For most of its 25 years, ARCO Indonesia has depended heavily on oil production from its Northwest Java Sea field (236234 bytes). Now the company is pursuing a more varied strategy. It includes gas development in the emerging Kangean block and aggressive exploration in Indonesia's burgeoning eastern frontier. ARCO Indonesia executives see gas as the future. In the past there was no domestic market for gas in Indonesia. But with its rapidly growing electrical power needs and declining oil production, Indonesia seeks to fuel its power generating plants with gas.
Gas also is turning around an ARCO Indonesia that a few years ago faced an uncertain future due to slumping oil production, dwindling profits, and rising costs.
ARCO has two strategically located offshore gas fields just north of Java, where most Indonesians live. Last year, ARCO brought on line significant volumes of gas from Pagerungan field on the Kangean block and from its Java Sea fields.
ARCO Indonesia Operations Vice Pres. Larry Asbury said, "Gas is important in Indonesia. It's our future. Our business strategy is to be the biggest gas supplier for eastern and western Java."
KANGEAN BLOCK POTENTIAL
The Kangean block is emerging as ARCO's "area of the future." In addition to Pangerungan start-up, a significant gas discovery on the block's Terang/Sirasun prospect is generating enthusiasm.
"We're now delineating 1.1 tcf of gas at Terang/Sirasun," Asbury said. "We're confident it is commercial. This has the potential to be our third major gas development. 11
Exploration Vice Pres. John Duncan notes that while the Terang wildcat found gas in 1982, it took the recent Sirasun discovery to make the combined fields commercial. Detailed seismic, additional drilling, and reservoir studies in 1993-94 firmed ARCO's understanding of the area. The company realized that not only is there a gas market but sufficient reserves as well.
Duncan says that as a follow-up to the Terang/Sirasun finds, ARCO will drill a number of small prospects in the area during 1995. "We are drilling six wells in the series-three exploration wells and three delineation wells. This program should run until mid-June. We're spending about $25 million on these six wells -half for exploration and half for delineation."
ARCO's Herb Vickers, responsible for developing the Kangean block, says ARCO is negotiating agreements to sell the gas while it fine tunes development cost estimates.
"Our goal for 1995 is to have agreements in place that will confirm the commerciality of the fields," Vickers said. "In 1996, we want to start construction of production facilities."
ARCO has been meeting with government officials to show how it would proceed with Terang/Sirasun development and how much potential gas is there. Vickers envisions a 30 well development program.
"We plan to do a subsea development, take the gas back to Pagerungan, process it, and bring it to shore via the Pag pipeline."
Vickers believes Terang/Sirasun has the potential to produce about 250 MMcfd The main market for the new gas is PLN, the government electrical power utility. The gas would be used to generate electricity. Vickers says there are many customers for added gas supplies in East Java.
Operator ARCO holds a 54% interest in the field. BP owns 36% and Bimantara 10%.
PAGEPUNGAN UPDATE
Pagerungan field is performing to expectations. About 300 MMcfd of gas is being delivered to PLN, national gas utility PGN, and state owned chemical/fertilizer company Petrokimia for use in East Java.
ARCO, committed to ultimately provide 400 MMcfd for 20 years, has spent $275 million developing Pagerungan.
A processing plant and support facilities were built on tiny, remote Pagerungan Island. Gas flows to an onshore receiving site in East Java.
Nine wells are producing - seven on Pag Island and two subsea wells off Pag Island. More subsea development wells are planned for next year off Pag Island. Still more wells will be required to fully develop Pagerungan field.
ARCO also developed a community project on Pag Island, which includes schools, a clinic, a mosque, recreation center, and icemaking; plant. The company hauls off wastes, monitors air
quality, anti is taking steps to protect marine life and coral reefs.
ARCO partners in the Pagerungan project are British Petroleum Co. plc and local company Bimantara.
Vickers is upbeat about ARCO's future in the Kangean block. "It's emerging as a key area for ARCO Indonesia and eventually should account for 40-50% of ARCO Indonesia's profit. The added potential at Terang/Sirasun is exciting. People are starting to recognize the potential of the Kangean block."
JAVA SEA WORK
To the west of Kangean block, ARCO has spent $330 million expanding the mature Northwest Java Sea oil field into an oil and gas field.
When ARCO found Java Sea gas many years ago, there was no gas market. Rut when gas demand exploded in recent years, ARCO began booking undeveloped Java Sea gas reserves and exploring for more. In all, the company has booked 1.5 tcf of gross reserves.
In 1993, ARCO installed four gas production platforms, an 80 mile pipeline, a CO2 removal/compression platform, and dehydration facilities in the field, enabling first commercial gas production. ARCO also built two onshore receiving facilities near Jakarta.
First Java Sea gas moved to shore
early last year for sale to PLN for electricity customers in Jakarta. ARCO is selling about 260 MMcfd of Java Sea gas at present. Under its current contract, ARCO is to deliver 1.1 tcf of gas in 11 years to feed Jakarta power plants.
JAVA SEA PHASE 2
Phase 2 of the Java Sea gas project is in full swing. The goal, says Project Manager Jim Westerheid, is to "make sure that the field can continue to deliver its gas commitment for another 10 years.
Among key pieces of the $47 million second phase are two new production platforms-one with four wells, the other with five wells. Gas will be separated at the two new platforms and sent to a modified platform, where it will be compressed and sent to an existing flow station.
Phase 2 also calls for three new pipelines, modifications to production platforms, a new compression facility, and a CO2 removal unit.
Westerheid said engineering work for the Phase 2 project is complete, and fabrication is proceeding in Houston and Indonesia.
This summer in Houston, turbines, compressors, and a CO2 removal unit will be put on skids that will arrive in Java in July. The two new production platforms, being fabricated in Indonesia, will be installed in the field in spring 1996. The turbine skid/module will then be transported to the field Phase 2 is to start up in May 1996.
The new Phase 2 facilities, Westerheid says, will ensure ARCO can deliver 260 MMcfd under the current 11 year contract, In the future, a series of smaller projects will help maintain contract delivery volumes.
Westerheid says that by employing a small, multidisciplinary project team, changing bidding practices, eliminating unneeded components, using fewer platforms, and rebuilding some parts, ARCO his cut facility costs of the project from the original estimate of $107 million to $47 million. "We cut facility costs in half by defining the project in detail and putting in only what was needed," he said.
GAS POTENTIAL, MARKETS
ARCO continues to explore for gas in the Java Sea.
"There's not as much gas in the Java Sea as we had hoped-about I tcf yet to be found," Duncan said. "And we don't expect to find significant accumulations. But we think we can add .50100 bcf/year over the next decade through exploration."
While ARCO's customers for Kangean and Java Sea gas have yet to take as much gas as anticipated, ARCO officials aren't too concerned.
In East and West Java, ARCO's gas customers installed facilities to burn gas for power generation and modified facilities to allow them to burn gas as well as oil.
Asbury noted ARCO Indonesia's gas customers have the power generating capacity but so far not the distribution network and infrastructure to add customers.
"The gas markets are slower developing for our big gas projects than we thought," Asbury said. "But our customers are adjusting and arc, gradually taking more gas."
JAVA SEA OIL
While ARCO Indonesia is increasingly pursuing a gas strategy, its engineers and explorationists, also are trying to slow the oil decline rates in the venerable Northwest Java Sea field. The company produces 112,000 b/d of oil from the field at present.
Engineering Vice Pres. Effendi Situmorang said, "We have 200 offshore structures and 11000 miles of pipelines in the Java Sea field. We're the oldest offshore company in Indonesia. And the Java Sea is still our bread and butter."
Asbury said, "We want to wring the last drop of oil out of the Java Sea in a low cost way. The natural decline is 20%/year. We have slowed it to 10%/year through infill drilling."
Duncan noted his company is targeting relatively small oil targets, about 10 million bbl of reserves.
"We're going back into the old areas and finding more reserves," he said. "With development and infill drilling, we're looking for zones that have been bypassed."
Duncan says about I billion bbl of oil have been produced from the Java Sea field. He believes there are about 500 million bbl remaining.
ARCO also plans to bring on line some shut-in wells via workovers. Situmorang estimated about 500 Java Sea shut-in wells are under review as workover prospects.
FRONTIER EXPLORATION
In addition to exploring the Kangean block and Java Sea, ARCO is mounting an aggressive exploration program in the frontier areas of eastern Indonesia. Duncan contends ARCO Indonesia is the most active explorer among major oil firms in Indonesia's eastern oil frontier.
Aware of its falling oil production and competition from other countries such as Viet Nam and China, Indonesia has been offering improved terms to entice oil firms to explore the country's eastern frontier.
Indonesia is a string of 13,000 islands extending about 3,000 miles. Almost all the oil and gas has been found in the central and western parts of the country.
The eastern frontier includes the remote islands of Irian Jaya, Sulawesi, and Seram. ARCO is exploring in all of these areas.
Duncan acknowledges government incentives to explore in the eastern frontier are a help but contends ARCO has been committed to exploring in this area for some time and was moving ahead even before the incentives.
"We have an established operations base, and we're in a position to explore in eastern Indonesia," he said. "We've gotten the program to the drilling stage by doing seismic and regional studies in recent years. We are focusing on four areas, and now we are testing them with the drill."
Last year, ARCO participated in a discovery on Scram Island with the 1 Oseil wildcat. Kufpec (Indonesia) Ltd., a unit of Kuwait Foreign Petroleum Exploration Corp., is operator, and ARCO has a 52.5% interest. The well flowed 3,850 b/d from one zone and 3,400 b/d from a second.
Duncan said, "This is the first substantial discovery in pre-Tertiary rocks in eastern Indonesia. And it shows there's potential in these older rocks in the frontier. It opens a whole new exploration play."
The Oseil strike will be delineated with a well to be spudded early in 1996.
ARCO isn't speculating on the potential because the find is a complex fractured carbonate reservoir, Duncan said. "That makes it hard to evaluate and appraise. There could be anything from 1 to 100 million bbl of oil. "
ARCO Indonesia is active in two areas of Irian Jaya. The company's 1 Wiriagar Deep well, drilled late last year in Irian Jaya's swampy northern coastal area, was looking for oil in pre-Tertiary rocks. Instead, a gas deposit was found.
"We're still evaluating it to see if it's commercial," Duncan said. "We're planning a second well this fall as part of our further evaluation of the general area. Because it's remote, unless there is significant gas, it won't be commercial."
One possibility, he noted, is to build a gas liquefaction plant and ship LNG to customers in Japan, South Korea, China, and Taiwan.
Operator ARCO holds an 80% interest and Kanamatsu 20% in the Wiriagar well.
In a mountainous, forested area south of Wiriagar, ARCO has been drilling the 1 Babo East Onin wildcat, using a continuous coring, slimhole helirig for the job. Duncan notes that in addition to the environmental benefits of the rig's drillsite of only 1 acre, the rig is more economical than a conventional rig. Other steps are being taken to protect and renovate the local environment.
Because of the remoteness of the Babo location, Duncan says, the accumulation needs to be large for oil or gas. The well was spudded last fall but has not reached projected depth because of mechanical problems.
"We'll go back in a few months to do a sidetrack," Duncan said. "If the Babo well is successful, there will be two or three more large structures to test."
On the Babo well, interests are operator ARCO 40%, Mobil Oil Indonesia 40%, and Kanamatsu 20%.
An ARCO Indonesia wildcat in Sulawesi also requires extra environmental precautions. Duncan said, "The two wells we're drilling this spring on the Kalosi block also employ a slimhole drilling rig... The locations are in hilly, rain forest terrain close to small villages."
ARCO, which is looking at 100 million bbl targets, ran an extensive seismic survey in this rugged part of Sulawesi in 1993 using pack mules. The first wildcat, 1 Tondon, spudded Apr. 1, and the shallow well was programmed to reach total depth in May. ARCO was to spud a second well, 1 Loka, soon after that.
INDONESIA PLANS, POTENTIAL
ARCO will drill four wildcats in the eastern frontier this year, spending $30 million. The company will spend $15 million to drill three wildcats on the Kangean block this year. Plans call for another $25 million to drill seven wildcats and delineation wells in the Java Sea.
Asbury notes that in recent years oil activity has slowed a bit in Indonesia, as many major firms have transferred exploration programs to China and Viet Nam, where terms are better and potential may be greater.
"We think Indonesia remains attractive," says Asbury "The economy is growing rapidly, and the demand for gas is strong. It's a proven oil and gas area, and the government is stable.
"We have a competitive edge because we have large amounts of gas near the population centers of Java. And Indonesia's eastern frontier has large potential."
ARCO is studying the possibility of buying or building a power generation plant in Indonesia. This, Asbury notes, would provide ARCO with a built-in customer for its gas.
"We're in Indonesia for the long-term," says Asbury. "We have been here 25 years and know the country. Our experience gives us an advantage."
ARCO Indonesia expects to earn close to $70 million this year and to be earning $100 million/year by 1997, even with no further discoveries.
Asbury said, "ARCO Indonesia took a dip in the late 1980s and early 1990s. But we're making a comeback. And we're determined to be a major player in Indonesia. Indonesia continues to be one of the foundations of ARCO's overseas expansion."
