodity dencies abound rendering the country a ‘compli- price flop and turbulent oil environment. We seek cated’ place for doing business for the uninitiated. out the optimism surrounding imminent growth Change may at last be underway, however, with hotspots such including mini-LNG, deep water, a singularly unorthodox, freshly elected and vi- shale reserves and a newly reconsidered CBM en- gorous president promising to trim Indonesia’s vironment. We also cover stakeholders striving to negative investment list and to return the eco- iron out Indonesia’s complex logistical landsca- nomy to heady 7 percent growth rates though pe and gain insights from those expecting to business-friendly policies and a big push on in- reap a windfall from forthcoming infrastructure frastructure renewal. Whether South East Asia’s and refining programs.

www.energyboardroom.com Indonesia Oil & Gas April 2016 5 HYDROCARBONS SNAPSHOT Production, Trade & Revenues

MACROECONOMIC ASSUMPTIONS FOR 2016 STATE BUDGET

5.3% 4.7% 5.5% 50 (USD/barrel) INFLATION 3 MONTH- GOVERNMENT ECONOMIC GROWTH TREASURY BILLS iCP

(thousand barrels/ 830 (thousand barrels/day) 1,155 day equal to oil) 13,900 (RP/USD) OIL LIFTING GAS LIFTING EXCHANGE RATE

Source: Indonesian Ministry of Finance.

OIL AND GAS TRADE REVENUES

Trade balance Production USD mln (USD mln) USB bln (mln BOEPD)

50 10 80 2.50

40 5 60 2.25 30 0 40 2.00 20 -5 20 1.75 10 -10

0 -15 0 1.50 2010 2011 2012 2013 2014 2015* 2009 2010 2011 2012 2013 2014 2015**

Total fuel imports Oil and gas exports Net contractor share Indonesia share Cost recovery Sources: SKKMIGAS; Indonesian Ministry of Trade. *BMI Research forecasts. **Wood Mackenzie forecasts.

INDONESIA OIL AND GAS PRODUCTION PROFILE 1996 - 2016

2000 PEAK PEAK ERA OF OIL AND GAS LAW 1977 1995 22/2001 Decline 10-12% 1734 1683 1689,1 1631 1624 1612 1624 1589 1587 1586 1575 1574 1557 1539 1519 1535 1537 1522 1506 1491 1500 1501 1499 1498 1468 1496 1500 1445 1462 1450,3 1407 1415 1408 1405 1387 1397 1404 1373 1362 1360 1373 1338 1354 1336 1305 1327 1341 1288 1303 1302 1302 1316 1267 1264 1252 1214 1229 1147 1082 1096 1056 1062 Build-up stage 1047 1049 1006 966 977 1000 954 949 945 953 902 889 904 893 853 847 Decline 2-3% 860

MBOEPD 797 773 742 744

601 569 585 550 544 512 500 466 488 401

266

153 99 109 74 91 52 57 57 51 53 59 0 1971 1981 1991 2011 1974 1975 1972 1973 1977 1978 1987 1976 1979 1982 1967 1983 1997 1985 1992 1988 1993 1995 1989 1986 1968 1998 2012 2013 1970 2015 1969 1984 1996 1999 1966 2016 1994 1980 2014 1990 2001 2010 2007 2002 2003 2005 2008 2006 2009 2004 2000

Oil Gas Source: Indonesian Petroleum Association (IPA).

6 Indonesia Oil & Gas April 2016 www.energyboardroom.com HYDROCARBONS SNAPSHOT Timeline & Infrastructure

SIGNIFICANT EVENTS IN THE HISTORY OF INDONESIA’S OIL AND GAS SECTOR

2014 2015 2015 2015 2016 Joko Widodo elected New oil and gas Indonesia reactivates Oil & Gas Governance Ministry announces intent to president on a manifesto law submitted to membership of Oil Reform Commission tender 21conventional and promising massive Parliament producer’s cartel, OPEC established to clean up the unconventional oil & gas investment in energy hydrocarbons sector blocks in an effort to attract infrastructure upstream investment

2014 2013 2011 2010 Indonesia registers oil Constitutional court rules Implementing GR. 79 on cost recovery production of 794,000 bpd, that BPMigas be dismantled. regulation and income tax for well below the government’s SKK established as the new -PMK 256 upstream sector upstream oil lifting target of 818,000 regulator for upstream -PMK 257 & downstream business bpd -PMK 258 activities

2001 2002 2003 2004 2008 Oil and Gas law Upstream and Downstream PT Pertamina Government Regulation Indonesia suspends its No. 22/2001 bodies called BPMIGAS (Persero) No.35 & 36 Regulation for membership of OPEC introduced, and BPH MIGAS were established upstream & downstream reflecting shift from oil revoking law established business activities exporter to oil importer No.44 status

1978 1968 1962 1961 1885 First LNG Pertamina was Pan American Oil Government First commercial plant entered formed Company signed the first signed first PSC oil discovery in production contract of work with in Aceh North Sumatra Pertamina and Indonesia joined OPEC

INFRASTRUCTURE SPENDING INDONESIAN RUPIAH TN (USD1 = RP12,950)

300

250

200

150

100

0 2012 2013 2014 2015 2016 Source: Natixis. www.energyboardroom.com Indonesia Oil & Gas April 2016 7 BLUEPRINT FOR THE NEW PERTAMINA Dwi Soetjipto, Pertamina President Director & CEO

VISION 2025: CAPACITY, EFFICIENCY AND INFRASTRUCTURE

Preface: The CEO of Indonesia’s national oil champion, Dwi Soetjipto, outlines his 2025 vision for restoring success to the country’s oil and gas sector. Extending a hand to foreign and domestic investors alike, he calls for collaboration in what will be a massive infrastructural development undertaking.

EBR: What are Pertamina’s current main areas of focus? DWI SOETJIPTO (DS): Our main priority is to secure supply for Indonesia’s energy consumption. We identify three gaps we aim to bridge prior to 2025: capacity, efficiency and infrastructure. The first focus point relates to our refining capacity. Our ambition is to enhance our refining capacity from currently 800000 boepd to more than two million boepd within the next ten years. To achieve this target we will not only need to modernize our existing refineries but also invest in the construction of entirely new facilities. The second priority is to overcome insufficient output I estimate that a total Investment efficiency. The Indonesian upstream sector happens to “ of USD 100 billion in infrastructure be dominated by legacy fields and mature wells where development will be needed to output is deteriorating so we, in tandem with our inter- accommodate our 2025 goals

national counterparts active in Indonesia, need to implement improved oil recovery (IOR) and enhanced oil reco- DWI SOETJIPTO PRESIDENT DIRECTOR “ very (EOR) techniques to consequently raise the output. & CEO, PERTAMINA The third big task at hand relates to infrastructure development where a great deal of collaboration is going

8 Indonesia Oil & Gas April 2016 www.energyboardroom.com BLUEPRINT FOR THE NEW PERTAMINA Dwi Soetjipto, Pertamina President Director & CEO

capabilities. On our side, we will be able to provi- New infrastructure development de administrative, land development, permit acqui- “ is especially needed in the sition support and project delivery capabilities. In gas sector and this is where other words, to help them cut through and navi- we envisage most of the gate the Indonesian regulatory and administrative

forthcoming activity to be landscape in a swift and efficient manner. The idea

taking place is that we will take care of that side of operations. “ Our strong intent is to create synergies beneficial to DWI SOETJIPTO PRESIDENT DIRECTOR all stakeholders and we are attentive to the concer- & CEO, PERTAMINA ns and interests of international actors. Pertamina’s primary concern is to secure a stable supply and price for Indonesia and we firmly believe that smartly defi- to be required in order for us to fulfil the domestic ener- ned partnerships can bring us more control over the gy needs. All in all, I estimate that a total Investment of supply-demand balance as well as bringing needed USD 100 billion in infrastructure development will be investment to Indonesia! needed to accommodate our 2025 goals, and to provide the right conditions for the recovery of Indonesia’s oil EBR: The new administration of President Joko and gas industry. Of course Pertamina will play its part Widodo is placing strong emphasis on ramping up in shouldering part of the responsibility for the invest- infrastructure development in the oil and gas sec- ments needed, yet it should be clear that we will not be tor. What responsibility does Pertamina have in able to attend to this heavy financial burden alone. We carrying out and executing these plans? are dependent on our foreign and domestic counter- DS: New infrastructure development is especially parts to collaborate, as only with joined forces will we needed in the gas sector and this is where we envisage be able to implement the infrastructure developments most of the forthcoming activity to be taking place: we vital for the nation’s future. need to further develop our pipeline networks, termi- nals, regasification units and to incorporate innovative EBR: What role does Pertamina play in helping to storage solutions that will enable us to tap into the full restore investor confidence in the Indonesian up- potential of this promising sector. We believe this will stream sector? be our main area of support to the realization of the DS: Pertamina is open to collaborating and to part- government’s ambitious infrastructural goals. nering with overseas actors that have something of The government has also unveiled plans to increa- quality to bring to Indonesian oil and gas development. se Indonesia’s oil and gas inventory from 60 to 90 We are ready to assist outside actors in successfully es- days. Pertamina is not responsible for infrastructu- tablishing operations here that will simultaneously de- ral interventions to inventory capacity. Our concern liver benefit to both their shareholders and the nation. is rather to bring in the necessary supply and will be I identify special opportunities for partnerships that accountable for any supply infrastructure develop- will enable Indonesia to bridge the aforementioned ca- ment needed to make this work. We need the gover- pacity gaps. nment to enhance the inventory capacity according An ideal partner is a company that is willing to invest to their plans so we can establish needed supply infras- heavily and bring in financial, supply and know-how tructure accordingly! www.energyboardroom.com Indonesia Oil & Gas April 2016 9 LEVERAGING FULL E&P POTENTIAL Dr. Syamsu Alam, Pertamina Upstream Director

STRATAGEMS FOR GETTING UPSTREAM MOVING AGAIN

Preface: Dr. Syamsu Alam, Pertami- new level in order to reduce our opera- raising domestic supply, as new resourc- na’s upstream director delivers a bullish tional costs and provide economic feasi- es are yet to be discovered. Therefore, assessment of Indonesias’ upstream bility to domestic production. In the West the need of international expansion is prospects and advocates ‘aggressive substantial and is consequently result- non-organic overseas expansion’ as Mandura Offshore (WMO) block for in- a formula for meeting domestic oil de- stance, we reduced our operational costs ing in an aggressive, non-organic expan- mand while simultaneously stressing the to under USD 30 per barrel by imple- sion strategy overseas. We are currently need for embracing a gas mind-set and menting enhanced efficiency measures. closely observing the overseas market, pressing ahead with deep water E&P. In the context of the low commodi- scrutinizing potential opportunities; ty price, the strategy to overcome the in particular in Africa where we already supply and demand gap in Indonesia is identified some potentially qualified EBR: In 2015, Indonesia’s crude oil clear: we will enhance our internation- assets, which we believe will enable us output was approximately 800,000 al upstream operations and bring more to further supply domestic demand. bdp. Domestic demand however crude oil into Indonesia, whilst improv- Notwithstanding these developments stood at approximately 1.4 million ing our domestic capabilities of operat- and the appropriate strategy, it will bpd. What are Pertamina’s plans to ing and managing our different assets. take time to establish our overseas op- enhance oil production? Oil and Gas combined, our 2016 target is erations to the extent that it will close DR. SYAMSU ALAM (SA): In 638,000 barrels of oil equivalent per day the domestic supply and demand gap. 2015, Pertamina’s domestic contribu- (BOE/D), of which 534,000 BOE/D will The current target is to achieve this by tion to national oil production was be produced domestically and 104,000 2025, depending on the development of approximately 200,000 barrels per day BOE/D will be brought in from our over- our financial capacities. (bpd) in addition to approximately seas operations. 70,000 bpd shipped in from our over- EBR: 85 percent of Indonesia’s seas operations in Iraq, Algeria and EBR: What role are Pertamina’s remaining reserves are natural gas Malaysia. The big question for us is: how international operations expected to assets, which implies that Indone- can we bridge the current supply and de- play in the future? sia’s hydrocarbon industry will be mand gap of roughly 600,000 bpd? SA: As a state owned enterprise (SOE) dominated by gas in the future. How Obviously we will try to boost domes- and national oil company (NOC), our is Pertamina preparing itself for this tic production; however, the potential is primary concern is to fulfil Indonesia’s change in market dynamics? limited due to the low oil price, which energy demand. We realize the sizeable SA: We understood ten years ago forces us to operate in survival mode. We gap between domestic supply and con- that Indonesia’s hydrocarbon indus- already enhanced efficiency to a whole sumption and identify the challenge of tries lies in natural gas thus realizing

10 Indonesia Oil & Gas April 2016 www.energyboardroom.com LEVERAGING FULL E&P POTENTIAL Dr. Syamsu Alam, Pertamina Upstream Director

The need of international expansion is substantial

“ and is consequently resulting in an aggressive, ly reduced investment in the block in

recent years, meaning that it conse- non-organic expansion strategy overseas “ quently did not realize its full poten- DR. SYAMSU ALAM UPSTREAM DIRECTOR, PERTAMINA tial for Indonesia. It was time for us to become the majority stakeholder that domestically our future business succeeded to implement efficiency of that asset, to ensure proper oper- will switch from oil to gas as well and measures that reduce our operating ation for the welfare of Indonesia. were consequently concentrating our costs. We need more operational con- It was a joint decision made by efforts on that topic through Pertamina trol in the remaining blocks in order to Pertamina and the government in a EP. We already reached the climax of reduce operational costs and enhance business-to-business approach. Total domestic gas assets attributing a much output for domestic consumption. If and Inpex are still on board, negoti- better financial profile than oil assets. we succeed to acquire a similar share in ations are still on-going and we will Despite the positive outlook, we face the Masela bloc as we now have in the establish the right terms and condi- the challenge of lacking gas infrastruc- Mahakan bloc, we will additionally be tions soon. ture; we have made some substantial able to reduce operating costs as we can gas discoveries, but have not yet estab- produce more. EBR: You started your career lished the needed infrastructure to de- Offshore is the hot topic for us right in Pertamina in 1989 resulting in liver it from the asset to the consumer. now, particularly as we are seeking to an unmatched 27 years’ experi- Despite the current lack of infrastruc- take over some offshore blocks from ence in the industry. During this ture development the key message here expiring production-sharing contracts time you have witnessed three is, that domestically we are already in (PSC) in the near future. We would gain oil price cycles. Given this vast the gas mind-set, therefore I am confi- most if we can partner with an IOC with experience, what is your recom- dent that Indonesia’s gas potential will extensive offshore and deep-water expe- mendation to the global industry be exploited to its full extent. rience, which will help us fully exploit in terms of navigating through the blocks; simultaneously we will learn times of low commodity prices? EBR: Another paradigm shift in and share our knowledge as well. SA: In my 27 years at Pertamina Indonesia’s hydrocarbon indus- I have been through ups and try can be seen from onshore to EBR: You mentioned your new- downs; however genuinely most- offshore, as some 75 percent of re- ly acquired share of the Mahakan ly ups. Pertamina has constant- maining reserves are in fact located block which came about by reducing ly developed and grown in its offshore. Pertamina’s offshore op- the shares of Inpex and Total. Given professionalism on a day-to-day eration costs are at approximately this context, the call for partnerships basis. This is especially true since USD 30 per barrel in comparison to sends mixed messages around the 2003 when Pertamina became a USD 18 per barrel on onshore fields. world. Could you please elaborate limited enterprise and didn’t act In the context of these operational on the developments that led to the as regulator anymore, changing costs, how will you realize Indone- acquisition of the Mahakan block? the mind-set of the company. sia’s offshore potential? SA: The previous majority share Pertamina is today steadfast in its SA: Obviously the operational costs operators, Total and Inpex, operat- focus on becoming the powerhouse of offshore operations are much high- ed the Mahakan block for over fifty for Indonesia. er than onshore operations. We have years. However, there was significant- www.energyboardroom.com Indonesia Oil & Gas April 2016 11 TPP: OPPORTUNITY OR THREAT? Fault lines of the debate

LOOKING TOWAR DS THE TRANS PACIFIC PARTNERSHIP

Preface: The virtues of Indonesia’s proposed accession to the Trans Pacific Part- nership - a 2016 trade agreement incorporating 12 Pacific Rim nations - remain contentious, but the repercussions for local oil and gas could be far reaching.

J o k o W i d o d o at the recent US-ASEAN summit. H.E. (Jokowi), presi- Whether or not participating in TPP dent of Indonesia, would be beneficial for Indonesia, voiced in October 2015 his inte- however, remains hotly contested rest in the on-going discussions and has been dividing opinions surrounding the concept of Trans internally across the local business joining the TPP act as yet another Pacific Partnership (TPP), which community. While many are thrilled stepping stone on the pathway to if it succeeds, would represent the by the potential opportunities to be attaining global relevance? Harry largest trade agreement in history. accrued, others fear the pressure of Haryanto, country manager for BDP Rumours, that Indonesia could itself ever greater foreign competition and International certainly thinks so join the TPP discussions among its doubt Indonesia’s readiness to join a pointing out that membership of the peers in South East Asia abound, trade bloc which may well prove to TTP would be a “logical next move” with Jokowi having already raised outshine the Association of South and “consistent” with the country’s the issue with US president Obama, East Asian Nations (ASEAN) historic tradition of engagement Commonly regarded as part of the and activism in international affairs. MIST wave of next emergent nations, The economic case may also prove ANDREW ROBB Indonesia’s economic trajectory compelling. According to Australian

Former Australian appears glistening. Being not only Trade Minister Andrew Robb, the Trade Minister the largest archipelago in the world, TPP would “remove approximately but also the largest economy in sou- 98 percent of trade tariffs between th east Asia with a GPD of USD its member countries” and thus “tre- 868.3 billion, the country already fea- mendously stimulate trade and eco- tures as a regional heavyweight and nomic growth,” also for Indonesia. HARRY is notable for its strong presence at However promising, the remo- HARYANTO the international level and member- val of trade barriers would, though, country manager for ship of bodies such as ASEAN, the enhance competition for domestic BDP International Asia Pacific Economic Cooperation business; a circumstance not viewed (APEC), the G20 and the World favourably by all stakeholders. Trade Organization (WTO). Could Wilani Widjaja, managing director at

12 Indonesia Oil & Gas April 2016 www.energyboardroom.com TPP: OPPORTUNITY OR THREAT? Fault lines of the debate

DHL Global Forwarding Indonesia, infrastructure across large swathes of admits that joining the TPP would the archipelago to practically enact only bring benefits for her company, any such deal. but foresees turmoil for Indonesia’s Whichever side wins out in the end, small and medium enterprises the Jokowi administration’s positio- (SMEs), which would be subjected to ning on the matter will hold high formidable competition from multi- symbolic value as an indicator of the national corporations. While doub- governing coalition’s economic con- ting that Indonesia’s SME’s will sus- viction. Will the presidency opt to tain the international pressure, she align with the forces of globalisation? further questions whether Indonesia Or will it choose to revert back to the is yet developed enough to maintain old narrative of economic protectio- a beneficial position within the trade nism? Irrespective of the outcome, agreement, citing a deficit of suitable Indonesia’s TPP decision will show! © DNV GL © DNV

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DNV GL_Oil & Gas Financial Journal advert_6.75x4.625in.indd 1 11/03/2016 10:47:35 www.energyboardroom.com Indonesia Oil & Gas April 2016 13 REFINERY DEVELOPMENT MASTERPLAN (RDMP) Rachmad Hardadi, Pertamina Refining Director

STRIVING FOR INDEPENDENCE

Preface: Rachmad Hardadi, refining director of Pertami- na, speaks out about the national oil company’s strategy to supply Indonesia’s demand in refined products while highlighting how strategic partnerships will com- plement the company’s flagship Refinery Development Masterplan (RDMP).

EBR: Indonesia consumes around 550 million bpd of refined products per year. This is expected to rise to 912.5 million in 2025. How will Pertamina secure the country’s supply of refined products and ensure that domestic demand continues to be met? RACHMAD HARDADI (RH): Our current refining capacity is around 800000 barrels of oil equivalent per day (BOE/D) of crude oil, however domestic consumption of refined products is at least 1.5 million to 1.6 million of BOE/D; therefore we currently import roughly fifty percent of domestically consumed refined products. level nine, RU VI (Balongan) from its current output of We assume that the growth rate of refined products con- 125000 BOE/D to 250000 BOE/D with the NCI remai- sumption will stagnate at five percent and will therefore ning at level 9, and RU II (Dumai) from its current rise to 2.6 million BOE/D by 2025. output of 175000 BOE/D to 350000 BOE/D with its Our ambition is to enhance our refining capabilities in NCI rising from level five to level nine. Once comple- order to supply domestic consumption ourselves, with ted, these RU’s will have a total capacity of 1.3 million the ultimate goal to not be any more reliant on imports. BOE/D. Additionally we recently took ownership of the To accomplish this, we have established the Refinery Tuban Refinery and the Bontang Refinery which adds Development Masterplan (RDMP) in collaboration with another 600000 BOE/D to our total capacity, which then our government. This plan is two-dimensional and inclu- amounts to 1.9 million BOE/D. The RDMP is planned to des the upgrade of our current refineries in addition to be fully realized by the end of 2019! two greenfield projects soon to be commencing. This narrows the gap to estimated consumption of The RDMP foresees the following upgrades: Refinery refined products by 2025 to 600000 BOE/D, which we Unit (RU) IV Cilacap from its current output of 360000 will bridge with two newly build refineries with 300000 BOE/D to 380000 BOE/D with its nelson complexity BOE/D capacity each. We are currently scrutinizing index (NCI) rising from level three to level nine, RU V potential strategic partners for the two greenfield pro- (Balikpapan) from its current output of 260000 BOE/D jects and will commence as soon as we found the right to 360000 BOE/D with its NCI rising from level five to partner. As you can see from the numbers, we anticipate

14 Indonesia Oil & Gas April 2016 www.energyboardroom.com REFINERY DEVELOPMENT MASTERPLAN (RDMP) Rachmad Hardadi, Pertamina Refining Director

Saudi Aramco is imminent. The RU V Balikpapan project Our ambition is to enhance our refining will be carried out with our own capabilities. In other “ capabilities in order to supply domestic words: we will fulfil our responsibility to the full extent

consumption ourselves, with the through a mix of our own capabilities complemented by

ultimate goal to not be reliant on imports the capabilities of strategic partners where needed. anymore “ Honestly, to build the new refining infrastructure is not that challenging. We choose and decide on the best RACHMAD HARDADI PERTAMINA REFINING DIRECTOR configuration, focusing on where we want to go and realize where we need to collaborate with the correct partners. The challenging part is the financing of the pro- the rising demand in collaboration with our government jects, which is where our strategic partners will step in. and we are well underway to meet our population needs! We estimate that the total costs of our plans will amount to USD 70 billion over the next ten years. However stag- EBR: How do you ensure, that the dependency on gering the cost may sound, together with the right stra- imported refined products will not simply shift to de- tegic partner we will stem it and realize opportunities pendency on imported feedstock for your refineries? together! RH: Crude oil lifted in Indonesia is mostly sweet crude and therefore expensive and limited in quantity on a glob- EBR: You’re currently filling capability gaps with al scale. Our refineries will be able to refine sour crude as strategic partners. Besides financing, where does well, this type of crude contains much more sulphur and Pertamina have sufficient self-capability and where is therefore cheaper and furthermore the most available are partners needed? crude oil around the world. Supply of sour crude oil will RH: Saudi Aramco rose from over 400 screened poten- not be a challenge once we transform our infrastructure tial partners for the RDMP projects as crude supply will from supporting sweet crude oil to sour crude oil. be crucial. As a strategic partner, they will also supply the crude oil to our refineries. For our greenfield pro- EBR: Pertamina recently took ownership of the jects we are already far advanced in finding the right Tuban refinery and Bontang refinery with the man- partner. The initially 400 potential partners have been date to enhance efficiency and capacity of these re- narrowed down to five potential candidates which are fineries for the benefit of Indonesia. How will you Rosneft, Saudi Aramco, China National Offshore Oil fulfil the responsibility that accompanies this task? Cooperation, Kuwait Petroleum International and a RH: Obviously we are aware that in the modern busi- consortium of PTT GC and Thai Oil, Thailand. All offer ness climate one cannot survive alone, which is why a distinct advantages and disadvantages as strategic part- major component of our forthcoming plans revolves ners and our role is to identify those and evaluate which around identifying and co-opting the right strategic partner offers the most comfortable partnership; we are partners. Under the RDMP for instance, we will collab- in charge of finding the right partner with the sole crite- orate with Saudi Aramco, the memorandum of under- ria laid out by our government being that cooperate gov- standing and head of agreement for RU IV Cilapac is al- ernance of the chosen partner must be spotless! We will ready signed, for RU VI Balongang and RU II Dumai we make our decision in the coming weeks ahead; we will are currently evaluating the economic feasibility studies decide on a single partner with the aim being to strike up and following suit with appropriate arrangements with an efficient and effective bilateral partnership!

www.energyboardroom.com Indonesia Oil & Gas April 2016 15 TRANSITIONING TO GAS Dr Wiratmaja Puja, Migas Director General

CLEAR IS THE NEW BLACK!

Preface: The Director General of Indonesia’s policy and regulation creator and good service executor for the oil and DR WIRATMAJA gas industry speaks out about rewiring the economy to run PUJA on gas rather than oil. Migas Director General EBR: Could you please start by outlining the specific functions and mandate of Migas within the Ministry of Energy? DR WIRATMAJA PUJA (WP): Migas’ mandate is essentially as a policy and regulation creator and good service and catalyst to growth. Migas is at the forefront of imple- executor for Indonesia’s oil and gas industry covering the menting this strategic transformation. entire value chain from upstream to downstream. Our core function comprises the formulation, implementation and EBR: You have spoken about the shortfall of gas in- technical standardization of policy across the sector. We frastructure and the need to rewire the domestic econ- also define the standards, norms and procedures that will omy to run on gas rather than oil. We also understand ensure fair play within the industry. that there are plans to turn Batam into a ‘city gas’ is- In the upstream sphere, our mission is to create the con- land. What are the various options for viably distrib- ditions that will bring about maximization of national uting gas across the archipelago? revenues in oil and gas exploitation and optimal utiliza- WP: We have a long-term strategy for gas utilization and tion of the country’s hydrocarbon resource base with a view infrastructure in place. For the west side of the country we to maintaining a reliable national energy security scenario. are adopting a philosophy of pipelines and fixed installa- Downstream, the task at hand is to guarantee the sustained tions because the offshore domain comprises mainly shal- availability of fuel and gas supply at a reasonable price in low water. Eastern Indonesia, by contrast, is characterized accordance with the capabilities of the national economy. by deep water so the intention there is to resort to virtual Right now Indonesia is living through a shifting para- pipelines deploying small LNG vessels to island hop around digm in how we utilize our hydrocarbon endowments. In a central hub. the past, we would sell the resource as a commodity and We are implementing a radical new strategy in the free channel the monetary proceeds into the state treasury. trade zone of Batam. The dream is to develop the island Today the dynamics are different and the government ins- into a clean energy enclave in which all diesel will be substi- tead seeks to harness those resources to power a high grow- tuted with gas, this will apply to industries, households and th economy that is increasingly thirsty for energy. In short, the transportation system. Batam will become a showcase we want to utilize our resource riches as an economic driver for the ‘city gas’ concept which then could potentially be transplanted elsewhere.

16 Indonesia Oil & Gas April 2016 www.energyboardroom.com TRANSITIONING TO GAS Dr Wiratmaja Puja , Migas Director General

Refinery building is also emblematic “ of this new spirit of treating hydrocarbons not as a trade commodity, but as a generator

of cluster growth DR WIRATMAJA PUJA “ MIGAS DIRECTOR GENERAL

Indonesian oil and gas a comparatively attractive investment destination. Our third priority is to enhance national energy security and render the country more resilient. Today Indonesia ranks as the second largest importer of fuel and we are naturally keen to reduce this dependency. To this effect, the state is rolling out the construction of 4 new oil refine- EBR: What has been keeping you most busy of late? ries each with a capacity of 300,000 barrels that will com- WP: Gas management is at the forefront of our con- plement the nation’s existing 4 facilities, which will also cerns. Historically, successive governments have developed undergo upgrades. These initiatives will allow us to redress energy infrastructure in the population heavy, west side of the balance between importing fuel and crude. the country at the expense of the rest of the archipelago. The energy distribution and supply chains in peripher- EBR: What do you say to those who criticize the real regions, remote islands and generally the eastern parts finery building initiative for merely substituting one are severely underdeveloped and this simultaneously im- form of national dependency (i.e. reliance of fuel im- pedes livelihoods and economic growth. The distribution ports) for another (reliance on crude imports)? of street lighting in night-time satellite imagery depicts the WP: Some analysts may well point out that economic deficit clearly. One big challenge for us is in enabling the savings from substituting fuel imports for crude imports build up of that infrastructure, and in managing our gas can be marginal, but that is to consider the issue from a intelligently and effectively so that the entire country can purely financial standpoint. Refinery building actually en- be bright at night. tails technology and know-how acquisition, human capital In the upstream domain, the priority is to foster a level of development and a scaling of the value chain. The co-bene- E&P activity commensurate to our natural resource abun- fits are wide reaching. Refinery building is also emblematic dance and vast potential reserves. Cognizant that much of of this new spirit of treating hydrocarbons not as a trade the future exploration activities will take place in high-risk, commodity, but as a generator of cluster growth, prosperity technologically challenging deep water plays, our current and national economic prowess. focus is on attracting outside investment into the ups- Meanwhile there are also plans afoot to establish additio- tream segment. We are well aware that considerable capital nal small refineries in strategic locations across the archi- injections and risk taking will be required if the country pelago. This is important because Indonesian territory is to realize its true resource potential, so know we have encompasses a high volume of scattered islands not all of to cultivate the sort of market conditions that will make which lend themselves to being serviced by a conventional www.energyboardroom.com Indonesia Oil & Gas April 2016 17 TRANSITIONING TO GAS: CLEAR IS THE NEW BLACK! Dr Wiratmaja Puja, Migas Director General

style, large-scale refinery. Papua represents a good exam- is being turned off by what it perceives as an imbalance be- ple of where efficiency gains could be realized. Right now tween risks and rewards. Complex licensing, complicated the province possesses oil, but not considerable quantities. land acquisition procedures and unfavorable fiscal terms Transporting small volumes of crude all the way to Java for have all been flagged up as impediments to action. Migas processing and then shipping back the refined product is has therefore been taking positive steps to rebalance risk clearly not very efficient and yet, to date, it represents the and rewards. only option available. We are actively seeking to change this. EB: What is your final message to the international EBR: What practical steps are you taking to rekindle investment community? in-country enthusiasm in oil and gas exploration? WP: The Indonesian oil and gas sector is open for busi- WP: Over the past 15 years there have been very few sig- ness, both in the upstream and downstream. Our door is nificant oil and gas discoveries in Indonesia and this is a open and we want to hear from you. Migas is committed to direct consequence of the paucity of exploration activity engaging in dialogue with you and harnessing your inputs taking place. The ministry has taken it upon itself to review as we strive to redraw Indonesia’s energy future. Join us and why this might be the case and it is clear that the industry make it happen.

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Jl. Adityawarman No. 51. Kebayoran Baru Jakarta 12160 - Indonesia T: +62 21 727 970 09 / F: +62 21 721 14 35 www.energyboardroom.com E: [email protected] Oil /& W: Gas www.sagatrade.co.id April 2016 19 COVER STORY Striving for a comeback INDONESIA

revere a local oil and gas industry er a high performance economy,” STRIVING that once boasted heavyweight ex- reflects Dr Kunturo Mangkusubroto, ports and gained international ac- formerly head of the presiden- FOR A claim for pioneering LNG and the tial delivery unit. Indeed, with COMEBACK iconic production sharing contract national energy demand surg- model. “Hydrocarbons prowess ing on average 7 percent annually, remains very much part of our but oil and gas production firmly on a As ASEAN’s largest economy and national psyche and we should downward curve, many are left won- the world’s 4th most populous na- rightly take pride in our illustrious tion comes to terms with the re- heritage, but times are changing dering if the Indonesian hydrocar- ality that it is fast becoming a net and we are now compelled to ex- bons industry can ever truly redis- energy importer, Indonesians still plore alternative pathways to pow- cover the glory days of old.

20 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

evertheless, in the words of Pertamina CEO Dwi Soetjipto, oil and gas still remains the N “biggest game in town” contributing some USD28.5 billion in 2015 in tax and royalties to the treasury and providing direct employment for over 300,000. Today the country ranks 20th out of world oil producers possessing roughly 1.1 percent of total H.E. JOKO DWI SOETJIPTO KUNTURO WIDODO MANGKUSU- global production, while for gas, it attains 10th lar- CEO, Pertamina BROTO president of gest producer status worldwide, second only to China Indonesia former presidential delivery unit in Asia Pacific. According to the latest Indonesian director Petroleum Association (IPA) figures, the country’s remaining proven, probable and possible (P3) oil reserves stand at a considerable 7,375 million stock tank all round: we’re talking about a country possessing 5 of the barrels (MMSTB), while P3 gas reserves amount to a most prolific 15 onshore basins in the region, great swathes mighty 150 trillion cubic feet (TCF). of virgin territory in the east where acreage can be picked up for peanuts and a large unconventionals upside,” he elaborates. “Asia Pacific is actually sitting on the world’s most uncon- Unsurprisingly, figures like these combined with the magnitude ventional reserves and Indonesia lies pretty much close to the of national demand, charm many an investor. Asia’s so-called heart of that,” concurs ExxonMobil’s president director, Jon “third giant” is, in the words of CPTDC chief representative, Gibbs, “so there’s massive scope for any oil and gas sector Jeffrey Chen Wenhai, “simply too big to ignore.” “When you firm, whether big or small, as long as you possess the technical consider the local demographics of 255.4 million people and capacity and audacity to properly leverage that.” Brian Pye, sheer breadth of the market, you’re likely staring at a future vice president for global business development of LR Senergy, economic powerhouse that will soon be enjoying some of the a plug and play operator and a fully-fledged oil company for fastest growth rates anywhere. It’s therefore vitally important rent, very much agrees. “Large swathes of Indonesia’s resourc- to be maintaining a local presence,” he assesses. es remain unexploited and the fact that the country is home to Strategy consultants tend to agree. “Clearly, with its young one of the world’s largest deep-water basins makes it hugely population and expanding middle class, it’s only going to be a exciting,” he exclaims. matter of time before Indonesia comes of age and matures into an economic high-flier. Three core ingredients are in conver- gence: the natural resources are here, the people are here and the infrastructure is finally coming. Plenty of serious players have entered the energy market cognizant of these facts and We’re talking about a country possessing angling for a slice of the action,” remarks Sacha Winzenried, “ 5 of the most prolific 15 onshore basins in the head of the energy division at PwC. region, great swathes of virgin territory in Other industry practitioners identify a multitude of addi- the east where acreage can be picked up for

tional attributes. “It’s a magnificent market serving up really peanuts and a large unconventionals upside unique opportunities for smaller independents like us to cut our “

teeth on and earn or spurs,” enthuses Kim Morrison, CEO of KIM MORRISON - CEO, LION ENERGY Lion Energy. “There’s a great deal flow with plenty of options

www.energyboardroom.com Indonesia Oil & Gas April 2016 21 COVER STORY Striving for a comeback

Rediscovering prowess on the world stage

WIDHYAWAN at odds with OPEC’s historic mission “Returning to OPEC is significant not PRAWIRAATMADJA of maintaining a high price. But, accor- only as it networks us into the world’s — ding to Widhyawan Prawiraatmadja, most prolific oil producers and renders Indonesian governor to OPEC Indonesia’s freshly appointed governor us less dependent on the spot markets, to the organization, such an analysis but it also enables us to rekindle our gra- “overlooks OPEC’s own journey from vitas on the world stage and reclaim our swing producer to base producer and rightful guise as a mediator, counterwei- its evolving priorities from artificially ght and voice piece of both SE Asia and DR SUBROTO striving to prop up prices to defending Asia’s largest Muslim community,” re- — market share.” “They’re seeking out flects Dr Subroto, a Suharto-era energy Founder and President of new markets and as Asia’s lone cons- minister and formerly the longest serving BIMASENA and tituent, we’ll provide that vital link to secretary general of OPEC. formerly OPEC’s the region where demand is growing Taking Indonesia into the IEA, an agency longest serving fastest,” he reasons. dedicated to improving the mitigation Secretary General Meanwhile, Indonesia hopes that stren- system in the event of oil supply disrup- After a period on the sidelines, Indo- gthening its cooperation with oil-produ- tion, can very much be seen in the same nesia is now back again right at the fo- cing countries will provide direct access light. “The logic is to streamline the com- refront of international energy geopo- to crude oil supplies. “We hope mem- munication channel between producers litics having simultaneously reactivated bership will enable us to go straight to and consumers, suppliers and buyers, its OPEC membership and been inau- the source of the crudes that we import hydrocarbon and renewables communi- gurated into the International Energy by dealing with the NOCs directly. Right ties and position ourselves as the bridge Agency (IEA). now there is an elaborate transaction between different sides of the energy On the face of it, Indonesia appears an chain of middlemen and third-party tra- market,” declares Energy Minister, unlikely addition to the oil exporters’ ders that we aspire to short-circuit,” ex- Surdiman Said. “Given IEA member’s cartel given that the country consu- plains Commission VII vice-chairman Satya strong propensity towards new and mes about twice as much crude as it Widya Yudha. “Indonesia could even start renewable energies, forging a strong pumps (last year being lumbered with importing more than 300,000 b/d of crude relationship with them should also be- an oil-import bill of close to USD 12 supplies directly from OPEC members by tter expose us to their technology and billion) thus placing it fundamentally the end of the year,” he indicates. know-how,” he argues.

OPEC CRUDE PRODUCTION million barrels per day Source: OPEC.

NOV 2015 DEC 2015 JAN 2016 SUSTAINABLE SPARE 2015 CRUDE OPEC SUPPLY SUPPLY SUPPLY SUPPLY PRODUCTION CAPACITY SUPPLY 2015 VS 2014 CAPACITY1 VS JAN 2016 CAPACITY

ALGERIA 1.11 1.11 1.10 1.12 0.02 1.11 -0.01

ANGOLA 1.74 1.75 1.75 1.81 0.06 1.76 0.10

ECUADOR 0.54 0.54 0.53 0.55 0.02 0.54 -0.01

INDONESIA 0.69 0.70 0.71 0.71 0.00 0.69 -0.01

IRAN 2.87 2.91 2.99 3.60 0.61 2.86 0.04

IRAQ 4.33 4.30 4.35 4.35 0.00 3.99 0.66

KUWAIT2 2.80 2.81 2.83 2.83 0.00 2.78 -0.02

LIBYA 0.39 0.38 0.38 0.40 0.02 0.40 -0.06

NIGERIA 1.84 1.80 1.84 1.91 0.07 1.80 -0.10

QATAR 0.68 0.65 0.68 0.68 0.00 0.66 -0.05

SAUDI ARABIA2 10.19 10.14 10.21 12.26 2.05 10.17 0.45

UAE 2.89 2.89 2.89 2.93 0.04 2.88 0.12

VENEZUELA3 2.40 2.37 2.37 2.46 0.09 2.40 -0.06

TOTAL OPEC 32.47 32.35 32.63 35.61 2.98 32.05 1.07

(excluding Iraq, Nigeria, Libya and Iran) 2.28

1. Capacity levels can be reached within 90 days and sustained for an extended period. 2. Includes half of Neutral Zone production. 3. Includes upgraded Orinoco extra-heavy oil assumed at 500 kb/d in January.

22 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

A defining moment for Indonesia’s lead energy protagonist

RACHMAD HARDADI multaneously guaranteeing the na- Central to all three objectives is — tion’s energy security. the realization that the country refining director, “Our overriding priority is to se- needs to act fast to stave off poten- Pertamina cure supply for Indonesia’s energy tial security of supply crises. “The consumption. Currently we identify massive effort underway to build up three gaps that we aim to bridge our refining capabilities is all about before 2025: capacity, efficiency and taking ownership of supplying do- infrastructure. Our ambition is to mestic consumption ourselves, with SYAMSU ALAM enhance our refining capacity from the ultimate goal being to reduce — the current 800,000 boepd to more our reliance on imports,” explains upstream director, Pertamina than 2,000,000 boepd in the next Pertamina’s refining director, Rach- ten years, hence our action plan for mad Hardadi. modernizing current refineries whi- Nor does the quest for new hydro- lst simultaneously constructing new carbons to feed a seemingly insati- ones. Secondly we need to bolster able national economy end within output efficiency so will be collabo- Indonesia’s own territorial waters Charged with overseeing none rating with technology specialists to with approximately USD 1 billion other than Indonesia’s return to implement improved oil recovery already set aside for foreign acqui- energy greatness, the country’s (IOR) and enhanced oil recovery sitions. “The need for international iconic national oil champion un- (EOR) techniques that will increase expansion is compelling and we are questionably has a monumental overall output to 1.9 million bpd be- readying ourselves for an aggressi- task on its hands. Undaunted, the fore 2025. The third gap relates to ve, non-organic expansion strategy company’s freshly installed lea- making up shortfall’s in infrastruc- overseas. We are busy scrutinizing dership have been hard at work ture development where I estimate potential assets, in particular in Afri- rolling-out an ambitious business that total Investment of USD 100 ca, which we believe may enable strategy that they are confident billion will be needed to accommo- us to further supply domestic de- will enable them to attain ‘world- date our targets,” bullishly affirms mand,” elaborates upstream direc- class’ operatorship status while si- CEO, Dwi Soejipto. tor Dr. Syamsu Alam.

LOOKING BEYOND THE LAND OF the oil reserve replacement ratio (RRR) sliding as low as SUPERLATIVES 40 percent. To cap it all off, IPA statistics for 2015 record- ed gestation times for bringing reserves to commercializa- Yet, for all the super-size numbers, the Indonesian oil and tion as lengthening to a full 8 years in stark contrast to the gas sector has spent much of the past decade languishing in international average of only 2 years. the doldrums with productivity, reserve replacement and “At a first glance, Indonesia is genuinely blessed with exploration tempo all experiencing seemingly terminal bountiful energy and mineral deposits, declines. According to the national upstream regulator’s and even a nice geographic positioning very own figures, oil and gas exports tumbled last year to right next to some very energy thirsty USD 28.75 billion saddling the state with a hydrocarbons markets, not to mention the rampant trade balance deficit of a whopping USD 11.84 billion. domestic demand. However significant Meanwhile actual oil production attained only 794,000 bpd constraints lurk in the background that missing the government’s modest lifting target of 818,000 loom larger than the geological risks JON GIBBS bpd when only a couple of decades ago production rates and cast a dark shadow over your in- president director, soaring upwards of 1.6 million bpd had been very much vestment decisions,” warns Medco’s ExxonMobil the norm. Exploration meanwhile fared little better with general manager, Roberto Lorato.

www.energyboardroom.com Indonesia Oil & Gas April 2016 23 COVER STORY Striving for a comeback

“Sluggish bureaucracy, legal uncertainty and an onerous but in Indonesia might never even make it to the devel- fiscal regime can create a pretty unappealing risk-to-re- opment stage.” ward ratio and conspire to make this market much tough- “Sadly sometimes the local hydrocarbons market does er than it really should be,” he laments. end up being rather like the woman you thought was beau- To illustrate the point, Helge Håland, Statoil’s fresh- tiful the night before, but who actually turns out to be ly appointed general manger, describes how a USD100 rather ugly in the morning,” jokes BritCham’s executive million dollar offshore well drilled in Norway could end director Chris Wren. “Investors must refrain from rushing up costing a mere USD22 million because of the direct headlong in without properly doing their homework and tax relief, but that the very same well in Indonesia would calculating the financials because this is the sort of regime cost USD120 million because of punitive land taxes that whereby a company can be obliged to pay taxes even be- fail to take into account whether the exploration is suc- fore tuning over a profit. Returns can look tantalizing, but cessful or not. “It’s simply the reverse to what you might market distortions do muddy the water so plan your entry expect,” he exclaims, pointing out “a find of 100 million strategy meticulously, just as you might when engaging barrels outside Stavanger would be considered fantastic, with an India or a China,” he counsels.

TEARING DOWN WALLS Alfa Laval offerings That’s not to say that Indonesia is completely out of the hydrocarbons game yet. Given its strategic location at the core in Oil and of booming, energy bulimic Asian markets, the country re- Gas industry tains a residual capacity to export locally. The archipelago meanwhile straddles the Strait of Malacca, one of the world’s major oil transit chokepoints, and its Batam special economic zone SEZ displays growing potential as a regional trans- shipment hub. Furthermore, the pressing need to feed its Freshwater Maker Fuel oil & lube oil Heat exchanger centrifuge very own turbo economy creates the strategic imperative for ALF Filter Deck drain treatment Indonesia to finally get its act together system Tank cleaning and start properly capitalizing on its vast Crude oil separator equipment natural resource endowments. Ballast water Bilge water separator treatment system Slop oil treatment system “The obstacles we face are entirely of our own making. It’s not as if we’ve run out of hydrocarbons or that we’re dealing with insurmountable technical sub-surface issues and are forced to sit ANDANG Alfa Laval Indonesia, PT BACHITAR Graha Inti Fauzi 4th Floor, JL, around waiting for breakthrough tech- Buncit Raya No 22, Jakarta Selatan chairman, DKI Jakarta 12510, Indonesia Phone: (62) 21 791 822 88 nologies. The cause of all this inaction in National Email: [email protected] the upstream segment is squarely down Exploration www.alfalaval.co.id Committee to an illogical fiscal, administrative and

24 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

regulatory land- risky to develop than others. We therefore agree that the incen- scape that is not tives offered need to be increased for such scenarios and the in- sufficiently support- tention is to enshrine this logic in the new legislation,” explains ive of investors,” Teguh Pamuji, secretary general at the Ministry of Energy. clarifies Andang Alongside that attempt to overhaul the fiscal regime, meas- Bachitar, chairman of ures are simultaneously being enacted to simplify, streamline ARI SOEMARNO TEGUH PAMUJI a recently assembled and accelerate the licensing and administrative process. “To former CEO, secretary general, National Committee date we have reduced the number of energy sector specific Pertamina Ministry of Energy for Exploration dedi- permits from 104 to 42 and my objective is actually to whit- cated to finding ways tle that figure down to 20 over time,” discloses,” Wiratmaja to incentivize E&P Puja, director general of D-G Migas, the policy formulation activity and increase reserve replacement ratios to 70 percent. arm of the Energy Ministry. “Moreover, in what I consider “We need the political guts to clear away all these barriers, un- to be a pretty radical step, the Ministry is now delegating the stop the bottlenecks and open the door wide to business once permit issuance for many of these remaining licenses to the more,” he assesses. Investment Coordinating Board (BKPM) so that PSC hold- Luckily Indonesia’s popular and freshly elected president, ers will, in the future be dealing with a one-stop, single-win- Joko “Jokowi” Widodo, an energetic, media-astute former fur- dow service as opposed to the current system where they are niture salesman seems intent on turning the page on an decades forced to interact with an entire web of overlapping and de- of inaction and timidity on the part of the former administra- centralized jurisdictions.” tion and has already placed reform of the energy sector high up on his political agenda. “We’ve already undergone a sea-change in how oil and gas THE COMPLEXITY OF OIL AND GAS PERMITS strategy is formulated with the nation’s resource wealth now IN INDONESIA treated in a much more enlightened manner by being explicitly RESPONSIBLE FOR DELAY IN COMMERCIALIZATION linked to economic development. The country’s hydrocarbons It normally takes 8-10 years to commercialize an oil and gas discovery. In reality, however, it took longer: Tangguh (16 years), Senoro (16 years), Masela are today seen less as commodities to be traded and more as a (17 years) and Banyu Urip Cepu (10 years). dynamo to national economic prosperity. Their centrality to the nation’s development path is thus much better understood and 17 Issuing Institutions >5,000 Permits per year the finance ministry is being made to realize that oil and gas is not a cash cow, but a catalyst that requires careful cultivation,” explains Ari Soemarno, former CEO of Pertamina and an in- 600,000 Documents formal advisor to the presidency. NUMBER OF PERMITS IN EACH PHASE To that effect, a welter of reforms have been enacted geared towards creating the right sort of enabling conditions to restore investor confidence and reinvigorate foreign and local upstream investment. “A new law will determine the allocation of the proceeds from oil and gas production by elucidating the ‘state take’ of the profits under a range of different scenarios. 26 85 107 109 14 Initial Survey Exploration Development Production Post-Operations Today’s government understands that some oil and gas fields such as deep water and unconventionals are more complex and Source: KATADATA ekonografik www.energyboardroom.com Indonesia Oil & Gas April 2016 25 COVER STORY Striving for a comeback

Voices from the inside – Insider advice on what to expect and how to succeed…

“This is certainly not a speculators’ market for those intending to cash in quick. To win the big tenders you’ll be expected to put down real roots. The government and state apparatus will be looking to you to commit to the country, build local capabilities and embed yourself into the local ecosystem by investing in the Indonesian labor force.” – DIPNALA TAMZIL, EXECUTIVE CHAIRMAN OF THE INDONESIAN PETOLEUM ASSOCIATION (IPA).

“It’s vitally important to conduct thorough due diligence given the opaqueness of the market and a propensity for rent-seeking behavior. Many a naïve entrepreneur has entered the market only to hook up with a ‘sleeping partner’ that acts as a drain on profit margins, but contributes little of value. Above all, be streetwise in your interactions with an economy that the World Bank ranks as 155 out of 189 in terms of ease of doing business.” – A. LIN NEMANN, CHAIRMAN, AMERICAN CHAMBER OF COMMERCE (AMCHAM).

“This market is all about bending the productivity curve back into incline through sustaining performance in legacy fields and gaining new reserves. Pertamina, as an agent of change, is at the forefront of this momentous endeavor and we invite you to collaborate with us and contribute too!” – SYAMSU ALAM, UPSTREAM DIRECTOR AT PERTAMINA.

“Our priority is to unleash the oil and local industry that had previously gained notoriety for insti- gas companies so that they can con- tutionalized corruption, shady wheeler dealing and influence centrate on their bread and butter task peddling. “This government will no longer tolerate any kind of hunting for and extracting hydrocar- of hanky-panky…we are now being proactive in addressing bons,” declares Amien Sunaryadi, chair- any weaknesses in the regulatory apparatus and in synchro- man of the upstream regulator, SKK nizing upstream and downstream activities to close off any

AMIEN Migas. “Beyond deregulation and the loopholes vulnerable to mafia-style, vested interests,” af- SUNARYADI mainstreaming of efficiency, we are si- firms Faisal Basri, chairman of a first-of-a-kind ‘Oil and Gas chairman, SKK multaneously repositioning ourselves Governance Reform Commission’ dedicated to eliminating Migas much more as an enabler and support to rent seeking and exposing malpractice. the industry,” he divulges. “Operating out in the oilfields as counterparts to the PSC holders we are well attuned to the needs of business and are keen to maximize our function as a conduit of REAWAKENING THE SPECTER OF RESOURCE dialogue between state and industry, while at the same time NATIONALISM adopting much more of a b2b approach than the traditional, business-to-bureaucrat interactions of old.” While many applaud the newfound liveliness of the Widodo Unprecedented attempts are also being made to clean up a presidency, some international oil and gas executives,

26 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

Re-thinking CBM for an Age of Austerity

BAMBANG ned a disappointing 0.625 mmscfd. Strictly speaking, this level of spe- WIDARSONO What went wrong for this once so cification is not necessary for CBM — highly touted industry? and their operating expense actually director, “The primary challenge with Indo- reduces the economic feasibility of Lemigas nesian CBM was actually the abili- the projects. The only alternative on ty to extract sufficient quantities of the local market, however, constitu- methane from the coal because the ted mining rigs that didn’t meet the quality of the reserves proved to be health and safety requirements de- DJOKO SISWANTO not quite as economically convin- manded by the directorate general — cing as the promoters has hoped. of oil and gas (DG-Migas). Our so- director for upstream Worries over bankability were then lution has therefore been to design business at DG-Migas compounded when the oil and gas a hybrid drill rig that represents a industry hijacked the development sort of halfway house that is lower process with their tendency to gold specification and cheaper to run, plate everything and ratchet up the but nonetheless conforms to higher cost.” observes Howard Kenworthy, health and safety norms,” explains Indonesia enjoys the 6th largest commercial director of Inflatable Lemigas’ ebullient director Bam- coal-bed methane (CBM) deposits Packers International (IPI). “Stake- bang Widarsono. “The prototype in the world boasting reserves esti- holders on all sides basically failed is complete and we’re now testing mated at some 453Tcf. To great fan- to appreciate that CBM is an orphan it out to great effect on Pertamina’s fare, the government thus awarded industry straddling both the mining Kalimantan fields,” he announces. 54 working areas for development, and hydrocarbons sectors, but not For it’s part, the ministry is conside- largely around Sumatra and Kali- fitting neatly into either category so ring a fresh new contract scheme mantan, only to see project perfor- requiring its own regime,” agrees to make CBM more profitable and mance hampered by concerns over IPI’s owner Clem Rowe. reinvigorate investment confiden- bankability. Reflecting the extent to Lemigas, Indonesia’s research and ce. “The proposed scheme would which expectations have plumme- development body for oil and gas involve what is known as a gross ted, state officials initially forecasted technology, however, believes it has split sliding scale, would have no production of 500 million standard resolved upon the perfect formula cost-recovery mechanism and would cubic feet per day (mmscfd) by the to make CBM economic again. “We apply a progressive split of produc- close of 2015, but were forced to re- identified that one of the major costs tion between the government and vise that target down to a mere 8.9 in CBM development in Indonesia contractors,” reveals the director mmscfd after 2014 production attai- derives from the hiring and opera- for upstream business at DG-Migas, tion of high-tech oil and gas rigs. Djoko Siswanto.

however, are perturbed by what they perceive as national- up local content requirements from 35 to in excess of 75 istic tendencies underlying much of the new policymaking. percent for many technologies and ser- “Legislators seem to have set their hearts on delivering up vices,” notes Diah Noor, country man- the lion’s share of Indonesian hydrocarbons to indigenous ger of INTSOK, Norway’s oil and gas players and placing many of the assets under the umbrel- board of trade. la of the NOC, so we will be compelled to adapt our cli- Equally alarming has been the ent base to reflect this emergent reality,” reflects Jimmy controversial decision not to renew Delaney, president director of Frank’s International. Total’s PSC for the highly productive FAISAL BASRI Of particular concern are some of the draft clauses list- Mahakam field, instead assigning only chairman, Oil and ed as part of the imminent oil and gas law currently un- a minority stake to the IOC and turning Gas Governance der parliamentary review. “Non-Indonesian supply chain over operatorship to Pertamina. “This Reform Commission’ companies are increasingly anxious about plans to hike is effectively nationalization by stealth

www.energyboardroom.com Indonesia Oil & Gas April 2016 27 COVER STORY Striving for a comeback

and is very much a sign of the new pro- For his part, Dwi Soetjipto, the CEO of Pertamina, is tectionist mood. There are a number of keen to allay any fears that foreign entities might end up big-ticket PSCs on the brink of expiry marginalized. “As the NOC we have a responsibility to and all eyes will be on whether a con- the nation to raise production and secure supply. Let’s be tract extension is granted to Chevron’s perfectly clear that we cannot achieve this historic mission Sumatran assets,” analyses David alone and as such will be actively seeking collaborations

RINALDY DALIMI Braithwaite, founder of the consul- with foreign partners who can bring in financing, technol- National Energy tancy Q Energy South East Asia. “The ogy and technical expertise,” he reassures, going on to Council danger is that nationalistic sentiment mention that “Pertamina will be shouldering the burden of might be pushing large sectors of the land and port licensing on behalf of their future JV part- economy down a state-owned govern- ners so as to facilitate better quality interactions.” ment-controlled path that will result in monopolistic inefficiencies,” he warns. Others vehemently disagree. “I’m a big believer in enhancing the priv- AN EVOLVING CAST OF ACTORS ileges of Pertamina, because I believe that hydrocarbons represent an asset One noticeable development has been the changing com-

KARDAYA of strategic national importance and as plexion of the protagonists operating at the forefront of WARNIKA such they need to be controlled by the Indonesia’s upstream segment following a spate of Chairman of state even if they sometimes lie beyond Commission VII in the House the reach of state ownership. Handing of Representatives Pertamina first-preference and joint 10 OIL AND GAS BLOCKS TO BE OFFERED ownership of new and expiring block IN NEW BIDDING ROUND fits well with this vision and simultaneously helps us to grow BLOCK LOCATION TYPE OF TYPE OF the NOC as it allows for technology and know-how transfer BLOCK AUCTION at an early stage,” argues Kardaya Warnika, Chairman of West Asri Offshore Conventional Regular open Lampung bidding

Commission VII in the House of Representatives. Oli Offshore E. Conventional Regular open “It’s high time we stepped up to the plate and took Kalimantan bidding Manakarra Offshore W. Conventional Regular open ownership of our own hydrocarbons industry,” agrees Mamuju Sulawesi bidding Rinaldy Dalimi of the National Energy Council. “Besides, Kasuri II Onshore Papua Conventional Regular open bidding

Indonesia forms part of the volcanic ring of fire with 129 Rupat Labuhan Offshore Riau Conventional Direct active volcanoes spread out across the country creating appointment North Jabung Onshore Riau and Conventional Direct some very distinctive geological terrain with oil and gas de- Jambi appointment posits more often than not trapped under areas covered by Southwest Onshore E. Conventional Direct Bengara Kalimantan appointment

lava which cannot be easily penetrated by the conventional West Berau Offshore W. Conventional Direct tools. This compels us to innovate homegrown technologies. Papua appointment MNK Batu Ampar E. Kalimantan Unconventional Regular open We cannot always be looking over our shoulder to Europe block shale bidding for our methodologies when the circumstances within our MNK Blora C. Java Unconventional Regular open shale bidding home territory are markedly different. The moment has ar- Source: Energy and Mineral Resources Ministry. rived for wrestling back the initiative,” he continues.

28 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

Brand Indonesia’s champions – local manufacturing comes of age

AKBAR RIVAI The tagline, ‘Made in — Indonesia’ may be a director, concept unfamiliar to Sagatrade Murni many, but it’s one that’s rapidly gathering pace according to some industry insiders. “You might not be aware of it, but Indonesia has actually developed a high caliber of homegrown technical expertise which is perhaps not so surprising give our country’s rich legacy in oil and gas,” reasons Akbar Rivai, Director of Sagatrade Murni, an indigenous fabricator of oilfield equipment that has been in operation since 1984. One of a wave of local success stories, Sagatrade Murni started off simple and slowly gravitated towards higher-spec oil tools production. “Originally we limited ourselves to manufacturing comparatively easy technologies such as welded centralizers, but over time pro- gressed to much more complex and challenging items such as hydraulic, mechanical and custom design liner hangers thus enabling us to scale the value chain and widen our profit margins,” he recounts. As the production lines matured, so too the business strategies. “For the centralizer market where profit margins remained slim, it had always been a case of pursuing high sales volumes. For the liner hangers, by contrast, the name of the game has been much more to do with investing in R&D and innovating new generations of pre- cision technology,” he explains. Such as narrative is far from uncommon. Ari Slamet Notokoesoemo, President Director of Arkon Prima, an Indonesian construction firm that first opened its doors in the early 1970s speaks of its own “long transformation from steel fabricator into a integrated solution provider for the energy industry” to the point where it today designs and delivers a versatile array of offerings from oilfield structures to power-packs. “Some of the multinational clients are initially skeptical of Indonesian sour- ced equipment, but when they discover that we have designed 4 turnkey power packs for Medco then it really opens their eyes,” he laughs. Photos courtesy of Sagatrade Murni. With local content requirements on the rise and gran- diose government-sponsored schemes underway to matic expansion has entailed the establishment of sa- ramp up hydrocarbon production, install gas infrastruc- les offices in Singapore, the UAE and Oman and even ture and add 35,000 MW within 5 years, one might logi- a production facility in Mexico, while Arkon Prima has cally expect homegrown entities like these to be in poll been following its clients to Africa and the Middle East position for the forthcoming Pertamina and PLN tenders. via a freshly installed outlet in Dubai. “If you don’t know In actual fact, aspirations are even more ambitious with about ‘Made in Indonesia’ yet, you certainly will do both companies aiming global: Sagatrade Murni’s dra- soon,” chuckles Rivai.

www.energyboardroom.com Indonesia Oil & Gas April 2016 29 COVER STORY Striving for a comeback

mergers, acquisitions, divestments and bankruptcies. “It’s as what happened to Niko Resources,” possible to identify some very distinct clusters of com- reflects KPMG’s head of energy, Mark panies,” explains Craig Stewart, Ophir’s general manag- Godson. er. “First there are the big oil majors like Chevron and “I feel there’s still ample room for ConocoPhillips who were granted their PSCs in the 1960s the small size niche players,” judg- and are now sitting on legacy assets many of which are es PwC’s Winzenried “but less so for

due to expire and who’ve little incentive to indulge in new those mid-tiers that were once so nu- MARK GODSON investments. Then there are predominantly Asian regional merous...we’ve seen a real thinning-out head of energy, actors like PetroChina, CONOC and Petronas who entered with entities like Hess and Murphy ex- KPMG around the nineties, work the market well and whose foot- iting and retreating to their home mar- hold remains firm. More recently we’ve been witnessing kets and even some of the more energetic and aggressive a number of household names like ENI and Statoil trying movers like Talisman and Salamander proving vulnerable their hand at the unconventional deepwater prospects in to takeover. What’s more we’re clearly transitioning over to locations like Makassar and we’re midway through that a new phase characterized by the dominance of Pertamina particular cycle. Finally there’s the smaller independents and the steady rise of indigenous actors.” targeting the initial development of stranded fields and that’s where there been some big time volatility.” “Until relatively recently, opportunistic independents were very much in the ascendency while the heavyweight companies would sit back not minding to pay a premium for getting in late. These speculative actors would seek out profitable pockets in the vicinity of the largest discoveries, From Active Vessel, Project Mobilization but many of these crumbs under the table have now been to In-active Vessel. hoover-ed up and the remaining outstanding prospects such as unconventionals and the under-explored eastern frontier will require deep pockets and considerable staying power. We’ve therefore noticed a strong tendency for some of the smaller outfits to disengage and de-risk their SHIPPING SERVICES | PROJECT MOBILIZATION | CREW MANAGEMENT exposure especially after some spectacular collapses such SERVICES | LOGISTIC SERVICES | TRANSPORTATION & WAREHOUSING SERVICES | LAY UP ANCHORAGE & MARINE SERVICES

SHIPPING SERVICES TRANSPORTATION & LAY UP ANCHORAGE WAREHOUSING SERVICES & MARINE SERVICE PT. Pelayaran Batam Samudra PT. Batam Samudra Jaya PT. Bias Delta Pratama • Shipping Agency • Steve Doring • Anchorage Service • Crew Formalities • Warehousing • Pilotage We’ve noticed a strong tendency • Ship Owner • Transportation • Ship to Ship Transfer “ • Underwater/Salvage LOGISTIC SERVICES CREW MANAGEMENT for some of the smaller outfits to • General Marine Service SERVICES PT. Batam Samudra • Port Operator disengage and de-risk their exposure • Project Mobilization PT. Bias Samudra For any enquiries, please email to : • Custom Clearance • Ship Crew Management [email protected] especially after some spectacular UNIT BUSINESS • Freight Forwarding • Tour & Travel

collapses Parent company of : “ Address : Komp. Sentosa Purnama Jaya Blok B No. 02, Jl. Yos Sudarso, Batu Ampar - Batam 29451, Indonesia MARK GODSON, KPMG, HEAD OF ENERGY Phone : +62 778 422 265 - Fax: +62 778 422 275 www.biasmandiri.com | www.biasdeltapratama.com

30 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

right here across the archipelago,” declares Andrew Law, general manager of Weatherford. “Innovation savvy service suppliers like us are going to be playing a big part in this new drive for efficiency by introducing the sorts of technologies that can trigger a step-change in production like our deep gas lift,” he predicts. SACHA SUSILO NATHAN Nathan Meehan, senior advisor at Baker Hughes very WINZENRIED SISWOUTOMO MEEHAN much concurs. “We’re going to be heavily involved in de- head of energy Commissioner, senior advisor, division, PwC PGN Saka Baker Hughes vising new strategies to drill wells at lower cost and are ramping up our offering for reservoir development services because we want to be involved earlier in the design One such homegrown outfit is PGN Saka which has been process so as to better understand the geo-mechanics of raising eyebrows for the speed in which it has developed our client’s reservoirs and thus be positioned to provide deepwater and shale positions: partnering with GDF Suez fit-for-purpose, more preemptive solutions that reduce op- EPI in Jangrik and even acquiring some acreage in Texas’ erating expenses,” he explains. Eagle Ford so as to learn the ropes in shale gas. “We aspire to become the model for other Indonesian firms to follow. The secret to our rapid success lies in smart partnerships, knowledge acquisition and equitable joint ventures, though PETROLEUM DRILLING EQUIPMENT of course it certainly helps to be able to fall back on the LINE PIPE AND OIL COUNTRY TUBULAR GOODS OILFIELD CHEMICALS clout of PGN as your parent company especially when you GEOPHYSICAL EXPLORATION, LOGGING, need to commercialize the gas you’ve discovered,” confi- MUD LOGGING AND WELL TESTING EQUIPMENT dently reveals commissioner Susilo Siswoutomo, who also DRILLING, WORKOVER AND happens to be a former deputy energy minister. PRODUCTION TOOLS OIL PRODUCTION EQUIPMENT OILFIELD SURFACE FACILITIES PETROCHEMICAL AND REFINERY EQUIPMENT OFFSHORE EQUIPMENT MAKING FIT FOR FIFTY

Structural change is also afoot with the Indonesian market seemingly positioned right at the vanguard of the many dramatic developments sweeping the industry as energy companies scramble to make themselves ‘fit for fifty” in the wake of a global oil price collapse. “We all enjoyed a good run from this past 4 year super-cycle of heady prices, but now everyone is having CPTDC Indonesia Office to return to the drawing board and rethink their busi- TEL +62 215 762 585 ness models because there’s going to be no place for the FAX +62 215 762 587 over-designed and over-engineered projects of yesteryear www.cptdc.com in the new epoch that’s unfolding and being played out www.energyboardroom.com Indonesia Oil & Gas April 2016 31 COVER STORY Striving for a comeback

Achmad Zakky Ridwan, president director of the certification and inspection society DNV-GL also identifies definite shifts in corporate strategy with “standardization fast becoming the new innovation” for many businesses. “There are many quick wins to be realized by importing solutions that have proven highly effective elsewhere...many of the infrastructure projects our cli- ACHMAD ZAKKY FANNY LISA YULIA RIDWAN HERAWATI ents are undertaking are capex intensive so they cer- COO, Bias president founder, PT. Mandiri Group tainly don’t want to be caught reinventing the wheel director, DNV-GL Navita Origo Solutions unnecessarily,” he observes. “Furthermore, in this new climate of stretched budgets, customers are also deter- mined to leverage as many synergies as possible so are Many local firms are equally keen to jump on the band- increasingly demanding bundles of integrated servic- wagon and respond to the widespread appeals for ‘op- es which is actually positive news for a firm with our timization.’ “This actually represents a momentous broad sweep of capabilities.” window of opportunity for the taking,” exclaims Fanny Herawati, founder of Navita Origo who is busy trying to convince E&P players to embrace the concept of the digital oilfield. “Finding and producing hydrocarbons LEMIGAS. SOLVE YOUR is becoming more technically challenging and economically risky, but we possess a real remedy in raising PROBLEM performance and reducing non-productive time through real-time data monitoring and interpretation that will UPSTREAM drive faster response times and facilitate more accurate Addition of oil and gas resources and reserves Increase of oil and gas production and reserves decision making,” she proudly proclaims. Development of unconventional gas (CBM, Shale Gas) The mantra of cost-containment and leaner operating Carbon capture and storage and enhanced oil recovery structures is also being applied to transport and ship- (CCS-EOR) ping functions meaning bulging order books for any ‘fixer’ able to smooth out the considerable costs asso- DOWNSTREAM ciated with Indonesia’s notoriously complex logistical Development of oil & gas processing technologies and products landscape. One such entity eager to capitalize on the Development of biofuel technology ‘new mood’ is the Bias Mandiri Group which is already Development of gas technology, storage, transportation making a name for itself as a reliable, full-solution & utilization agent of choice for forwarding, shipment, port and ma- Development of CO emission reduction technology 2 rine services. “Through our longtime cultivated association with port and handling authorities, we’ve become

Jl. Ciledug Raya Kav. 109, Cipulir, deeply specialized in speedily securing the requisite Jakarta Selatan 12230 permits and licenses needed for our clients to surmount T: 62-21-7394422, Ext. 1218 F: 62-21-7246150 their mobilization, movements and logistics challeng- www.lemigas.esdm.go.id E: [email protected] es across Indonesia’s uniquely complex operating environment as an archipelago encompassing over 17500

32 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

Eastern flair–how Asian investors cracked the Indonesian market

JEFFREY CHEN billion), Japan (2.5 billion) and such as the transitional zone,” WENHAI Korea (1 billion). “The Singapo- concedes Khairul Rizal, founder — rean and Indonesian economies of Quest Geophysical. chief representative, are highly synergistic and com- For PetroChina’s subsidiary, CPTDC plementary: the former acting CPTDC, ever-closer engagement as a premium resource base with actually makes a lot of sense, not the latter offering a massive hin- just economically, but politica- terland ready to absorb high vo- lly as well. “We perceive a clear “Western entrepreneurs would lumes of capital, technology and opportunity to establish a dee- do well to take note of the Chi- knowhow. Then there is also the per footprint in Indonesia,” as- nese, Japanese and Koreans shared cultural understanding,” serts chief representative, Jeffrey who’ve all been here for many explains Meurling Noor, chairwo- Chen Wenhai. “Not only is there years, who continue to invest man of the Singaporean Cham- a strengthening business case and have been highly successful ber of Commerce. for developing in-country manu- over a prolonged period. East In the oil and gas sector, such a facturing, but also, at a strategic Asian companies are the ones phenomenon shows little sign of level, the Chinese government that really ‘get’ this market. It’s abating. “There’s been a surge is actively encouraging Chinese a clear illustration that if you de- of Chinese companies crowding businesses to interact more pro- monstrate patience and learn to out the steel and oilfield structu- foundly with the South East Asia work astutely within the system, res fabrication market, many of region,” he explains. “The clear you can really travel far,” coun- which are fiercely competitive on willingness is to see Chinese en- sels KPMG’s Mark Godson. price,” divulges Arkon Prima’s terprise making material invest- The statistics for inward invest- Ari Slamet Notokoesoemo. Other ments in nearby markets rather ment for the first 3 quarters of commentators agree. “Chinese than just treating them as an ex- 2015 would certainly seem to firms now dominate the geophy- port destination so, were we to back up that assertion with Sin- sics and seismic study slice of establish a factory in Indonesia, gapore toping the list by brin- the local market, which has pus- then that would align neatly with ging in USD 3.5 billion dollars hed some of the more traditional prevailing foreign policy,” he re- of FDI followed by Malaysia (2.9 entities like us into new arenas affirms.

islands,” explains chief operating officer, Lisa Yulia. “already we’re witnessing some previously unthinka- “It’s apparent that the old style of doing business ble developments like mini-refineries being incorpo- has run its course and that the winners in Indonesia’s rated into upstream facilities.” new energy game will have to demonstrate high lev- Rovicky Siswanto, chairman of IAGI has also picked els of versatility and adaptability,” muses Hasanuddin, up on this growing trend. “It’s becoming all the rage to director of the consultancy, CBA see companies kaleidoscope-ing down the value chain Energy, which seeks to capitalize on and bundling upstream and downstream into a single en- the prevailing climate by injecting tity so as to trim back the transaction chain. We first saw fresh avant-garde ideas into the mar- it in the geothermal niche with no one selling steam, but ketplace. Those who prove capable rather electricity. Then the same model was replicated at providing technologies and meth- by mine-mouth providers, this time converting coal into odologies that deflate cost, shorten electricity to sell direct to the extractive metals sector. HASANUDDIN supply chains and instill efficiency Before you know it, we’ll see E&P players delivering director, CBA electricity converted from gas to the remote and isolat- Energy are going to experience a serious upswing in business,” he predicts, ed off-grid regions,” he surmises.

www.energyboardroom.com Indonesia Oil & Gas April 2016 33 COVER STORY Striving for a comeback

CHARTING INDONESIA’S OIL AND GAS For the west side of the country we are adopting a phi- RENEVENUE FLOWS losophy of pipelines and fixed installations because the offshore space comprises mainly shallow water. Then

Total of 71 oil and for deep water Eastern Indonesia, the intention is to re- gas extraction blocks sort to virtual pipelines deploying small LNG vessels to

COMPANIES Companies island hop around a central hub,” clarifies D-G Migas’ declare taxes and shares production director general, Wiratmaja Puja. according to block: “project-level “The smart money is all on investments in bridging reporting” infrastructure and supply chain architecture to link up the future pools of gas supply in the east with the main From every block, government receives tax (left) and share markets of demand in the west,” muses former energy of oil / gas (“in CENTRAL kind”) minister, Darwin Saleh. “My personal forecast is that GOVERNMENT Part of oil / gas is mini-LNG will turn out to be the next big growth indus- sold to state-owned refinery (domestic try,” he discloses. “South East Asia is an incredibly gas- use) and another part on international prone region characterized by vast numbers of stranded market (export) fields and a 500 billion strong population concentrated Total revenue from oil and gas: in the high-density, urbanized pockets of Java, Sumatra, USD37 bn Kalimantan, Peninsular Malaysia, Thailand and Luzon. Part goes to state budget It doesn’t take a wizard to realize that mini-LNG might prove the optimum way for overcoming the physical dislocation and joining-up the dots,” he reasons. Part of revenue is distributed to the “Mini-LNG certainly offers an enticing proposition regions

REGIONAL for foreign investors because it’s a domain where the AND LOCAL government has delivered clear signals (in its resolve GOVERNMENT to convert power plants away from a dependency on Source: EITI. expensive diesel) yet where potential local competitors like Pertamina and PGN simply don’t possess the requisite technology,” calculates Q Energy’s David BETTING ON GAS Braithwaite. “Almost everything to make it work from the floating storage and regasification units (FSRUs) to Of the multitude of new market opportunities opening the mini-LNG micro vessels to the up, one sure-fire bet seems to be the engineering, pro- facilities to break bulk will be reliant curement, construction and installation of gas infra- on outside expertise and technology,” structure. After all, Indonesia’s proven gas reserves are he speculates. three times its oil equivalent, local demand has skyrock- “We hope that Indonesia can ac- eted over 155 percent within a decade and the Energy tually become the first place to im- Ministry has announced its intent to “ensure gas main- plement mini-LNG on a grand scale DARWIN SALEH tains a contribution of 20 percent primary energy sup- and that we can assist the country in former energy plies through to at least 2025.” “We have a long-term realizing this. Indonesia would be an minister strategy for gas utilization and infrastructure in place. ideal test-bed for new technologies

34 Indonesia Oil & Gas April 2016 www.energyboardroom.com COVER STORY Striving for a comeback

and operating styles that can eventually be exported stranded field then redeployed elsewhere as the gas re- round the world to other countries with similar com- source depletes) is actually a critical endeavor because positions such as the Philippines. We see it as a great one solution might appear very good on Capex side, but learning curve where we can experiment new approach- actually end up being very expensive to maintain from es and optimize them,” attests Johan De Saeger, Chief an Opex perspective,” he notes. Representative of Engie. The new activities underway will also likely cascade into growth for associated business areas. “You can expect there to be a significant boost in demand for the HE WHO DARES, WINS provision of in-depth concept and feasibility studies prior to selection of gas infrastructure options,” rea- Overall, the Indonesian market re- sons DNV-GL’s Khaled Mattar. “Evaluating the eco- mains something of a paradox: mush- nomic case of competing infrastructure proposals (such rooming energy demand juxtaposed as comparing permanent base fixed pipeline installa- with plentiful natural endowments, tion solutions against FSRUs that can be stationed at a but limited commensurate business LIN NEWMANN opportunities for developing that ex- executive director, traordinary potential. “It still presents AmCham what I would describe as an ‘acquired taste’ for most foreign entrepreneurs,” remarks AmCham’s Lin Nemann. Yet the numbers don’t

Delivering guidance, performance and operational excellence lie and with some USD22.2 billion worth of investment for your subsea and oﬀshore needs. already spent on upstream for 2015, some of the more au- Expertise in engineering integration and provision of bespoke dacious investors are raking in considerable profits in what SURF, mooring and modular package solutions. continues to be a high risk – high reward environment. Considerable local knowledge and higher local content. “The base fundamentals of the market over the long term look promising and now is certainly the moment to be buying up cheap and seizing those asset disposals if you have the cash in hand,” attests Eric Herman of Puma Energy, an integrated gas company that has taken the local market by storm by acquiring much of Medco’s downstream business. “The plunging oil price actually affords great possi- bilities to those actors possessing capital and enacting counter-cyclical strategies who can take advantage of Global Support – Local Presence – Smart Solutions the weakening positions of their competitors to take a step ahead,” discerns Hendra Lesmana, country man-

Menara Rajawali 23rd Floor ager at John Crane. “In many respects the winners of Jl. DR. Ide Anak Agung Gde Agung Lot #5.1 Kawasan Mega Kuningan, Kuningan Timur tomorrow, will be borne out of the consolidation of the Setiabudi, Jakarta Selatan 12950 P: +6221 576 1725 F: +6221 576 2581 market underway today,” he acknowledges. It would www.cba-energy.com therefore seem all is still to play for. www.energyboardroom.com Indonesia Oil & Gas April 2016 35 MERGERS, ACQUISITIONS AND SHAKE-UP Craig Stewart, Ophir General Manager

BETTING BIG ON DEEPWATER CRAIG STEWART

Ophir General Preface: Craig Stewart, the general manager of a feisty new Manager and entrant to the local market, Ophir, outlines the company’s president of the lofty offshore ambitions while shedding light on the rationale Indonesian Petroleum Association (IPA) behind one of this year’s headline mergers and acquisitions.

EBR: Maybe you could start by giving an overview of essentially to seek out and target discoveries dating from the Ophir’s newly acquired assets in Indonesia and their cur- 1980s and 1990s, which were considered non-economic at the rent state of commercialization? time. With new innovations in technology over the past dec- CRAIG STEWART (CS): Ophir today possesses 13 PSCs ade and a soaring increase in commodity prices these dormant in Indonesia: seven of which belonged to Salamander along assets suddenly became much more economically viable to de- with a further six deepwater blocks, which were recently ac- velop. At the same time, they remained under the radar screen quired from Niko Resources. Last year, Salamander made the of majors who wouldn’t consider them to be scalable enough. headlines for its discoveries in West Keredan, which essentially It was a niche that was perfect for an entity like Salamander. ended up doubling the size of their original flagship Keredan Typically the company would concentrate on a small number field to 600 bcf. We are thus forging ahead with the develop- of asset positions, or hubs, that offered the full spectrum of ment of this very promising field. production, development and exploration opportunities and Successfully integrating Salamander within the Ophir Group would insist on holding the operatorship so as to be able to will naturally be a key priority for this year. At the same time we control the scale, scope and pace of implementation of the will be conducting a re-evaluation of all the acreage in the por- work programmes across its asset base. tfolio so as to define the plan of development. For Keredan, for Ophir, by contrast, has been a deepwater explorer, pure and example, we want to explore the viability of supplying the local simple with a geographic focus firmly on the African sphere. coalmining industry whom appear keen on the idea of substi- We’re taking about big money drill programs with a single well tuting their considerable diesel consumption for LNG. costing anything between 50 and 100 million USD. Their target would be the sort of mega discoveries that would also be EBR: Prior to the takeover, Salamander was a full cycle of interest to the majors and super-majors. upstream oil and gas company with an illustrious reputation as one of the more vigorous independent E&P com- EBR: So, when you blend those two very different ap- panies in Indonesia. Ophir’s backdround as an Africa-fo- proaches what do you get? cused deepwater explorer is markedly different. What, CS: Well, the acquisition allows Ophir to expand its foot- then, can we expect from the effective merging of these print to transcontinental proportions. It also enables the two very distinct entities? company to build a production base that can help finance the CS: Salamander’s business strategy was very similar to that sort of ambitious exploration programme that it is very keen of some of the other smaller independent E&P companies ac- to pursue. The purchase of Salamander is in many senses tive in Indonesia such as Pearl or Kris Energy. The idea was the first step to establishing that readymade production

36 Indonesia Oil & Gas April 2016 www.energyboardroom.com MERGERS, ACQUISITIONS AND SHAKE-UP Craig Stewart, Ophir General Manager

EBR: Is the acquisition of Salamander symptomatic of a broader trend taking place across the Indonesian E&P landscape? We’ve been witnessing firms like Niko and Hess exit the market and some stakeholders are speaking of a consolidation in the upstream market. CS: The Indonesian market has always been pretty tricky for the smaller E&P players and with the oil price crash everything has got a whole lot tougher. Explorers have to grapple with a highly demanding operational environment in which the time taken to bring a discovery into production exceeds 15 years. platform for internal financing. The simultaneous buying You need pretty deep pockets to be able to endure this length up of Niko’s deepwater acreage also makes sense because of time without generating revenue. More recently, we’ve seen those are precisely the sort of high-impact, frontier explora- a push for unconventionals with a number of heavyweight tion assets that Ophir consider to be their specialism, their players trying their hand at the deepwater prospects in the bread and butter so to speak. Makassar straight with mixed degrees of success: ENI, Statoil, In many respects Salamander was a perfect choice for Marathon and Anadarko to name a few. We are midway takeover because of the immense experience and know- through that cycle with those PSCs having been awarded a few how contained within. We’re talking about a fully-fledged, years ago and this is a bandwagon that Ophir is now climbing stand-alone actor with a strong track record active across on. Our ambition is to continue and further the cycle. the full chain of E&P activities in Indonesia. Not only do North American outfits in particular have been under great you acquire the expertise of being an operator, but also the pressure to pull out of difficult markets such as Indonesia and know-how of how to play the Indonesian market, which is to focus instead on their home markets. Hess, for example, notorious for being difficult. In Africa, Ophir could operate would fall into that category. It used to be that the smaller from Perth and parachute in personnel and technology as companies would target pockets in the vicinity of the large and when needed right up to the preliminary development discoveries, but many of these ‘crumbs under the table’ have phase. Indonesia, however, represents an entirely different now been hoovered up. The outstanding opportunities now ball game. are going to be in the underexplored east and unconventio- You cannot get anywhere acting remotely. Procurement nals and that is going to be high risk, costly and require a lot has to be conducted within country. There are local content of staying power. requirements to deal with and local service suppliers to be navigated if you are to strand any chance of executing any EBR: What advice do you have for incoming upstream blocks for which you possess the licenses. Salamander isn’t actors seeking to make a success out of the Indonesian then merely a production base for generating cash flow, but a market? fount of insider knowledge and readily functional operating CS: You need to build up a strong indigenous workforce. entity that is going to be vital to the success of any deepwater Nationalistic tendencies abound in Indonesian oil and gas and exploration campaign Ophir desires to undertake. The end you will need to embed your business into the local ecosystem product is therefore a logical blending: not just of geographies if you are to be successful. Luckily the local level of human but also of capabilities and a fusion of expertise. It’s a fit that capital is technically very high as Indonesia enjoys long and makes a lot of sense. historically bountiful oil and gas heritage. www.energyboardroom.com Indonesia Oil & Gas April 2016 37 UNCONVENTIONALS Kim Morrison, CEO Lion Energy

FORTHCOMING SHALE BOOM? KIM MORRISON

Preface: The CEO of a pioneering Australian oil explorer, CEO, Lion Energy Lion Energy, speaks out about defying the naysayers, positioning his company as an early mover in fracking and betting on Indonesia’s embryonic shale oil and gas market.

EBR: Lion energy has built up an eye-catching portfo- targets at the same time in a very cost-effective way. Our pro- lio of conventional and unconventional assets in Indone- duction from conventional oil and gas meanwhile generates sia’s Sumatran basins. How has this come about? the cash flow that enables us to fund our on-going activities KIM MORRISON (KM): Lion Energy is an Australian in the unconventionals domain. Stock Exchange (ASX) listed E&P company focused on Indonesia where it has been operating for over 15 years. We EBR: How about your choice of location in Sumatra? possess two existing PSCs – Seram and South Block A – and KM: Our initial focus on the North and Central Sumatran have meanwhile been establishing an early mover position in basins chimes with our attentiveness to cost control and re- unconventionals with 2 on-going Joint Studies and 2 further alising optimal efficiency. We strive to be in the heartlands of Joint Study applications in process. Key to our success is our proven basins, in areas with a presence of existing infrastruc- strong management team with proven records as creators of ture and where the local populations are habituated to oil and shareholder value in the petroleum industry. We are motivat- gas activity. The one area in Indonesia that stands out on all ed by having considerable “skin in the game”. Importantly of these counts is Sumatra: existing infrastructure already in we all have extensive Indonesian in-country experience. Our place, nearby markets exist in the form of large conurbations, strategy for growing our company is essentially to build near- and there is long legacy of hydrocarbons development so the term conventional revenue, whilst concurrently exploiting an local government regulatory frameworks are well aligned with associated unconventional upside. what needs to be done. In our South Block A PSC in North Sumatra, for example, we have defined a low risk oil prospect EBR: Tell us more about the rationale behind pursu- with near term production potential and a world-class gas/ ing both resource categories concurrently. condensate prospect. This block is well located with respect KM: As a small independent entity it’s useful to be hedg- to existing pipeline networks and catchments of market de- ing our bets. Our unconventional strategy is to build a large mand that will support the economics of the project. position with high working interest and use conventional exploration to de-risk the potential in a cost effective way. We EBR: You’ve talked about placing substantial skin in consider the unconventional portfolio as ultimately being the game. Having an Australian-listed company that is attractive to a large multinational and plan to leverage our exclusively focused on the Indonesian market seems to position very much in a similar way to early movers in Texas. be a rather unorthodox strategy, which runs counter There are also many logical synergies to be leveraged from what most Australian investors are doing. Why does this this sort of twin-prong approach. When drilling a conventio- approach work so well for Lion? nal well, we can gather information on the unconventional KM: Indonesia tends to have a bad reputation in Australia

38 Indonesia Oil & Gas April 2016 www.energyboardroom.com UNCONVENTIONALS Kim Morrison, CEO Lion Energy

the market dynamics and attempt to skip corners, which leads them into trouble. For those that do possess the knowhow there are real rewards to reap. The success of Australian oil and gas explorers AWE and Santos are tes- tament what can be achieved if you go about it in the right way.

EBR: You are notable for being one of the very first movers in Indonesian shale. What do you say to the naysayers who doubt the country’s suitability for – there is almost the feeling that the country is synony- shale development? mous with corruption – which scares away many of my KM: Indonesia has defined unconventionals as being compatriots. At Lion, we perceive this judgement to be hydrocarbons that require fracture stimulation to pro- unfair when speaking of Indonesian oil and gas. All-too- duce. We’re not looking at coal seam gas but rather at often, the hydrocarbons sector gets lumped together with tight and shale gas, something that s been a steady fea- the mining industry, which is handled in a fundamentally ture of the American market for the past 50 years. We different way in Indonesia in that much of the regulation don’t have to reinvent the wheel. I have absolutely no takes place at the local level where corruption and mis- doubt that if the Sumatra basin happened to be within management is rife. Oil and gas, by contrast, tends to be part of US territory rather than in Indonesia, then shale dealt with by the central government, which is cleaner production would be well underway by now. Just so long and more even-handed so presents an altogether different as the government implements an appropriately support- proposition. ive regulatory framework there’s no reason why shale de- The case for investing in Indonesia is pretty compe- velopment can’t be a massive success here too. lling from both a conventional and unconventional We predict there will be some low hanging fruit in ter- standpoint: Indonesia is the world 4th largest country ms of tight oil and gas, which will represent the quick by population with over 250 million people; it has a dyna- wins for unconventional development. Later on, shale gas mic growing economy; and energy demand growing at will come into play to the point where it develops into a around 5%. Conventional oil and gas production is falling fundamental part of the local industry. There’s a long at the same time as demand is growing leading to a major way to go and it will be costly. We don’t profess to have energy short fall forecast in the years ahead. Moreover the resources to take it through to first gas but we’re loo- the government is actively encouraging exploration for king at aggregating a position, de-risking it initially and unconventionals and is offering attractive fiscal terms. In then partnering with a bigger player to push it over the Indonesia we can pick up acreage for 5 dollars an acre and finishing line. that constitutes paying the signature price for a PSC. For Lion is pursuing new unconventional PSC’s via the the US there are people paying 10,000 dollars an acre for Joint Study process, which is a low cost way for the com- shale development. The contrast is stark. pany to secure large acreage positions. Each of these joint We understand the market well, so are ready to embra- studies has multi-TCF and multi-hundred million-barrel ce these opportunities. The ASX listing also affords us potential so it’s a risk that we calculate as worth taking. a certain credibility and investability. Companies that Our success will depend on our abilities to identify the don’t do so well tend to be those that fail to understand sweet spots. www.energyboardroom.com Indonesia Oil & Gas April 2016 39 INFRASTRUCTURE AND CONSTRUCTION Big-ticket investments

percent, well below that of neighbouring Thailand, Malaysia BUILDING and Vietnam. The shortfall to make up remains considerable. “We only THE ROAD possess 840 kilometres of toll roads, whereas China adds an TO THE FUTURE additional 4000 to 5000 kilometre every year!” acknowledges Widodo. Even more so in the realm of energy, where a lack of supporting infrastructure from pipelines to grid networks Preface: By making infrastructure development one of the is preventing the country from tapping vast hydrocarbons defining planks of his presidency, Joko Widido strives to in- deposits in the far-flung eastern regions. Dwi Soetjipto, CEO ject new momentum into Indonesia’s stuttering economy. of Indonesia’s national oil champion, Pertamina, forecasts that “as much as 100 billion USD will need to be pumped into the new build and upgrade of energy infrastructure” so ublic spending in Indonesia rose by 7.3 percent as to stave off energy crisis and successfully anticipate the in quarter four of 2015, as a direct response to 4th most populous nation’s skyrocketing energy demand. P the commencement of President Joko Widodo’s Realizing the imminent severity of this issue, Pertamina ambitious infrastructure development program, have already established a midstream master plan to secu- which strives not only to keep a lid on unemployment and re the supply of refined oil products and started proac- prop up demand for raw materials, but to simultaneously tively courting outside investment for the construction boost investor confidence and buttress Indonesia’s growth of hardware such as new refineries. Pertamina’s refinery rate amidst rising competition from within the Association director Rachmad Hardadi, says the plan aims to “raise the of South East Asian Nations (ASEAN). company’s own refining capacity to 1.9 million BOE/D by Such news has been warmly welcomed by many in the 2019,” though admits that even this will not be enough to business community who view the Widodo presidency as an make Indonesia self-sufficient for refined products. “Our important catalyst to rectifying decades of infrastructural plans when fulfilled will narrow the gap to estimated con- neglect and underinvestment when infrastructure spending sumption of refined products by 2025 to 600000 BOE/D,” as a proportion of GDP fluctuated between a mere 3 and 6 he calculates.

40 Indonesia Oil & Gas April 2016 www.energyboardroom.com INFRASTRUCTURE AND CONSTRUCTION Big-ticket investments

PROJECTS IN OIL AND GAS INFRASTRUCTURE FROM 2015 TO 2017

PROJECTS EXPECTED EXPECTED EXPECTED INVESTMENT TOTAL OUTPUT 2015 OUTPUT 2016 OUTPUT 2017 (IN USD MILLION) (IN USD MILLION) 2015 2016 2017 Development -4 gas stations -plots of land for -22 gas stations 18.6 66.7 118.6 203.9 of oil and gas -2 pilot workshops 22 gas stations -38 km pipeline transportation -1,00 converter kits -documents for en- -5 GTM infrastructure vironmental study -7 pilot workshops -detailed engineering design -5,000 converter for construction kits (DEDC) -10 mobile refu- cling units (MRU)

Improvement Front-end enginee- Detailed engi- Construction of 35 0.8 22.7 26.8 50.3 of fuel storage ring design (FEED) neering design fuel depots capacity in eastern for 35 locations for construction Indonesia (DEDC)

Development of Survey and FEED Land acquisition Construction 8.5 170.4 113.6 292.5 Trans Java gas and construction pipeline infrastructure (Somarang-Ci- rebon-Balengan)

Development of Survey and FEED Land acquisition Construction 2.2 44.3 29.5 76.0 gas pipeline in- and construction frastructure Bali- kpapan-Samarinda (130 km)

Floating storage FEED for a floating Construction of Construction of 2.6 56.8 75.7 135.2 and regasification storage unit (FSU) FSU regasification units units and regasification in 4 locations in for 4 locations eastern Indonesia

Development of Construction in Construction in 3 Construction in 3 4.2 12.5 20.8 37.5 gas network for Balikpapan (4,000 cities: Musi Ban- cities: Modan, So- households SR) yuasin, Cilegon, marang, Samarinda Surabaya (12,000 (20,000 SR) SR)

Construction of FEED for 3 loca- Construction in 3 Construction in 3 1.9 11.4 11.4 24.6 LPG tanks 2x1,000 tions locations (Jayapu- locations (Jayapu- MT in three loca- ra, Wayame, Bima) ra, Wayame, Bima) toins (Jayapura, Wayame, Bima)

38.9 384.7 396.4 820.0

Source: Energy and Mineral Resources Ministry. www.energyboardroom.com Indonesia Oil & Gas April 2016 41 MINI-LNG APPLICATION Johan de Saeger , ENGIE chief representative

PLAYGROUND FOR INNOVATION?

Preface: The Chief Representative of newly rebranded EN- JOHAN DE GIE discusses how the Indonesian energy sector is fast be- SAEGER coming a test-bed for the demonstration and scaling up of fresh technologies and innovative operating concepts. ENGIE chief representative

EBR: In April, GDF SUEZ underwent a thorough re-branding that not only established the company under the new banner of ‘ENGIE’, but also entailed over- such as battery storage to the extent where we can see power hauling the corporate strategy. In a nutshell, what are generation being scaled down to the ‘single self-sufficient buil- the main changes? ding’ level. ENGIE is therefore transitioning to equipping a JOHAN DE SAEGER (JdS): The rebranding to ‘ENGIE’ ‘tomorrow-land’ less reliant on centralized utilities. is part of an overall strategy to align ourselves with three Thirdly, ‘digitalization’ is fundamentally changing the emerging trends in the global energy domain. Firstly, we are demand profile of electricity. A combination of digital appli- aware the world is entering a new era characterized by a ‘de- cations and refined storage mechanisms are flattening the dis-

carbonisation’ and an urgency to limit global CO2 emissions. crepancy between peak and non-peak demand and reducing We are thus adapting ourselves in line with this new reality by the need for peak shaving open cycle gas turbines. In the futu- transitioning away from carbon-heavy fossil fuels. Gas power re, even common household items such as fridges will incor- generation produces less than half the emissions of the most porate smart tech components that can switch on and off efficient types of coal so we are increasing our work share relat- anticipating shifts in electricity demand. ENGIE is therefore ed to gas and phasing out the share pertaining to coal. preparing itself to make full use of these technological leaps. The second tendency that has come to our attention is ‘decentralisation’ which we consider is going to be quite EBR: What has been the direct impact of these three impactful in Southeast Asia. The power sector has been qui- developments to the Indonesian operations? te stable in terms of structure for the past century: changes JdS: Our Indonesian operations will actually be at the have tended to be incremental and evolutionary and it hasn’t vanguard of the three shifts. The country is undergoing its been subjected to the sorts of disruptive technologies that own transition to gas and we will be bidding for mid and have revolutionized other industries such as upstream hydro- downstream gas value chain projects many of which will be carbon E&P. We calculate that this is set to change radically. tenders from PLN, the single buyer for electricity. We think that big centralized power plants that are distribu- Being an archipelago of some 18,000 islands, Indonesia is ting their electricity to industrial, household and commercial also suited to a micro-grid, decentralised power generation consumers via transmission and distribution lines is a model approach so we will be seeking to participate in that too and that is increasingly becoming less dominant. Breakthrough bolster our capabilities in small-scale LNG. We are working technologies are now allowing us to miniaturize components with reputable local companies for potential investments in

42 Indonesia Oil & Gas April 2016 www.energyboardroom.com MINI-LNG APPLICATION Johan de Saeger, ENGIE chief representative

we have much to offer from supplying the suitable molecules to implementing and operating the floating or land- based storage hubs, the micro regasification units and the small-scale power plants. We hope that Indonesia can actually become the first place to implement mini-LNG on a grand scale and that we can assist the country in realizing this. Indonesia would be an ideal test-bed for new technologies and operating styles that can eventually be exported round the world to other countries with similar compositions such as the Philippines. Indonesia is an exciting place to be right now for micro-solutions. We see it as a great learning curve where we can conduct feasibility studies, test out new approaches and optimize them. PLN has already come out with a tender to supply rega- small-scale LNG projects, encompassing small-scale lique- sified natural gas to the gate of 32 small to medium sized faction, small-scale LNG vessels, and small-scale storage and power plants in the eastern regions. They are essentially re-gas facilities. We have also noticed that Indonesia, histori- demanding a turnkey project with the exception of the cally a big exporter of LNG is no longer entering into export power plant element, which they intend to build them- contracts and is now rerouting the resource to cater to domes- selves. This means that the bidding company will have to tic consumption. What’s more, Pertamina has even signed supply the molecules and the small scale vessels that will import agreements with US companies. Given our wealth of do the milk run from storage hubs to the sites. Indonesia LNG assets worldwide, we can therefore envision selling LNG is thus fast becoming a great playground for applying inno- to Indonesia, especially for new IPP developments and within vative concepts. specific cooperation agreements, so will be looking into the viability of such arrangements. EBR: How strategically important then are ENGIE’s Indonesian operations in relation to the company’s ac- EBR: Can you please elaborate on ENGIE’s capabili- tivities elsewhere? ties in small-scale LNG and the value offering you can JdS: Indonesia is becoming evermore strategically im- bring to an Indonesian energy infrastructure that is portant to ENGIE. Mini-LNG opportunities are more con- disproportionately developed in the West and where crete here than anywhere else in the world so that brings many of the remote islands in the east remain under- us huge opportunities to demonstrate our leadership and supplied? to develop new solutions. President Jokowi’s 35,000 MW JdS: We firmly believe in mini-LNG as a concept for the program within 5 years is a case in point of the burgeon- future not only in Indonesia but many places where this ing opportunities for Independent Power Producers. The could be applicable given the trend towards decentraliza- original intention was that IPPs like ENGIE would supply tion, smaller port facilities and grids. Very few companies 25,000 MW and the PLN would provide the rest. Now it yet possess a track record in this area, but given our world- looks like it will fall to the private sector to supply 30,000 wide experience pool and capabilities across the entire value MW. This is big news. Today the number of power projects chain we do think we are well equipped to become one of on offer in Indonesia is roughly on a par with the entire rest the pioneers. Our breadth of experience with LNG means of the Asia Pacific region put together. www.energyboardroom.com Indonesia Oil & Gas April 2016 43 BONDED LOGISTICS PARKS & SUPPLY CHAIN EFFICIENCY Asok Kumar, President Director of PT Schenker Petrolog Utama

SMOOTHING SUPPLY CHAINS IN A COMPLEX LANDSCAPE Preface: The president director of DB Schenker’s Indo- nesian affiliate discusses how shrewd application of the concept of Bonded Logistics Parks (BLP) can enable the world’s largest archipelago surmount its logistical challenges.

EBR: How significant is Indonesia for DB Schenk- level on a day-to-day basis. From a logistics perspective er’s global operations? it’s challenging as the infrastructure is not yet as devel- ASOK KUMAR (AK): From my personal perspec- oped as it could be. As example, a commonly used logis- tive it is not significant enough, yet; my job is to change tic concept, already implemented in China, Singapore, that. Indonesia is the fourth most populous country in Thailand and many more countries, is the concept of the world, has the highest GDP within the Association bonded logistics parks (BLP) which act as special eco- of South East Asian Nations (ASEAN) and is certainly nomic zone, where goods can be stored, manipulated the largest and most important economy in the region. and held until use without the pay of duty. It will be However, if you compare the size of DB Schenker’s op- implemented in parts of Indonesia now, however in com- erations in Indonesia with its operations in Malaysia or parison with aforementioned countries it is a rather late Singapore it falls short. Due to the highly developed na- implementation. tions on our doorstep—especially Singapore—some opportunities are limited as a lot of business is taken out of EBR: In a 2014 interview you declared that “In- Indonesia. Many major MNC’s choose Singapore as their donesia’s progress is clearly visible”; where did you regional hub even though Indonesia is the main market as identify this progress and how has this dynamic the infrastructure in Singapore is better developed, regu- evolved in the last two years? lations are more transparent and there is less bureaucracy, AK: His Excellency president Joko Widodo and his gov- which provides enhanced ease of doing business. ernment have recognized the pitfalls of their logistics infrastructure and how it impacts the Indonesia economy. The EBR: Having lived and worked around the world government has made it one of their focal points to reduce prior to coming to Indonesia, how do you assess the the logistics expenditures by developing the infrastructure ease of doing business in Indonesia? across the archipelago. I have recently witnessed strong de- AK: Indonesia undoubted challenges the ways of doing velopments and I am delighted of this progress. business due to complexity of its environment and its At DB Schenker we have the obligation to support our regulatory framework. In terms of licenses and author- customers in enhancing the ease of their supply chain ities there used to be no centralized body; businesses and provide cost efficiencies—the government develop- here had to see many different authorities on a regional ments will help us as well as our clients, as it will bring

44 Indonesia Oil & Gas April 2016 www.energyboardroom.com BONDED LOGISTICS PARKS & SUPPLY CHAIN EFFICIENCY Asok Kumar, President Director of PT Schenker Petrolog Utama

EBR: With some 75 percent of Indonesia’s oil and gas reserves located offshore, Indonesia’s hydrocarbon industry is experiencing a paradigm shift from on- to offshore. How will this affect the business dynamic of DB Schenker in Indonesia? AK: Whereas the local market dynamics for the logistics sector as a whole will undeniably change, it will not change for DB Schenker. Obviously servicing offshore sites with our services is much different from servicing onshore sites, nonetheless we have already an established portfolio in offshore services valued by our clients. Therefore we will not need to reinvent ourselves, as we already have the means, the expertise and the rep- the overall costs down for our clients and us, and allows utation to serve our clients’ offshore aspirations to the us to offer even more efficient and effective logistics’ full extent. solutions. From a pure economic perspective the government has EBR: Offshore projects are associated with much achieved much as well. Despite the low commodity price higher costs than onshore projects, how does DB and Indonesia’s dependency on it, economic growth was Schenker provide unique cost efficiencies to its clients? achieved and credits certainly belong to the new gover- AK: I mentioned earlier that the Indonesian govern- nment. Indonesia is moving in the right direction and I ment is now implementing BLP’s; two years ago we am confident that this progress will be maintained con- submitted a paper to regulatory authorities arguing sequently bringing Indonesia at its deserved level of sig- for a BLP in Balikpapan, East Kalimantan Indonesia. nificance in the region! Our argued rationale was, that up until now, equipment used for Oil and Gas projects in that area was EBR: Every company entering a country needs a stored in Singapore’s BLP and as soon as it was needed trusted logistics partner. Why is DB Schenker in In- it was shipped to Balikpapan which skyrocketed logis- donesia the trustworthy partner of choice? tical costs. Now the government is building a BLP in AK: Providing logistics services in Indonesia is a com- Balikpapan allowing us, and other players, to serve our plex business and not easily accomplished. In contrast to clients more efficiently bringing the cost down. many of our competitors that recognize the “challenge”, Currently, I would estimate 70 to 90 percent of all equi- we identify the nature of Indonesia’s characteristics as pment stored in Singapore’s Loyang Offshore Supply an opportunity. Undoubtedly its remote locations, un- Base is destined for Balikpapan in Indonesia. The sole derdeveloped infrastructure, complex regulatory frame- rationale for this location was the absence of equivalent work and high level of bureaucracy need to be addressed facilities with equivalent regulations in Indonesia. Now appropriately, and indeed, at DB Schenker we have the the benefit of such location will shift from Singapore to in-depth market knowledge, international recognized Indonesia! I would not consider this to be our sole achie- expertise and best practices, and the human resources to vement, however we did go the extra mile to support this excel in Indonesia’s challenging environment unmatched Indonesian achievement ultimately allowing us to better by competition! serve our clients. www.energyboardroom.com Indonesia Oil & Gas April 2016 45 COUNTER-CYCLICAL BUSINESS STRATEGIES Eric Herman, Puma General Manager

RISE OF A NEW ERIC HERMAN

Puma General CHALLENGER IN Manager MIDSTREAM AND DOWNSTREAM

Preface: Eric Herman, general manager of a mid- and downstream oil company ed a fundamental step forwards for the that has recently taken the local market by storm reveals the unique opportunities local entity as it empowered us to be in presented by employing a counter-cyclical business strategy at a moment when control of our own destiny. asset disposals are rife. By buying up someone else’s house and remodelling it to our liking, EBR: Puma Energy, a globally increase in share capital very much rep- we were able to slot into the mar- integrated midstream and down- resents a tick in the box and endorse- ket faster than would otherwise have stream oil company and subsidiary ment of our business strategy and cru- been the case. We still had to take our of the commodity trading multi- cially provides us with scope for action time, however, to thoroughly evalua- national Trafigura, has been going as and when we see opportunities un- te the local partner and conduct the through an expansionist phase and folding in the marketplace. proper due diligence. We were aware yesterday actually posted profit in- that some foreign entities have ended creases of 16 percent compared to a EBR: What have been the main up with inappropriate local part- year ago. Tell us about these success- milestones characterizing Puma’s ners through having been overly has- es and the strategies underpinning engagement with the Indonesian ty in their selection process and were them. market? eager to avoid that particular pitfall. ERIC HERMAN (EH): That’s ab- EH: Indonesia had already been des- In Medco, we thankfully selected an solutely right. We are in the midst of ignated as a strategically important iconic and reliable local brand whose a highly interesting period in Puma’s market for our parent company, which downstream apparatus would serve as lifecycle. As global oil prices have is entirely logical given the country’s a stable foundation on which to build dropped, a lot of the majors have been vast mineral wealth and Trafigura’s further. increasing their downstream asset dis- long established track record as one of Our in-country strategy right now is posals, but Puma remains steadfast in the heavyweight trading houses in pre- basically to supply high-speed diesel to executing its original business strategy cious metals. There are different ways the mining industry as an entry point. and already is reaping the rewards: a to enter a market such as Indonesia There is a lot of demand from the ener- rise in gross profit from USD 325 mil- and the pathway Puma eventually re- gy thirsty extractive industries and it lion in Q2 2014 to USD 375 million in solved upon was to buy into a com- actually makes perfect sense to focus Q2 this year. The other major piece of pany with an existing asset base and on this B2B niche given the embedded news has been the announcement of a reputation. We essentially bought into expertise of Trafigura. In the longer very healthy USD 500 million invest- Medco’s downstream business back in perspective, however, we can perhaps ment into Puma from our main share- 2012 and then, early last year, acquired also envisage branching into retail and holders, Trafigura and Sonangol. This the remaining shares. This represent- the lubricants market.

46 Indonesia Oil & Gas April 2016 www.energyboardroom.com COUNTER-CYCLICAL BUSINESS STRATEGIES Eric Herman, Puma General Manager,

that have extended out into the mid- population of 3 million and a relatively stream and downstream. Of the SOEs, stable, small-scale infrastructure whe- Pertamina is the big elephant in the mar- re we can be pretty sure of hitting our ketplace that, in spite of its considerable business objective. The sheer scale of the sway, cannot realistically attend to the market and expansiveness of the geogra- entire archipelago’s supply chain needs phy make Indonesia an entirely different alone. There therefore remain many de- proposition, but not one that daunts us. cent opportunities for a company like On the face of it, Indonesia looks like EBR: Tapping into the nexus be- Puma to collaborate with the national a supply chain nightmare. With over 18 tween energy and mining is increas- champion to help plug the needs of the 000 islands and a legacy in which the ingly mentioned as an emergent Indonesian economy. In terms of inter- infrastructural development of popula- market opportunity in Indonesia and national competitors, the field is rather tion-heavy Sumatra and Java has been probable growth spot for suppliers thin. Super-majors like Total and Shell privileged at the expense of the periphery and distributors. What is so attractive maintain their retail stations, but the and outer regions, there are considerable about catering to this niche market? subsidizing of fuel has never made the unmet energy needs. Then there is no EH: The Indonesian mining sector is lower part of the value chain particularly central grid into which you can plug in highly dependent on securing a steady profitable and, under the current eco- and play as might be expected in Europe and reliable fuel source and its actors are nomic climate, the tendency for them or North America. Instead you encoun- increasingly willing to pay for an inter- has been very much to pull back from ter isolated power plants fed by diesel at nationally classed distributor that can anything outside their core capabilities. considerable expense and substantial guarantee security of supply. A large per- pressure for generation of environmen- centage of a mine’s operations requires EBR: How strategically relevant are tally unfriendly coal fired power due to a consistent supply of clean fuel other- Puma’s Indonesian activities given all the local abundance of that particular wise the machines will not function op- that is going on elsewhere across the resource. To cap it all off, you confront a timally. International and local mining company’s business portfolio? myriad of permitting issues at the regen- firms alike are actively seeking reputable EH: Indonesia offers massive potential cy and local authorities levels that also partners with capabilities to fulfil their and is fundamental to our South East threaten to wreak havoc with any supply energy needs at a competitive price. We Asian footprint. We may not have a re- chain that you might be attempting to are confident that we are just the sort of tail presence in every country, but more set up and entail winning over each local entity that can fit the bill. often than not we do assume a critical community in turn. role as linchpins in the security of energy Nevertheless what others might inter- EBR: How do you assess the com- supply. We aspire to position ourselves at pret as formidable barriers to entry, we petition and Puma’s points of differ- the very epicentre of Indonesia’s energy view as excellent opportunities. For a entiation? supply solutions. start, domestic demand for supply and EH: There are three types of competi- That is not to say it will be an easy ride distribution of imported oil products tion: SOEs that have traditionally been and we are well aware of the need to pro- will only increase as the population mus- running everything, some local players ceed in a robust and purposeful man- hrooms and the country scales the value that have established a definite pres- ner. The Indonesian market is always chain. There will be much work to do in ence in the supply market such as AKR going to present greater complexity putting in place and tying in the neces- Corporindo and then the oil majors than a country such as Botswana with a sary supply chains. www.energyboardroom.com Indonesia Oil & Gas April 2016 47 THE ARCHIPELAGO DIMENSION Complexity of movements

INDONESIAN LOGISTICS: disruptive forces afoot

Preface: Logistical complications have long stymied business interactions between the country’s manifold island communities. Professional service are now innova- infrastructure. Harry Harionto, country manager of BDP ting new ways to unblock the system. International Indonesia, admits that infrastructure in some parts of Indonesia still remains “too embryonic to fully serve ndonesia, the largest archipelago in the world, counting and support logistical needs,” however is quick to praise current some 17500 islands, naturally bequeaths an exceptional government policies that mandate the build up of a web of I challenge to those who seek to construct and establish supportive energy and transportational infrastructure reaching operations in onshore E&P, namely logistics. Whilst battling to out into some of Indonesia’s more isolated rural areas. reach remote sites and to overcome the hurdles of underdevelo- The nature of Indonesia’s two-dimensional logistic challenge ped or non-existent infrastructure, stakeholders simultaneously – geographic circumstance and regulatory contradiction – tends encounter a dense thicket of overlapping rules and regulations, to limit competition between service providers. A handful of pla- which serve to further compromise logistic value chain effective- yers have actually leveraged this situation as an opportunity for ness. Few players to date have yet succeeded in transforming the- developing specialization, thus eventually realizing monopolis- se manifold challenges into a personal bonanza, bearing profits tic benefits in an otherwise highly competitive market segment. where others confront desperation and frustration. Asok Kumar, president director of Schenker Petrolog Utama, Cognizant of the extent to which escalating logistical costs calculates that “the extreme conditions” of some of the sites whe- are impeding growth and holding back the economic develop- re his oil and gas clients reside, constitute a “massive opportuni- ment of entire swathes of national territory, the recently elected ty” for those logistics firms with the right capabilities. “Moreover, administration under Joko Widodo has been making attempts many of the recently discovered hydrocarbon reserves are situa- to sweep up the regulatory jungle and haywire mesh of contra- ted in areas with practically no established infrastructure, in dictory and often-duplicated rules, permits and licenses that kick other words conditions in which Schenker has managed to in when moving merchandise, machinery and workers from one build up the requisite know-how and specialist capabilities,” he region, province or locality to another. “Rightfully so,” according observes. to James Pearson, director at Altus Logistics. Mr. Pearson, who is Conversely any logistics provider seeking success in the local busy trying to implement best practice in logistical coordination market will thus need to strive beyond mere application of the services across the Indonesian marketplace, draws attention to standard solutions deployed elsewhere, and to instead prove the urgent need for “reform of the regulatory ecosystem” so that adept at anticipating context-specific disruptions. Isa Syarif, it properly incentivizes and rewards the sorts of quality logistical country manager for Mammoet Indonesia, recounts how certain and supply chains “so desperately called for by the Indonesian R&D efforts within Mammoet’s headquarters have been dedica- business community.” ted towards “identifying and harnessing technological solutions Although the regulatory framework is still under specific to the rough geographical conditions of Indonesia terri- renewal, progress has already been made on another front: tory,” and attributes this to the success of the local affiliate.

48 Indonesia Oil & Gas April 2016 www.energyboardroom.com INDEX Including list of advertisers

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COMPANY NAME PAGE # Alfa Laval 24 Pertamina 2, 4, 7, 8, 9, 10, 11, 14, 15, 21, 23, 25, 26, Altus Logistics 48 27, 28, 29,30, 34, 40, 43, 47 American Chamber of Commerce (AMCHAM) 26, 35 PGN Saka 31 Arkon Prima 29, 33 Puma Energy 35, 46, 47 Baker Hughes 4, 31 PwC 21, 30, 31 BDP International 12, 48 Q Energy South East Asia 28, 34 Bias Mandiri Group 30, 32 Quest Geophysical 33 BIMASENA 2, 22 Sagatrade Murni 2, 19, 29 CBA Energy 33, 35 Saudi Aramco 15 Commission VII 4, 22, 28 Singaporean Chamber of Commerce 33 CPTDC 21, 31, 33 Statoil 24, 30, 37 DB Schenker 44, 45, 48 Total 11, 22, 27, 47 DNV-GL 13, 32, 35 ENGIE 35, 42, 43 ExxonMobil 21, 23 Frank’s International 27 IAGI 33 Indika Energy 2 Indonesian Petroleum Association (IPA) 2, 6, 21, 36 Inflatable Packers International 27 Inpex 11 INTSOK 27 KPMG 30, 33 Lemigas 2, 27, 32 Lion Energy 21, 38, 39 LR Senergy 4, 21 Mammoet 48 Medco 4, 23, 29, 35, 46 Migas 2, 6, 7, 16, 17, 18, 25, 26 Ministry of Energy 16, 25 National Energy Council 28 National Exploration Committee 24 Navita Origo Solutions 18, 32 Oil and Gas Governance Reform Commission 26, 27 OPEC 7, 22 Ophir 30, 36, 37

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