IHS Global Insight Perspective | |
Significance | The government mainly awarded blocks to smaller local players working in consortiums formed to share investment obligations and risk, although a few large foreign companies like ExxonMobil and Hess were also brought in for blocks with higher investment commitments given their greater financial resources and technical expertise. |
Implications | The government wants local oil and gas companies to rely on local banks to meet investment commitments as a means of shoring up the banking sector. However, the long duration of energy projects and the significant exploration risks, all borne by the contractor in Indonesia, suggest that banks may be reluctant to lend, raising some question marks over how investment obligations will be met. |
Outlook | Exploration activities will commence over the next three years, reflecting the government's strategy of maximising the potential for oil and gas discoveries in order to meet demand growth over the medium term. The government now plans to open tenders for a further 24 blocks in early May to meet its target of signing 50 more oil and gas contracts this year. |
Blocks Awarded
Indonesia's Energy and Mineral Resources Ministry has awarded 11 of the country’s new oil and gas blocks, in a long-term bid to reverse its declining oil and gas output and boost state revenues. The blocks are spread across the Indonesian archipelago, although with more focus on the lesser explored eastern areas of the country, particularly those around Papua, as was the case in the last licensing round. The blocks were awarded under a so-called direct offer mechanism, where oil and gas companies can pitch proposals to the government to carry out joint studies of blocks they are interested in. During any later tender process, these companies get first priority to develop the blocks. In Indonesia the direct offer mechanism is used in addition to the licensing round method, under which 22 blocks were awarded in October (see Indonesia: 17 October 2008: Indonesia Concludes Oil and Gas Licensing Round; 22 Blocks Awarded). The use of both methods reflects the government's aim of maximising the chances of successful discovery by offering a large number of blocks. In addition, the government has received US$21.65 million in the form of signature bonuses for the 11 blocks and expects them to draw in total investment of US$189 million, which will help boost state revenues.
Smaller local players were the main winners under the direct offer mechanism. These included relatively unknown companies such as PT Realto Energi Nusantara, PT Prosys Oil & Gas International, PT Bama Bumi Sentosa, and PT Toba Sejahtera. Indonesia's oil and gas regulator BPMIGAS has been pushing local companies such as these to meet their investment obligations for the blocks (which range from US$5.18 million to US$40 million) by relying on local banks, given the previously low rate of non-performing loans to the energy sector (see Indonesia: 27 October 2008: Indonesian Energy Firms Encouraged to Seek Domestic Funding to Avoid Credit Crunch). However, the long duration of an energy project, which leads to delays in repayment of loans to banks (which are in need of a swift boost to reserves) and the sizeable exploration risks, which raise the possibility of loan default could dissuade some banks from lending to local oil and gas companies, which may be forced to look to the turbulent international credit markets. There are therefore still question marks remaining over how local companies will finance their commitments. The increased difficulty of meeting investment commitments in the current economic climate could explain why consortiums have been formed for six out of the 11 blocks to share costs and risks as well as to pool technical expertise.
However, a few international companies were also awarded blocks. Esso Exploration International Ltd. (a subsidiary of ExxonMobil Corp.) was awarded the Cendrawasih Block together with Biak Petroleum LLC, and Hess was awarded the South Sesulu Block off Kalimantan. Australian Worldwide Exploration was also awarded the Terumbu Block. Neither Hess nor ExxonMobil are newcomers to Indonesia; Hess operates the Ujung Pangkah gas project and holds interests in the massive Natuna Block A, while ExxonMobil's has a number of assets including the Arun, South Lhoksukon/Pase complex, and the large Cepu Block. ExxonMobil and Hess appear to have been awarded the blocks because of the higher costs of exploration in these areas, reflected by investment commitments of US$40 million for Cendrawasih and US$26 million for South Sesulu, which are significantly higher than for most other blocks.
Outlook and Implications
The companies that have been awarded blocks are expected to submit their confirmations by 1 May and the contracts will be officially signed on 5 May, during the opening of the 33rd annual conference of the Indonesian Petroleum Association (IPA). The companies then have three years to complete geological and geophysical studies, seismic surveys, and exploratory drilling. The 11 blocks could only possibly start to contribute to boosting Indonesia's flagging oil and gas output once development of any discoveries begins, probably from around 2012 onwards. However, the government is extremely keen on maximising discoveries which can help reverse growing oil import dependence and flagging gas production over the medium term. To these ends, the government plans to open tenders for 24 new oil and gas blocks at the IPA conference in May. Indeed, the government has set a target of signing 50 more contracts with contractors to develop oil and gas blocks this year, as well as 14 deals to develop coal bed methane (CBM) deposits, reflecting state concerns to make use of the country’s significant coal deposits to meet forecast gas demand increases, estimated by BPMIGAS to rise by between 7% and 8% per year (see Indonesia: 9 April 2009: Pertamina Signs 12 Natural Gas Sales Agreements in Indonesia). Large foreign majors such as Total and Eni, which are both working to expand their foothold in Indonesia, could feature among foreign majors with Chevron, Murphy Oil, and BP—other possible contenders in the forthcoming round (see Indonesia: 13 November 2008: Total Looks to Expand Influence in Indonesia). The large number of new exploration blocks being offered suggests that Indonesia has significant potential to increase reserves and production of oil and gas. However, while new acreage holds significant promise for foreign companies, recent licensing rounds suggest that the government may be forced to increasingly award blocks to local operators, as a combination of reduced liquidity in the global market, investor concerns over shifting contract terms, and recent moves by NOC Pertamina to force farm-ins to high reserve blocks will deter some foreign investors from participating.