On the seventh day of Christmas my true love gave to me… seven swans a-swimming, according to the ancient English carol. But not here, as, for the third year in a row, we are running through the Twelve Days of Christmas from an offshore energy perspective.
Last week's edition (here) included six gratuitously unnecessary liftboat accidents, five stranded deepwater rigs, and four subsea vessel deals. Our first week (here) opened with an arrest warrant in a pear tree for unlucky Angolan heiress Isabel dos Santos, two hydrogen-powered windfarm support vessels for the Saverys family, and a trio of LNG projects moving forward in Asia and East Africa.
What do we find happening now? We're heading to Indonesia to find Nine ladies dancing, Eight maids a-milking, Seven swans a-swimming…
Indonesia has had seven presidents since independence from the Netherlands in 1945. This lineup includes two generals, a father and his daughter, an ageing Islamist with a bad beard, an erstwhile Messerschmitt aerospace engineer, and a former teakwood furniture manufacturer from central Java, being the current incumbent, Joko Widodo.
Last week, the country made headlines after its parliament finally approved a new criminal code to replace old legislation based on Dutch colonial laws. The new code imposed a prohibition on sex and cohabitation outside marriage, punishable by fines and possible prison sentences, as well as making insulting the president a criminal offence, as is protesting without a permit. The changes will not come into force for three years, and in order to successfully prosecute someone for sex outside marriage, the complaint must be brought to the police by a spouse, a parent, or a child of one of the parties having the illicit sex.
Dr Albert Aries of the criminal code reform team reassured Aussie tourists and foreign investors not to worry (here). Presumably, the Balinese believe no Aussie parent would dob in their adult kids to the Indonesian police for partaking in some holiday romance in Kuta outside wedlock…
The overhaul of the criminal code has been planned since the 1960s but took sixty years to achieve. A high speed rail link between Jakarta and the Javanese city of Surabaya has been talked about for decades, but remains a "long-term plan," according to the Indonesian transport minister last month (here).
Anyone who has done business in Indonesia knows that things move more slowly there. Very slowly, indeed. The capital is supposed to move from Jakarta… somewhen, before 2045, when somebody can build a new one called Nusantara on the coast of Borneo (great Bloomberg video here).
This procrastination is especially evident in the oil and gas sector, where literally trillions of cubic metres of valuable natural gas sit under the seabed in proven discoveries waiting for someone to drill the wells and install the infrastructure needed to extract the methane. Our next three days of Christmas will focus on these festive gifts lying there, just waiting to be unwrapped in the only OPEC member that is a net importer of oil.
Presidents come and go in Indonesia, the gas projects do not progress. Maybe that will change in the New Year… but probably not.
Italy's ENI says 2023 will finally be the year it takes the final investment decision on its Maha field deepwater gas and condensate development located off Kalimantan province. The field's Plan of Development is due to be approved by the government in Jakarta next year. Bravo!
Maha field was discovered way back in 2002 and is located in around 1,200 metres of water. ENI hopes that it will tie-back the reservoir to its existing Jangkrik floating production unit (FPU) 16 kilometres away.
Maha's reserves were appraised last year and are estimated at more than 600 billion cubic feet (approximately 16.99 billion cubic metres) of gas, plus some oil and condensate. Upstream reported that production start-up could come as early as 2024 and that production will peak in 2028 to compensate from failing output from other fields feeding into the Jangkrik FPU.
Also near the Jangkrik FPU are the Rapak and Ganal production sharing contracts, in which Chevron holds a 63 per cent stake as operator while ENI owns around 20 per cent. These blocks are home to the long stalled Gendalo-Gehem gas field development projects, known as Indonesian Deepwater Development (IDD) Phase 2.
Gendalo-Gehem are gas fields discovered by Chevron's predecessor company Unocal in the year 2000. It has proven reserves of around two trillion cubic feet (56.63 billion cubic metres) of gas, plus condensate, located in 2,000 metres of water. For over a decade, Chevron has struggled to get the sums to add up to kick off the project.
The first stage of IDD, the Bangka field development, began production in August 2016 and delivers gas to the Bontang Liquefied Natural Gas (LNG) terminal. Chevron, however, has never been able to make the economics work for IDD Phase 2, so the fields remain in limbo.
ENI has been rumoured to be interested in buying Chevron's stake for several years. Watch this space.
A similarly long wait has bedevilled Abadi gas field, a giant mid-water discovery by Japan's Inpex in the east of the country, in the Arafura Sea, right up against the maritime border with Australia. The Abadi gas field was discovered in December 2000 by successful wildcat well spudded by the drillship Energy Searcher. In 2002, two appraisal wells, the imaginatively named Abadi-2 and Abadi-3, were drilled to examine the extent of reserves, and four more wells were drilled in 2007 and 2008.
Abadi's recoverable gas reserves are believed to be more than 10 trillion cubic feet (283.16 billion cubic metres), and it is a prime candidate for a LNG development, as the few nearby Maluku Islands are dirt-poor and lightly populated. The field lies in water depths of between 300 metres and 1,000 metres some 2,600 kilometres away from Jakarta. Abadi means "fire" in Bahasa, by the way.
Shell was brought in as a 35 per cent partner in 2011, and the company proposed a floating liquefied natural gas (FLNG) solution, which president Joko Widodo promptly vetoed. Shell then tried to sell its shareholding for a reported sum of US$1.6 billion in 2019 – unsuccessfully.
Not a standard cubic foot of gas has been commercially produced from Abadi.
With the experience of Abadi, IDD and Maha in mind, you would have thought that other companies holding deepwater gas discoveries in Indonesia would be patient. Earlier this year, Harbour Energy drilled and tested the successful Timpan-1 well in 1,280 metres of water using the drillship West Capella in the Andaman Sea, north of Sumatra.
"While the well encountered a material gas accumulation, further work will be required to establish commerciality and the full potential of this play across the licence," Harbour said in its press release here.
Harbour now needs to drill some appraisal wells to assess the size of the find but experts are already talking about this being the biggest gas discovery in Indonesia since Abadi. The better news for Harbour is that the Timpan discovery lies much closer to domestic gas buyers in Sumatra, close to the Arun LNG plant, and the Andaman block also has much easier access to Singapore, Malaysia, and Thailand to monetise the find. In its latest investor presentation (here), Harbour announced that additional 3D seismic acquisition had already started over the eastern area of the Andaman II block and that planning was underway for potential exploration and/or appraisal drilling in late 2023.
Wood Mackenzie estimates that Harbour's Andaman II block has the gross potential of up to 12 trillion cubic feet (339.8 billion cubic metres) of gas and 400 million barrels of condensate across the Sangar drilling prospects and in the Timpan cluster. Inpex, ENI, and Chevron's experience suggests that even if such reserves can be proven, extracting the gas and selling it will be a time-consuming process.
Harbour has a 40 per cent operating interest in the Andaman II PSC, along with partners Mubadala and BP on 30 per cent each. BP operates the Tangguh LNG plant in West Papua in the eastern-most part of Indonesia and is currently constructing a third LNG train there, which is also three years late and may come into production only in early 2024 now.
Surprise!
As Abadi, IDD, and Maha grind painfully slowly towards production, or not, the biggest field of all remains tantalisingly out of reach. On the eighth day of Christmas, I present… not eight maids-a-milking, but eight billion cubic feet (226.53 billion cubic metres) a day of gas which should be a-flowing. But they aren't, and they probably never will.
This is a gas field that Indonesian oil and gas industry regulator SKK Migas previously believed has in-place reserves of 222 trillion cubic feet (6.28 trillion cubic metres) of gas – smaller than Qatar's giant North Field but still large by international standards and massive by regional standards. An estimated 46 trillion cubic feet (1.3 trillion cubic metres) of methane is believed to be recoverable.
This is a field that Italy's Agip (now ENI) discovered in 1973, fifty-nine years ago, in shallow water in the Natuna Sea, but so far, all efforts have failed to get any gas into production. This field holds the distinction of being Southeast Asia's largest undeveloped gas discovery.
Ladies and gentlemen, I present the East Natuna gas field (formerly Natuna D-Alpha), and I ask an important question. Why has 46 trillion cubic feet of recoverable reserves in just 145 metres of water not been developed?
It is not for want of trying (excellent summary here). Indonesia's state oil company Pertamina and ExxonMobil predecessor company Esso formed a joint venture in 1980 for the development of what was then known as the Natuna D-Alpha gas field.
In 2007, ExxonMobil wrote off US$400 million and Pertamina US$60 million, and the Indonesian government cancelled the concession.
Not a standard cubic foot of gas had been commercially produced then, and fifteen years later, the total production remains… zero.
Pertamina signed fresh heads of agreement in 2010 with ExxonMobil, Total, and Malaysia's Petronas for the development of the East Natuna block. By 2012, Petronas was walking away (here), as it could not get the economics to work out. PTTEP of Thailand stepped in instead. In 2017, all the foreign partners decided that the project was unfeasible, and left East Natuna to Pertamina.
The fundamental problem is that over 70 per cent of the gas in the reservoir is carbon dioxide.
The East Natuna reservoir is a giant CO2 bomb. Anyone who produces the trillions of cubic feet of gas in the field is going to have to separate and reinject twice as much CO2 as the methane they produce. CO2 is intensely hostile to steel, and, so far, carbon capture and storage (CCS) schemes, led by Australia's Gorgon project, have serially underachieved, costing more than expected and sequestering less CO2 than planned.
The Northern Lights CCS project in Norway has committed to ordering two 130-metre-long CO2 carriers to ship the liquified CO2 in 7,500-cubic-metre parcels using tankers with special high-tensile-strength nickel steel alloy tanks with a wall thickness of five centimetres (here). Maybe if Northern Lights works, the same CCS and transport technology could be applied in Indonesia. That's a big maybe, however.
In the past, Pertamina had estimated that oil prices needed to be around US$85 a barrel for East Natuna to be economically viable. The Russia-Ukraine War has raised the prospect that maybe the project can proceed before net zero commitments and decarbonisation leave it a stranded asset.
In October, Upstream reported that Malaysia's national energy company Petronas was interested in partnering with Pertamina to bring the East Natuna gas field into production.
"Indonesia's upstream regulator SKK Migas said it has received interest from Petronas about East Natuna… and would immediately broker talks with operator Pertamina," the publication said.
Then at the start of this month, EnergyVoice and Indonesian website VOI.id excitedly reported (here) that SKK Migas officials had told them that Russia's Zarubezhneft was also interested in entering the management of the East Natuna with Pertamina.
So far, like so much in Indonesia, nothing has been signed. Talk is cheap. With Sergey Lavrov, the (insert adjective of your choice) Russian foreign minister in Indonesia for the G20 summit around the same time as Zarubezhneft's professed interest, I can see why he would be keen to curry favour with his hosts, at a time that Russia is an international pariah on account of its invasion and war crimes in Ukraine.
Quite where the estimated US$40 billion would come from to progress this expensive and technically very challenging project is not clear. East Natuna would probably cost as much to develop as is required for the building of Indonesia's new capital, Nusantara.
Let's see if SKK Migas says that Petrochina or Sinopec make a move next…
One project where Petronas does seem to be making progress is with Abadi. At last. Malaysia's oil and gas champion has expressed interest to buy part of Shell's 35 per cent stake in the LNG project, Reuters reported. The piece also stated Petronas is working in conjunction with a dream team pairing of Pertamina and the Indonesia Investment Authority, which is the country's sovereign wealth fund.
Ironically, Petronas, like Shell, is a pioneer in FLNG technology and operates two FLNG units in Malaysia, as we reported in our survey of the sector here. President Widodo has categorically ruled out any FLNG solution for Abadi. However, he will leave office in February 2024. President number eight could possibly be his deputy, the former general and current defence minister, Prabowo Subianto.
Let's just say that perhaps Prabowo could be persuaded to rethink the whole FLNG solution were he to be president and were the right incentives in place? It wouldn't be out of character for the son-in-law of former second president Suharto.
Inpex is now submitting a revised Plan of Development for Abadi to SKK Migas, including a CCS scheme, which may push the project budget above the US$20 billion often cited.
The development concept is based on a floating production, storage and offloading (FPSO) vessel able to handle 1.8 billion cubic feet (50.97 million cubic metres) of gas per day and 36,000 barrels of condensate per day, according to Upstream (here). The treated gas would then be piped to a two-train onshore LNG plant on a nearby island with capacity of 9.5 million tonnes per annum.
The Indonesian government, like the East Timor government for Greater Sunrise field (here), prefers a land-based LNG plant as it will generate more local jobs, even if the project takes longer and costs more.
Inpex is now saying that it expects first gas from the project by the 2030s. Once you have waited nearly a quarter of a century, another decade or two doesn't really make much difference, I suppose.
There's an Indonesian proverb that goes "Di mana ada kemauan, di situ ada jalan," which translates into, "Where there is a will, there is a way." So far, Jakarta's political will to break the deadlock and to make foreign investment in gas developments happen has been sorely lacking.
Indonesia is rich in gas, but its dysfunctional governance means that OPEC's only oil importer is, once again, failing to make progress with huge offshore projects that could help the country raise the revenues it needs for the new capital and the high-speed rail network. Indonesia's energy policy needs, in the festive tradition, three wise men to sort it out.
Selamat hari Natal (Happy Christmas) to all our Indonesian readers!
Background Reading
A lovely map of the Malaku islands where Abadi is located is here.
The New York Times sub-header on Prabowo's appointment as defence minister in 2019 here tells you all you need to know about him: "Prabowo Subianto, a former general who was discharged from the military for breaking the law, violating human rights and disobeying orders, will oversee Indonesia's defence policy…."
Our 2020 Twelve Days of Christmas featured some classics, which have stood the test of time nicely (here and here) covering Cairn Energy (as was), Esvagt, Vantage Drilling, Shearwater, Swire Pacific Offshore and Seacor, followed by the oil price, floating wind, ammonia fuel cells, Myanmar, Bourbon and Standard Drilling (as was).
Our 2021 Twelve Days of Christmas (here, here and here) featured Cairn Energy becoming Capricorn Energy, Vantage Drilling, North Star and Vard, Shearwater and Shell, Windcat Workboats, Swire Pacific Offshore, ammonia fuel cells, the oil price, Myanmar, Floating Wind, Bourbon's revival and Standard Drilling (as was).