Good afternoon Ladies and gentlemen and thank your for the introduction…
The title of my presentation today is: “Delivering Indonesia’s Future Energy Needs” In doing so I am wearing two hats, one for the Indonesian Petroleum Association and one for Risco Energy.
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I have split the presentation into 5 parts: A brief overview of Indonesian energy market trends A more specific look at key upstream oil and gas trends A look at the role and performance of exploration and what role exploration needs to play A closer look at gas markets Highlight the challenges and opportunities Indonesia presents as the IPA sees them.
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Firstly however, I would like to introduce Risco Energy.
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Our initial focus has been on building reserves production and cashflow.
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Our Strategy, put succinctly is: Leverage our access to capital at a time when its scarce. Leverage relationships with opportunity providers and financial markets. Use speed and transactional ability as a source of competitive advantage. To be market driven in our portfolio construct, working backwards from what the equity markets reward. To be upstream growth focused.
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Our growth and value creation has been achieved with a very high quality teams of experienced professionals that are dedicated, high performing and a pleasure to work with.
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Now a few words on energy market trends.
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Like many developing countries, the primary driver of energy consumption is economic growth and this chart clearly shows the impact on energy consumption of Indonesia’s dramatic economic growth since emerging from the 1998 Asian financial crisis. The economy shows an energy intensity of around 1.7 and trending downwards. Energy subsidies are however still pervasive in the Indonesian economy and changes in subsidy levels also periodically impacted annual energy consumption growth.
At a forecast 6.0% economic growth rate, Indonesia’s energy consumption will more than double in the next 10 to 12 years and gas should play a key role in meeting this demand increase.
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The National Energy Council (NEC) has defied a High, Base and Efficiency case for energy growth trends. The efficiency case shown here requires energy intensity falling below 1.0 in 2025 and that's a big ask. This case has: 6%p.a Energy consumption growth 3% p.a. Oil and gas consumption growth The bottom line is more than doubling on energy demand over the period 2010 to 2025.
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Indonesia’s economic development of the 1970’s and 1980’s was partly oil export driven. However declining production and rising consumption saw Indonesia transition to become an oil importer in 2003 and loose its OPEC membership shortly thereafter. Indonesia remains a substantial gas exporter however. Indonesia’s status as the worlds largest LNG exporter, was lost to Qatar a few years ago, however Indonesia continues today as a net oil and gas exporter on a boe basis. However, on a value basis, with Indonesia importing some half of its petroleum product needs and exporting LNG and piped gas, the hydrocarbon trade account is in balance or slightly negative. Indonesia’s coal production and exports have skyrocketed in the last five years as it feeds energy hungry India and China in particular with thermal coal. This growth has stalled recently however Production of renewables, largely geothermal and increasing palm oil is growing steadily from a small base however the full potential of geothermal is a long way from being realized.
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The bottom line is that Indonesia’s net energy exports remain strongly positive with the industry’s historic export status being driven successively by oil, then gas and now coal. There are now high expectations (and real needs) for unconventionals to play a major future role.
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As mentioned earlier, the Indonesian energy sector is still highly distorted by the blunt instrument of subsidies and I would be remiss of me not to provide further color. In the 2103 draft budget, energy subsidies make up 15% of budget expenditure These subsidies distort consumption, investment, BOP’s and tax revenues and are at best poorly targeted. The political will for change is unfortunately lacking at the moment.
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Lets now look at some key trends in upstream oil and gas.
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Oil and gas still plays a significant role in the economy.
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Combining oil and gas together we see how challenging even the NEC efficiency case target is.
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Given the urgent need for reserves replacement lets now take a look at the role of and performance of conventional exploration.
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Over the period 2005 to 2010 Indonesia exhibited a >100% reserves replacement ratio from all sources. Most of this came from development and production optimization investment activities as the industry responded to high prices. The result delivered mostly gas. Only 18% of the additions came from exploration which again was gas dominated.
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The low contribution from exploration to reserves replacement is partly due to the continued long term decline in exploration drilling activity that suffered a step reduction after the New Oil and Gas Law was introduced in 2001.
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Exploration activity has not just declined in absolute terms but Indonesia has lost market share to its regional competitors as its investment competitiveness declined.
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Indonesia’s exploration efficiency, the “boes”, found per wildcat well drilled, has been poor, further impairing the contribution of exploration to reserves replacement.
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I mentioned the industry responded to rising oil and gas prices by investing heavily in oil and gas development and production optimization. This chart quantifies the response in $’s
Exploration investment has not responded to rising prices and has in fact declined in real terms. The recent small exploration investment increase has been driven by the so far unsuccessful deep‐water adventure.
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The various NEC demand projections identify a significant oil and gas production supply shortfall. By 2025 the shortfall is 2.6 Mmboepd that will have to be filled by some combination of: EOR Conventional Exploration Unconventionals Imports
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The bottom line: A dramatic increase in NFW drilling activity is required to fill the gap. This chart does the math's based on current exploration efficiency etc. By 2015 we need to be drilling 3 X the number of exploration wells that we do now and that assumes a big role is played by unconventionals. By 2020 its 5 X current exploration drilling levels.
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Lets now take a close look at gas markets, important in an increasingly gas dominated upstream business.
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Indonesia's gas production growth rate has moderated substantially since the growth of LNG export expansion came to an end in the early 1990’s. Pipeline exports boosted export growth in the 1990’s and more recently the Tangguh LNG plant in Papua came on stream as Indonesia’ third LNG export facility. The most striking long term trend is now the rise of domestic gas consumption. This is driven by the pricing benefits of natural gas and government policy to replace expensive petroleum product imports (which are subsidized) with domestically produced gas.
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So how is the gas production utilized? In 2010 some 83% of Indonesian gas production was sold, with the rest being either consumed in production operation or lost through flaring and shrinkage. Of the gas that was sold some 38% was consumed in the domestic market and the remainder was either exported as LNG, largely to Japan, Korea or Taiwan or through pipelines to Singapore and Malaysia. PLN (State Electricity Company) and PGN (State Gas Company) and Fertilizer Producers (State owned) were the largest domestic consumers responsible for over 70% of consumption between them. All were supply constrained in 2010.
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While Indonesia is gas resource and reserve rich many fields are undeveloped and distant from the major markets in Java with supply constrained by a lack of transportation infrastructure.
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Beyond upstream gathering pipelines, the major gas transportation infrastructure centers around “South & Central Sumatra ‐ West Java” and “Natuna Sea – Singapore and Malaysia” Plans for pipelines (more like pipedreams) from Kalimantan to Java have not been realized and are rapidly being overtaken by lower cost, quicker and more flexible LNG import terminals or Floating Storage and Re‐gassification units (FSRU’s) planned to address critical gas supply shortfalls in Java and Sumatra. Pertamina and PGN are major players in this new infrastructure development with PLN being the major customer, especially where it has CCGT facilities burning expensive imported diesel fuel.
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A long history of low domestic gas prices, certainly lower than export prices as this graphic shows, is one of the reasons behind the current domestic supply constraints. Lack of Infrastructure and customer credit quality were other significant factors impeding supply. Effectively, upstream suppliers were for many years being asked to subsidize largely state owned domestic consumers and support PGN’s fat profit margins. This was never sustainable in my view and led to the current shortfalls. This situation, driven by necessity, is now changing but the philosophy of pricing domestic prices below international prices is unfortunately deeply ingrained.
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Upstream gas prices, as measured by new domestic gas contract signings have been trending strongly upward for a number of years, as oil prices (and upstream costs) have also trended upward and supply constraints increased. Years of low long flat nominal pricing has been replaced by higher starter prices with some form of indexation now the norm. Oil linked prices paid by some customers deliver prices in excess of US$10.0 / MMbtu at current oil prices. This is a good deal for both producers and customers. In 2011 the average headline price for new gas contracts was US$6.3 / MMbtu. This however compares with an average Minas Indonesian Crude Price (ICP) of US$ 113.63/ bbl. or US$18.90 / MMbtu.
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The chart clearly shows the compelling gas value proposition for energy customers whose alternative is market priced fuels or for some, subsidized petroleum products. Also shown is the expected prices of re‐gassified LNG delivered from the Bontang LNG plant to customers in West Java. While this represents an approximate doubling in average 2011 gas prices, the result is still very cost effective gas and environmentally friendly energy for consumers in Java.
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So lets now look at the opportunities and challenges as the IPA in particular sees them
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The Fraser Institute annual survey of upstream investment attractiveness results reinforces the IPA point that competitiveness needs to be improved to attract the capital necessary to provide the energy for growth. Indonesia ranks 114 out of 133 jurisdictions. There is a clear correlation between investment attractiveness in this survey and where capital is actually migrating.
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