Indonesia’s Oil Supply Runs Deep


The Jakarta Globe | February 12, 2012
About 90 kilometers off the eastern coast of Kalimantan, Chevron is undertaking one of the most ambitious projects in Indonesia, drilling almost two kilometers below sea level to tap crude oil and natural gas from the nation’s vast potential of reserves. 
The US energy giant began the $6 billion project in 2008 and the operation won’t start production until 2015, when it is expected to pump more than 30,000 barrels of oil per day, or about 3 percent of the country’s current annual output. It’s one of the few sites in the archipelago where offshore drilling is taking place, in a part of the industry that is impeded by cost and the lack of incentives to explore new sources of crude oil. 
At stake is Indonesia’s energy independence and its possible return as a member of OPEC. 
Sixty hydrocarbon basins may hold 106.2 billion barrels of oil equivalent, and areas that may contain another 89.5 billion barrels of oil equivalent have yet to be explored, according to data from the Agency for the Assessment and Application of Technology (BPPT), a department that operates under the Ministry of Research and Technology. 
“It’s a waste of time if we have such a big potential reserve and we can’t make it easier for oil and gas companies to explore,” said Widjajono Partowidagdo, the deputy at the Ministry of Energy and Mineral Resources. 
The disputed waters of the South China Sea, at 3.5 million square kilometers, are comparable to Indonesia’s 4.9 million square-kilometer territory. 
The South China Sea has potential reserves of as much as 213 billion barrels of oil, the US Energy Information Agency says on its Web site, citing a Chinese estimate. A 1993-94 study by the US Geological Survey pegs the total of discovered reserves and undiscovered resources in offshore basins at 28 billion barrels of oil in the same area. 
Approximately 60 percent of Indonesia’s potential 106.2 billion-barrel reserve is located in known offshore basins. Of that 64 billion barrels, 70 percent can be found in deepwater sites at depths of more than 1.5 kilometers below the sea’s surface, which highlights the challenges in procuring oil and gas with existing technology at those depths. 
The remaining 40 percent of potential reserves is located onshore, mostly in eastern Indonesia on islands such as Papua, Kalimantan and Sulawesi. The eastern area of the country has a high potential for gas reserves, too, but similarly to crude oil, there has been little done in terms of exploration and production. 
Spanning more than 17,500 islands, Indonesia is a nation abundant in natural resources. In energy, it ranks second in exporting coal after Australia and is the world’s third-largest shipper of liquefied natural gas after Australia and Qatar. 
Indonesia joined the Organization of the Petroleum Exporting Countries in 1962, shortly after its founding, but left the group in 2008 after becoming a net importer of crude oil. 
On a proved reserves basis, Indonesia has 4.2 billion barrels, compared to Malaysia at 5.8 billion barrels and China at 14.8 billion barrels, according to a June 2011 report by London-based British energy producer BP. 
Indonesia’s current oil production of around 900,000 barrels per day (bpd) is less than the 1.2 million bpd output of a decade ago and it has resorted to buying crude from Middle Eastern nations including Saudi Arabia, Iran and Kuwait. 
As for other energy sources, Indonesia has 20.8 billion metric tons of proven reserves in coal, according to the Energy Ministry, but only 3.1 billion tons have been mined from 1980 to 2011. That resource is more accessible because coal deposits are inland and technology is cheap and readily available. 
Indonesia relies on large overseas companies such as Chevron to tap the oil from the depths of the sea. 
Chevron, based in San Ramon, California, is the biggest overseas energy company operating in Indonesia. It exports around 30 percent to 40 percent of all crude oil that is produced in the country. 
The company, which has been operating in Indonesia since 1924, was awarded rights in 2008 to explore four deepwater blocks in Kutai Basin, East Kalimantan. 
Dony Indrawan, manager of corporate communication for Chevron in Jakarta, said that at 1.828 kilometers below sea level, the company’s project would be the deepest offshore development in Indonesia. 
That distance is more than four times the height of the 452-meter Petronas Tower in Kuala Lumpur, the tallest structure in Southeast Asia. 
Chevron’s expertise in deep offshore drilling extends to sites in the Gulf of Mexico, Nigeria and Angola. 
“The lessons learned, best practices and expertise gained from these developments will be incorporated in the Indonesian deepwater development project,” Dony said. 
Still, such technology doesn’t come cheap. 
Deepwater projects often require expensive and complicated facilities such as floating production facilities that are attached to the sea floor by cables or some type of flexible system. 
“The wells extend to the sea floor and then penetrate thousands of feet into the earth to tap oil and gas and bring it to the surface,” Dony said. 
Rudi Rubiandini, the deputy of operations at BPMigas, which oversees exploration and production, estimates the project will cost $6 billion, more than four times the cost of the $1.3 billion onshore project in Cepu operated by Exxon Mobil’s subsidiary, Mobil Cepu Limited. 
The block is expected to produce 1.1 billion cubic feet per day of natural gas and 31,000 barrels of oil per day. Chevron has partnered with Italian energy company ENI for the project. 
One of the last large undeveloped onshore fields is the Cepu block, in East and Central Java, where Mobil Cepu discovered 250 million barrels of proven oil reserves in 2001. The company estimates that the area has the potential to contain 600 million barrels in oil reserves. 
Pertamina Hulu Energi, a subsidiary of state-owned oil and gas company Pertamina, currently has no intention to explore new offshore fields. Instead, it is focusing only on handling offshore fields where contracts have already expired. 
Last year, Pertamina HE, which works with foreign companies to develop projects, was awarded the West Madura Offshore block in East Java that had been developed by South Korea’s Kodeco Energy and the China National Offshore Oil Corporation. 
BPMigas, the regulator, was disappointed with Pertamina’s output in 2011. The company produced 190,000 bpd, failing to meet its 208,000 bpd target. 
Last year, all companies in Indonesia produced 329 million barrels of oil, of which 131 million barrels were exported. 
Still, that was not enough to meet demand for the nation’s refiners and petrochemical companies. The country had to import approximately 109 million barrels from overseas. 
Pertamina’s other subsidiary, Pertamina EP, is developing mostly onshore blocks that are close to being depleted. 
Agus Amperianto, Pertamina EP’s spokesman, said the company used some old equipment, such as pipelines and oil tanks dating to 1942, but this had little affect on production. 
A BPMigas official said that drilling equipment was constantly supervised and that any equipment more than 20 years old would be replaced. 
Still, no deepwater project is an easy job. 
BPMigas’s Rudi said that Pertamina did not have the ability to develop deepwater projects. 
“Who would be brave enough to invest such big money?” he asked. 
Aside from Pertamina, there are several Indonesian private oil and gas companies such as Medco Energi and Energi Mega Persada that may undertake such projects. 
“It’s a bitter fact that to develop deepwater, we need foreign investors,” Rudi said. 
Eka Satria, director of asset development at Medco E&P Indonesia, said that the company was still focusing on developing the existing oil and gas blocks in the country. 
“We are not planning to develop deepwater projects in the short term unless we have a potential business in that,” Eka said. 
To encourage exploration in deepwater sites, the government should offer incentives such as eliminating the 25 percent tax on production of oil and gas for domestic use, some analysts say. 
The government must support local companies to invest in deepwater projects by providing reliable data based on exploration activities, said Priagung Rakhmanto, an energy analyst at the Reforminer Institute. 
It is necessary to explore more basins in Indonesia to secure additional oil and gas resources, he said, otherwise the nation’s current reserves will be depleted in approximately 60 years. 
“It’s mostly the world-class oil and gas companies that are willing to take such high-risk projects,” Priagung said. 
Kurtubi, an energy analyst from the Center for Petroleum Economic Studies, said that should crude oil from deepwater basins be extracted, Indonesia would not need to import any more crude. 
The East Nusa Tenggara deepwater basins supposedly contain huge oil and gas resources, but the area is remote and companies are only exploring the Makassar Strait basins, he said. 
“The government should provide companies incentives by cutting taxes in the exploration phase. Otherwise, no one will explore our deepwater basins,” Kurtubi said. “And within five years after such exploration, Indonesia could become an OPEC member again.”