Indonesia - Maintaining momentum through 2024

Following on from my two previous articles looking at Indonesia, this third article will take a look at some of the things to look out for in 2024, with a focus on the positive decisions that need to be made to continue the momentum in the upstream industry.

A new president

The big elephant in the room for 2024 is the general election, with voting set for 14th February 2024. Joko Widodo is not running he has hit the two-term limit so we are going to see a change of president. We will have to wait and see what this means for the upstream industry but it certainly creates the potential for disruption.

Clarity on gas utilization priorities

In my first article, I discussed some of the positive above-ground changes we have been seeing over the last couple of years. However, one of the remaining above-ground challenges comes in the mixed messages on both gas pricing and gas exports. The utilization of gas produced in Indonesia can be split into four broad categories:

• Domestic - pipeline: gas distributed into the domestic market through the pipeline network, generally operated by either PGN or PLN.
• Domestic - LNG: gas distributed as LNG from one of Indonesia's LNG liquefaction plants to a domestic LNG regasification plant.
• Export - LNG: gas exported as LNG from one of Indonesia's LNG liquefaction plants to the international market.
• Export - pipeline: gas exported via pipeline. The two countries with receiving these exports are Singapore (through a pipeline from Sumatra and a pipeline from West Natuna) and Malaysia (from West Natuna).

The chart below, from MEMR data, shows these splits since 2010.

Like a number of producer nations, Indonesia is facing the challenge of trying to balance growing domestic demand with the desire for export revenues, set against a backdrop of production declines.

The reaction has been inconsistent messaging and actions, with a couple of examples for gas and LNG exports given below:

• Exports - Pipeline: in February 2020, the Indonesian government announced that gas exports from Sumatra to Singapore would be stopped at the end of the (then) current contract in August 2023, with the gas being sold into the domestic market instead. I understand that this announcement was a key driver for ConocoPhillips sale of the Corridor PSC to MedcoEnergi. However, in November 2022, the Indonesian government signed a new five-year extension to the export contract.
• Exports - LNG: in May 2023, press reports indicated that Indonesia was considering stopping new LNG export contracts in order to meet domestic demand. However, this was later toned down to being that any new sales contracts for the export of LNG would need to take into consideration domestic demand, with the latter prioritized.

The simplest way to ease the pressure on balancing domestic vs priorities would be to grow gas production. There is a good pipeline of undeveloped discoveries to make this happen but the complication is that the majority of these are remote from domestic demand centers, thus requiring transportation as LNG and running into the issues around domestic vs export pricing, which brings me nicely to my next topic.

Clear messaging and actions on gas price

As with the domestic vs international debate, there have also been challenges and uncertainty when it comes to gas prices, with the domestic gas and LNG prices being the focus.

• Domestic gas prices: in 2016, Presidential Decree No. 40 stated that the domestic gas price for industrial use would have a ceiling of 6 US$/MMBTU. Prices had previously been negotiated between the producer and the buyer. This price cap, when applied to new projects, has a significant impact on the economics and could stunt investment in domestic gas projects without some flexibility on the fiscal terms. In addition, if there is an option to export the gas by pipeline, this may offer better pricing.
• Domestic LNG prices: in 2022, LNG from domestic projects made up about 17% of total domestic supply, up from about 12% in 2018. If domestic LNG cargoes are priced similar to international cargoes then this creates a very different price level (premium) compared to domestic pipegas, particularly with all the turmoil in LNG markets over the last two years. However, if domestic cargoes are sold at a discount to international prices, then this disincentivizes the project partners from wanting to sell LNG into this domestic market.

Obviously, Indonesia would like low domestic gas prices, with minimal subsidies. What the upstream investors need is clear and consistent messaging and actions, forged from industry engagement.

Expiring PSCs

As discussed in my first article, there have been issues and uncertainty around how PSCs will be handled at expiry. Investors need a clear picture on the options around the approach to expiring PSCs, particularly where this uncertainty could impact their investments today/today's investments will have a payback after the expiry date.

We have seen positives here, but it is still seen as a risk to investors. What we really need is clear, concise and consistent messaging about how expiring PSCs will be handled.

Continuing momentum on national strategic projects

According to a recent presentation by SKK Migas, there are four national strategic oil and gas projects: Tangguh LNG, Abadi LNG, Indonesia Deepwater Development / Geng North, and Asap Kido Merah.

In addition, they identified five strategic oil and gas projects: AFCP, Banyu Urip Infill Clastic, Forel Bronang, Mako, and Hidayah.

A number of these projects are either under development or progressing well towards FID:

• Tangguh LNG: with train 3 now onstream, the focus turns to the Ubadari Carbon Capture project that will see CO2 captured from the LNG plant used to enhance recovery from the Vorwata field. There is good momentum on the project, with the POD approved and FEED underway.
• AFCP: an inlet compression project for the producing Anoa field in the Harbour Energy operated Natuna Sea Block A. Already well into development and should be onstream in mid-2024.
• Banyu Urip Infill Clastic: an infill drilling campaign for the producing Banyu Urip oil field in the ExxonMobil operated Cepu PSC. The drilling is underway and should be onstream in mid-2024.
• Forel Bronang: new oil and gas field developments in the MedcoEnergi operated South Natuna Sea Blk B PSC. The gas project came onstream in late-2023 and the oil project should come onstream in mid-2024.
• Hidayah: development of the 2021 oil discovery in the PETRONAS Carigali operated North Madura II PSC. FEED is currently underway and the recent 20-year extension awarded at PETRONAS' adjacent Ketapang PSC will help to maintain momentum towards FID.

This leaves three of the national strategic projects: Abadi LNG, Indonesia Deepwater Development / Geng North, and Asap Kido Merah, plus one of the strategic projects: Mako. I will take a look at each of these, with the focus being on some of the actions and decisions that SKK Migas and the government could take to facilitate getting these projects to FID.

Continuing momentum on major projects - Abadi LNG

I have talked about Abadi in a number of previous articles. There is now clear momentum behind the project and the government would love it if the project could be brought onstream prior to 2030 and will be putting pressure on INPEX to make this happen. A number of critical issues have been resolved (Shell divestment, CCS approval, CCS being cost recoverable) on the project but there are a few remaining above-ground uncertainties that need to be addressed prior to FID, including:

• LNG sales contracts and domestic LNG: the LNG volumes from Abadi should be able to secure long-term contracts, particularly from Japanese offtakers. However, we need to see clear decisions on how much LNG will be reserved for the domestic market and at what price.
• Regional government partner: in 2021, it was reported that INPEX were in the process of transferring 10% of the Masela rights to the regional government of Maluku. There has been little news on this, but the local partner would need to be able to fund their >US $2 billion share of CAPEX.
• PSC expiry / terms: the current PSC is scheduled to expire in 2055, but the project will produce beyond this. It would be helpful to the project partners to see a further extension. In addition, the partners may push for some further fiscal incentives.
• Cost escalation risk: the newly approved POD has a CAPEX estimate for the project of $20.9 billion, compared to a 2019 estimate of US $19.8 billion, with CCS added to the project for the latest estimate. Given that we are experiencing cost inflation in the industry, I have some concerns about the potential for cost escalation, both before FID and during execution.

Continuing momentum on major projects - IDD / Geng North

I looked at the potential development of the IDD fields in July: https://www.dhirubhai.net/pulse/indonesia-ma-eni-acquire-chevrons-remaining-assets-robert-chambers/, after which we saw the discovery of more gas at Geng North: https://www.dhirubhai.net/posts/rochambers_eni-announces-a-significant-gas-discovery-activity-7114617084730331137-ZS3k/

I believe that Eni's acquisition of Chevron's assets is now complete and Eni have some pretty aggressive timelines to develop Geng North. To facilitate this, and the development of the IDD fields, there are a few above-ground issues to address:

• PSC extension: the Rapak and Ganal PSCs expire in 2027/28 and so will need to be extended. This was likely agreed prior to the acquisitions but nothing has been formally announced.
• Domestic gas / LNG: the gas produced from the field will likely be sold into the local gas market and the Bontang LNG plant. Pricing and domestic allocation will again be issues to resolve. However, Eni's strong existing position in the basin should help with these issues.

Continuing momentum on major projects - Asap Kido Merah

I looked at the potential development of the Genting Oil & Gas operated Asap Kido Merah (AMK) fields in my third article on FLNG: https://www.dhirubhai.net/pulse/flng-new-dawn-part-3-potential-indonesia-robert-chambers/. Genting have been grated approval to export the LNG volumes from the project, which allows them to avoid the issue of domestic obligations and pricing. The SKK Migas presentation states that they hope to see the field come onstream in Q4 2025, which looks impossible to me, with an earliest onstream date of 2027 more likely given the timelines to construct a new FLNG vessel.

The US $ 3.4 billion project would be a big undertaking for Genting, who currently hold 100% interest in the asset, but they look to be moving towards FID given that they have awarded a limited notice to proceed agreement (LNTP) to Wison to start ordering items for a 1.2 mtpa FLNG vessel.

Continuing momentum on major projects - Mako

It was great to see the potential development of the Mako gas field on this list. The field sits in the Duyung PSC and is operated by Conrad Asia Energy. Back in May, Conrad started a farm-down process for the asset and my thoughts at the time can be found here: https://www.dhirubhai.net/pulse/indonesia-farm-in-opportunity-conrad-asia-duyung-psc-chambers/. They are looking to reduce their 76.5% stake in the asset to 40-50%.

The recent SKK Migas presentation states a target onstream date for the Mako field development of Q4 2025, we would need see things move very quickly from here for this to happen. To me, there are two major elements that need to be resolved for the project to progress to FID, with a third item having the potential to improve the attractiveness of the project:

• Third-party access to WNTS: the primary option for getting the gas to market would be through the West Natuna Transportation System (WNTS), operated by a consortium of companies led by MedcoEnergi. However, this seems to be causing some challenges to Conrad. It wouldn't take too much pressure from SKK Migas onto MedcoEnergi to get this moving.
• Gas Sales Agreement (GSA): in September 2023, it was announced that the Mako partners had singed signed non-binding key terms with Singapore's Sembcorp Gas for the first long-term gas sales agreement for the Mako gas field, with the price indexed to Brent crude prices. Conrad have stated that the hope to convert this into a binding GSA in Q1 of this year.
• Fiscal terms: there has been no indication from the project partners that they would like to change the fiscal terms for the project. However, given that the fiscal terms were converted to Gross Split in 2019 there may be some benefits to switching back to cost recovery, although this may slow the development.

Given that this is a priority project for SKK Migas, I would hope that they can help to resolve the third-party access issues and facilitate with any other issues preventing the project from taking FID. For their part, Conrad have shown willingness to continue to invest in Indonesia by taking up two new blocks in the first bid round of 2022, but will need to see progress at Mako to continue doing so.

Showing success for smaller investors

There used to be a diverse group of smaller international investors happy to invest and explore in Indonesia. However, that group has shrunk considerably over the last ten years, with the above-ground challenges being one of the key drivers.

There are some success cases starting to emerge. For example, Jadestone Energy are developing their Akatara gas field in the Lemang PSC, with first gas expected by mid-2024. However, the flip side of this is that the asset was previously held by Mandala Energy, who could still be active and investing in Indonesia if they had encountered fewer issues when they held the asset.

I have discussed the potential for Conrad Asia Energy to become a producer at Mako, but there are many other examples of smaller companies investing in Indonesia, that will be hoping for a favourable and consistent investment environment. These include Harbour Energy, Criterium Energy, Prima Energi, and the new owners of the Bulu PSC.

Unlocking Andaman

The recent exploration successes in Andaman and the Kutei Basin have been real fillips for exploration in Indonesia. For the Kutei basin, the gas commercialization options are pretty clear, with the Bontang LNG plant having plenty of spare capacity but there will need to be some conversations about local pipegas demand in Kalimantan as well as domestic LNG.

However, if we look at Andaman, then the resource scale combined with the lack of existing infrastructure, has the potential to see the discoveries become politicized, resulting in delays to any development.

I can certainly see the case for domestic pipe gas being prioritized, but the existing Arun-Belawan Gas Pipeline has a capacity of 300-400 MMscf/d, which would only require 1.5-2 Tcf of the resource to produce at capacity for 10-15 years. If the resource proves to be closer to the 10 Tcf mark, then discussions will certainly need to be had about exporting the gas, as either pipegas to Singapore and/or Malaysia, or as LNG to international markets. Going the LNG route would require either a new liquefaction plant or some serious mothballs to be blown off of the old Arun facilities.

The Indonesian government has highlighted the importance of a timeline development at Abadi, and if they apply the same to Andaman, then I hope that we could see some real momentum build and good decisions made.

Learn from bid round success and failure

I looked at some of the recent trends in the bid rounds in my first article and commented on the positive take-up. Since this article, Indonesia have stated that they plan to offer 10 blocks in 2024. They also mentioned that there were no bidders for Natuna D-Alpha that was offered during the second 2023 round, with seemingly only the two Akimeugah blocks receiving offers from the six blocks offered across rounds two and three.

They will need to understand why there have been limited bids in the second and third rounds, decide what investors they would like to attract, and then work to understand and close the gaps that have prevented these investors from bidding.

Questions and feedback

I have created this article through my own research. If you have any questions or feedback on the article then please drop me a DM.