FRONTIER SEARCH TO SLOW IN INDONESIA

Oil and gas exploration in Indonesia likely will begin refocusing on proven areas after 1993, Arthur Andersen & Co.'s Far East oil analyst predicts.

Arthur Andersen's James Sales said disappointing exploration results, outdated production sharing contract (PSC) terms, and low oil prices are discouraging companies from exploring frontier acreage.

But Indonesian frontier activity during 1992-93 is likely to remain high because a large number of PSCs awarded in the past 2 years by state owned Pertamina cover high risk frontier areas.

PSC contractors have disclosed several discoveries on recently awarded frontier tracts. However, the discoveries have been relatively small and far from pipeline infrastructure. With prevailing low oil prices, Pertamina likely will find it difficult to entice companies to extend PSCs or joint operating agreements beyond minimum exploration commitments, Sales said.

"Some companies have dropped frontier acreage already. Unless something happens to give companies a reason to continue, they are going to drop more of those blocks."

Also, companies are offering an unprecedented number of farmouts, including 60-70% of acreage in the eastern part of the country, not all of which has been tested by drilling. About 40% of the acreage under contract is in the eastern half of the country.

"Operators of about every block in the eastern part of the country are looking for new partners," Sales said. "A lot of that is because many of the contracts were signed when oil prices were quite a bit higher.

"Now that the price of oil is in the $20/bbl range and looks like it's going to stay there for a while, companies can't justify the high cost of drilling in frontier areas. The size of structures and prospects they are looking at can't make money with a $20/bbl oil price."

As companies become increasingly frustrated with their inability to replace reserves by exploring frontier blocks, farmout and acquisition activity will increase, he said.

MAJOR DISCOVERIES

By contrast, production sharing contractors continue to make major discoveries in more mature areas of Indonesia.

For example, Sales lists:

Total's North West Peciko discovery on the Mahakam block in April 1991 with estimated reserves of 3 tcf.
Asamera Oil (Indonesia) Ltd.'s Dayung discovery on the Corridor block in August 1991 with estimated reserves of 500 bcf.
Marathon's KRA oil discovery on the Kakap block in October 1991 with reserves estimated at 50 million bbl (OGJ, Oct. 28, 1991, p. 40).

Of particular significance, Sales said, is Asamera's 1 Kuala Langsa wildcat on Block A in Sumatra, which last April reportedly cut more than 700 ft of net gas pay in Miocene Peutu limestone at about 10,825 ft (OGJ, May 11, p. 37).

Aceh Gas & Oil Co. Inc. of Japan and Asamera, a unit of Gulf Canada Resources Ltd., each own a 50% interest in Block A.

Sales said seismic data are poor on the discovery and Peutu reservoir quality varies considerably. Asamera said testing of the upper pay in Kuala Langsa yielded 36 MMcfd of gas that was 81% CO2 and 19% hydrocarbons. Testing of the lower zone yielded gas 83% CO2 and 17% hydrocarbons (OGJ, July 13, p. 31).

The 1 Kuala Langsa strike is about 110 km southeast of the Arun natural gas liquefaction/processing plant and about 85 km southeast of Arun gas/condensate field.

Arun field, where a unit of Mobil Corp. owns a 100% contractor's interest under an agreement with Pertamina, is Indonesia's biggest producing gas/condensate field. It supplied nearly all of Mobil's total Indonesian production of 1.6 bcfd of gas, 51,000 b/d of condensate, and 46,000 b/d of LPG in 1991.

Arun field is a 1971 discovery that went on stream in 1997. Cumulative production is more than 1.5 billion bbl of oil equivalent, or about 50% of estimated ultimate recovery.

The reservoir is in natural decline, and booster compression will be required to deplete its reserves and meet LNG sale contract volumes. Installation of compression is to begin this year, with completion scheduled for early 1995.

Arun plant, built and owned by Pertamina is operated by PT Arun Natural Gas Liquefaction Co., a combine of Pertamina 55%, Mobil LNG Indonesia Inc. 30%, and Japan Indonesia LNG Co. 15%, ships LNG and LPG to buyers in Japan and Korea. Condensate goes to buyers in the Far East and North America.

Sales said the Arun plant should be a ready market for Kuala Langsa production.

PSC TERMS

Sales said the Indonesian government must improve terms available to Pertamina contractors through PSCs or joint operating agreements if it wants companies to continue exploring frontier areas.

Under terms adopted in 1988, production sharing contractors pay a bonus at the time a contract is signed and assume all risks of exploration. The bonus is not recoverable but can be charged against tax liabilities after profitable production begins. PSCs also require contractors to pay a bonus to Pertamina when production reaches specified levels.

PSCs allow contractors to be reimbursed with "cost oil" for all allowable current costs of production and amortized exploration and capital expenditures. Remaining "profit oil" is split after taxes, with the government receiving 85% and contractors 15% in mature oil producing areas. In marginal oil producing areas, defined as fields producing less than 10,000 b/d in the first 2 years on stream, the split is 80-20 and in frontier oil areas 75-25 to the government and contractors, respectively.

On all gas prone acreage, 70% of after tax profit goes to the government and 30% to the contractor.

Sales said those terms attracted partners in the past because the price of oil was higher and was expected to increase.

"But now the oil companies seem to be thinking we'll be living with a pretty stable oil price for some time, and really need something better if they're going to be enticed to stay in these areas and, beyond that, to sign new contracts," he said.

Pertamina signed 22 PSCs in 1991 and 19 in 1990 (OGJ, Newsletter, Jan. 13).

About 18 new production sharing contracts were signed in the first 10 months of 1991. Since then, only three have been signed.

"That sort of shows the picture," Sales said.

TALK OF CHANGE

Sales said there is talk of the Indonesian government changing PSC terms to more favor contractors, but nothing has been concluded.

"My feeling is the government might give up another 5%, but that's not going to be significant enough," he said. "I think another 15-20% would be needed to stimulate interest.

"Continuing success of exploration on old blocks, combined with the lack of success on recently awarded acreage, points to a general shift in activity back toward more mature areas."

Another factor dulling the attraction of Indonesia's oil and gas prospects is an increasing number of attractive prospects available in other parts of the world, Sales said.

"There is a lot of money around for international exploration, but there also is a lot of competition. And unless Indonesia locks up that money in the form of 3-4 year commitments, within the next year the money might be in one of the new C.l.S. republics, South America, or some other countries in Southeast Asia."

Still, Sales said, companies seeking to expand international portfolios will find Indonesia an exciting oil and gas province. Oil and gas resources in the country are highly prospective because of Indonesia's stable economic and political climate. Indonesia also is near Asian markets and growing local economies.