Energy Study Division




Unconventional Hydrocarbon as Indonesia
Future Energy
Shale gas Key Takeaway

Indonesia has ASEAN’s largest shale potential.
Indonesia desperately needs new production or see oil & gas deficit increase 500% by 2025.
Shale offers disproportionate value generation to early movers.
Challenges remain, but can be aided by appropriate regulation and fiscal regime to stimulate

Unconventional upside
Indonesia’s nascent shale potential is a stand out within ASEAN, ranking 9th and 17th globally for
shale oil & gas in place respectively on EIA/MEMR data. Indonesia’s hydrocarbon demand is
skyrocketing while conventional production is stagnating, with a particular need to import crude.
The result is a US$1bn/month oil & gas deficit that is set to balloon to US$6bn/month in the absence
of new incremental domestic production to replace imports. Shale is a solution that also satisfies the
government’s aim of energy security and independence. While Indonesian shale remains fledgling, it
offers disproportionate value generation opportunities for early movers. Challenges exist, but
Indonesia is highly fiscally motivated to stimulate activity.
A stand out for shale potential in ASEAN
Indonesia’s nascent shale potential is a stand out within ASEAN, ranking 9th and 17th globally for
shale oil & gas in place respectively on EIA/MEMR data. Within Indonesia, shale potential has a clear
weighting to Sumatra, which represents 41% of the 574tcf shale gas and 88% of shale oil in place.
Expanding oil & gas deficit fuels a need for incremental production
Indonesia’s oil & gas trade deficit currently exceeds US$1bn/month in net imports and is growing.
The drivers are stagnating oil & gas production in the face of skyrocketing domestic demand.
Assuming imports continue to fill the ever-widening supply/demand gap, we forecast Indonesia’s oil
& gas trade deficit will balloon to US$6bn/month by 2025. Furthermore, we see upside risk to this
figure given what we believe are understated assumptions in Indonesia’s National Energy Policy
(NEP) for oil & gas demand. Increasing import reliance runs directly counter to NEP’s clear objective
of energy independence and security, which is logically better satisfied by maximizing the full
potential of conventional and unconventional hydrocarbons domestically – of which shale has still to
be tapped
Early days offer the thick edge of value creation - but also challenges
Shale in the USA and Australia, as well as CBM in Indonesia, demonstrate the early movers’
opportunity to capture 20% of the full-cycle value by investing <5% of the full-cycle capex. However,


challenges remain: Indonesia’s investment climate for conventional oil & gas is broadly uncompelling
both regionally and globally. Some of these issues can cross over into unconventional, particularly
ones of above ground operating and regulatory environment. Others are potentially amplified in an
unconventional setting. Much of this can be addressed via clear, supportive and enabling regulation.
Additionally, fiscal terms are critical in competing for the internationally mobile skills and capital that
shale intensively utilises. Ultimately, Indonesia is highly fiscally motivated to stimulate shale activity.

Figure 1. Seven major Indonesian shale basins




Joint operation of Natuna block proposed
Raras Cahyafitri
Thu, January 7 2016 | 05:43 pm

Following years of delays in the development of a number of gas projects around the
Natuna Islands, an exploration committee is planning to propose a joint development
involving a number of blocks in the area as part of moves to make costly projects more
Andang Bachtiar, the head of an ad-hoc national exploration committee established in 2015,
said the team was currently working on the plan for five blocks in the environs of the
archipelago.'We will propose a joint POD [plan of development] for five blocks. Under the
plan, each party will be responsible for the development of certain facilities, but
management will be shared,' Andang said. According to Andang, the five blocks include East
Natuna block 'previously known as Natuna D-Alpha ', Tuna block and South Natuna Sea
Block B.
East Natuna block has total proven reserves of 46 trillion cubic feet ( tcf ), making it the
largest gas reserve in Asia. Unfortunately, the gas field has a high CO2 level of around 71
percent, necessitating advanced technology and huge investme nt to develop the block. As
reported earlier, the block needs between US$20 billion and $40 billion in investment.
State-owned Pertamina, US-based ExxonMobil, France's Total SA and Thailand's PTT
Exploration and Production ( PTT EP ) are among oil and gas firms reportedly interested in
the block.Development of East Natuna is estimated to be feasible only if oil prices exceed
$100 per barrel. Currently, the global glut has pushed the price to a level of $37 per barrel.
Meanwhile, Tuna block is operated by Premier Oil, which holds a 65 percent stake. The
remaining 35 percent is held by the Mitsui Exploration Company. On the other hand, South
Natuna Sea Block B contractors are Conoco Phillips with 40 percent ownership, leaving
Chevron and Inpex with 25 percent and 35 percent, respectively. According to a recent
report, the contractors are seeking to release part of their stake to new partners.
According to Andang, all the planned blocks are located in remote areas, and there has been
no discussion among operators. 'If we work together, I'm sure we can shift the political
constellation as well as the constellation of oil and gas prices, because the reserves there


are huge,' he said, adding that the plan had to be formulated as soon as possible, as
implementation would take two or three years.
Meanwhile, Pertamina director for upstream affairs Syamsu Alam said earlier that the
contractors had asked for a two-year extension to the period of principal of agreement
(POA) of East Natuna block, which expired on Dec. 10.
The POA for East Natuna field, formerly known as the Natuna D-Alpha block, was seen as an
important stage prior to the signing of a production-sharing contract ( PSC ). The POA was
signed in 2011, the same year the PSC for East Natuna was expected to be concluded.
However, no progress has been reported to date. 'Even if the extension is granted, it's
unlikely the block will be producing by 2030,' Syamsu said.
The Natuna Islands in the South China Sea are Indonesia's northernmost territory. While
they lie far from the so-called nine-dash-line claimed to mark China's territory, recent
tensions have driven the government to exert its stake over the area.



Energy holding company to speed up
gas infrastructure development:
Indonesian official
Kamis, 21 April 2016 18:10 WIB | 1.625 Views
Jakarta (ANTARA News) - A holding company in the energy sector would help speed up
massive development of gas infrastructure, an official said. "We very much support plan to
put PT Perusahaan Gas Negara (PGN) in a holding company under Pertamina as the parent
company," Oil and Gas Director General IGN Wiratmaja Puja said here on Thursday.
Wiratmaja said with the combination, it would be easier for the energy and mineral
resources ministry in assigning massive infrastructure program in the energy sector.
Meanwhile lawmaker Satya W Yudha from the Commission VIII of the Parliament said the
merger would improve efficiency in the development of gas infrastructure. Executive
director of Energy Watch Indonesia Ferdinand Hutahean said after the combination the first
step to be taken is to determine a strategy and priority scale for gas infrastructure
development. Development of household gas infrastructure should be a priority that the
people could have cheaper energy replacing more expensive LPG, Ferdinand said. Networks
of gas infrastructure for industry should also be expanded that the countrys manufactured
products would be more competitive in prices with the use of cheaper energy, he said.
Earlier, Minister for State Enterprises (BUMN) Rini Soemarno said PT Perusahaan Gas
Negara (PGN) would become a subsidiary of Pertamina. Pertamina would be the parent
company. The shares owned by the government in PGN would be handed over to
Pertamina, whicyh is wholly owned by the government, Rini said. She said the process of
forming the energy holding company has been in the final phase and it is expected to be
wrapped up in September this year. Implementation is waiting only for a draft government
regulation which is expected to be issued in mid July, she added. She said the plan is part of
the program of grouping state companies in a number of holding companies. She said
holding companies would also be formed in five other sectors - finance, construction and
engineering, toll road, mining and housing. She said PT Pertagas, which is a subsidiary of
Pertamina operating in gas production, could be combined with PGN that they would not
operate separately.
The office of the state enterprises minister said the energy holding company would be
formed before July this year. This year, Pertamina was asked by the government to build city


gas networks in six areas for 23,158 households to add to 26,225 households already having
gas supply in March 2016. Gas pipe networks are already installed and operational in six
cities including Prabumulih, South Sumatra for 4,650 households, Jambi 4,000 ho useholds,
and Sengkang, regency of Wajo, South Sulawesi 4,172 households, Bulungan,EastKalimantan
3,300 households; Sidoarjo, East Java 6,154 households and Bekasi, West Java 3,949
households. PT PGN also plans to expand its gas pipe networks by a total of 600 kilometers
in 10 cities this year including Jakarta, Bekasi, Cirebon, Pasuruan, Surabaya, Sidoarjo,
Semarang, Medan, Batam, etc. PGN already distributed gas to more than 107,690
households until early 2016.



The need for a national strategic petroleum
Montty Girianna - director for energy, mineral resources and mining at the
National Development Planning Board ( BAPPENAS )
Jakarta | Wed, February 13 2013 | 08:48 am
The fact that our fuel demand is increasingly met through higher imports is really alarming.
Today, not only do imports comprise two-thirds of gasoline and one-third of diesel fuel for
domestic consumption, but also one-third of crude oil for intake to our refineries. Exposure
to international oil markets is thus astonishingly huge.
Our crude production is falling; it has steadily decreased to much less than 1 million barrels
a day. Mature oil fields with declining rates of production and a shortage of investment in
new exploration contributes to low rates of production. Our refining capacity also remains
stagnant. We have not expanded our refining capacity over the past
20 years.
The combination of an unfavorable rate of crude production and a shortage of refining
capacity, in the face of avid domestic consumption, has led to increasing dependency on
imports — increased vulnerability in our energy security. In fact in 2005, this country was
the only OPEC member that was a net oil importer.
Too heavy a dependency on imports is risky in many ways. As we set fuel prices fixed below
the international market rate, soaring and volatile import prices have led to a large and
unpredictable subsidy allocation, creating an excessive fiscal burden. Sadly, this forces us to
forego vital investments such as in health, education and infrastructure, and makes the
subsidy allocation difficult to predict leading to numerous government-budget revisions.

This mismatch is even worse when we project our demand for the next 10 to 20 years. We
are committed to having economic growth of 7 percent a year and with that commitment, a
huge volume of gasoline and diesel needs to be secured to fuel the engine of development.
In the coming 10 years, the demand for gasoline will double and that for diesel will increase
by one-third.


Of course we have to work on the demand side by promoting efficiency measures, as well
as on the supply side by increasing production. But more fundamentally, when we are
relying on imports, is to develop a mechanism or an instrument by which price shocks can
be effectively absorbed, and our budget securely set, hedged against uncertainty.
We should consider what the International Ene rgy Agency (IEA) has initiated. The IEA,
established in the wake of the 1973 oil crisis, requires its members to have a Strategic
Petroleum Reserve ( SPR ) as a way to hedge against oil price shocks. The members have to
maintain an oil stock sufficient to fulfill demand for three months, either held exclusively for
emergency purposes or for commercial and operational use.
The US, an IEA member, has an SPR of 174 days, of which 98 days is held by industry and the
balance by the government. The UK is another IEA member having an SPR of 268 days
entirely held by industry. Non-IEA countries such as China and India have launched their
own reserve programes to hold the same stock levels mandated by the IEA.
We cannot wait to have an SPR until we are in a very bad shape. At least, for now, the
government has to provide legislation as well as policies on the long-term perspective for an
SPR, and start collaborating with industry to formulate a scenario of fuel stockholding

Policies have to be developed to ensure that the SPR is a part of price-smoothing
instruments to “protect” consumers from volatile import prices. Given the present
circumstances, the Mid-Oil Platts Singapore ( MOPS ) price would best serve as a basis for
developing a scenario for an SPR.
We cannot fully pass the volatility of MOPS on to domestic prices, and the SPR has to be
designed to fulfill that intention. In addition, an SPR has to be seen as a hedging mechanism
against oil price jumps that are deemed to have a major impact on our national economy. A
definition of “major impact” must be set to justify the need and the size for the SPR, and
later on as a basis for triggering a release of SPR stocks.
Also, the SPR has to be developed as a building block to mitigate a severe fuel supply
disruption. An unplanned refinery shutdown would be a major reason to justify holding
back-up fuel stocks.
Power outages can be avoided by providing buffer stocks of fuel for a power plant. An SPR
should hold fuel stocks that are consumed in a large quantity by consumers. Today, we
should focus on stocks for gasoline and diesel, but later on a stock of liquid petroleum gas (
LPG ) and crude would also be necessary.
Finally, the SPR has to be developed both for emergency purposes through public stocks, as
well as for commercial and operational use via stockholding obligations on industry or


private stocks. We might expect stock levels held by the public to be generally larger than
the government’s stockholding obligation. Currently, Pertamina holds fuel stock for 20 days
for commercial and operational use. Public stocks should be much larger than that.
The revision of Oil and Gas Law No. 22/2001 should define the fundamental traits of any
SPR. The law should clarify who will ultimately be accountable for implementing the SPR,
who will own the stock, and the roles of our state-owned oil company Pertamina and
industry players, etc.
In the mean time, we can identify and assess what is the current available infastructure,
including refineries, oil terminals, pipelines, floating storage units, etc., and their capacity.
How can they be pledged for SPR?
The expansion of existing refineries and development of new refineries and crude terminals
has to be within the framerwork of SPR implementation. Exploring potential access to
neighboring storage and oil trading hubs in Singapore might also be necessary for shortterm purposes. It is important to have a consensus among policymakers on a realistic
timeframe for SPR development, short- and medium-term, as well as long-term.
Overall, the aim of having an SPR is to ensure the security and sustainability of adequate
fuel supplies, i.e., gasoline and diesel, for the domestic fuel market. A key task of course is
to guarantee the availability and smooth distribution of fuel to everyone anytime,