INVESTMENT IN THE

UPSTREAM OIL & GAS INDUSTRY

IN INDONESIA

FEASIBILITY STUDY
 TABLE OF CONTENTS

SECTION I WORLD CONDITIONS

1.1 Long Term Production Forecast
1.2 Oil Price Development & Forecast
1.3 Summary
1.4 Conclusion
SECTION II INDONESIA
2.1 Production & Consumption
2.2 Requirements for Improvements
2.3 Facilities for Investors
SECTION III LEGAL
3.1 Constitution
3.2 How it Was
3.3 Present Conditions
SECTION IV CONTRACTS
4.1 General
4.2 Production Sharing Contract
4.3 Technical Assistance Contract
4.4 Joint Operating Agreement
4.5 Operating Cooperative Agreement
4.6 Life Span of a Contract
SECTION V OPPORTUNITIES
5.1 Basins in Indonesia
5.2 Exploitation and Development
5.3 Exploration
SECTION VI PROCEDURES
6.1 Process
6.2 Budget
6.3 What Next
6.4 Exploration Costs
6.5 Operating
SECTION VII ECONOMICS
7.1 IRR and Cashflow
7.2 Production rates
7.3 Payback
SECTION VII DISPOSAL OF PRODUCT
8.1 Oil
8.2 Gas
SECTION IX SUMMARY & CONCLUSION
9.1 Summary
9.2 Conclusion

ATTACHMENTS
A Typical PSC Cashflow Projection
B Law 22, 2001
C Regulation 42 / 2002
D Regulation 35 / 2004
 GLOSSARY OF RELATED TERMS

AMDAL Analisis Mengenai Dampak Lingkukungan

Environmental & Social Impact Study
API American Petroleum Institute
ASTM American Society for Testing Materials
BOPD Barrel of Oil per Day
BP MIGAS Badan Pelaksanan Kegiatan Usaha Hulu Minyak dan Gas
Bumi
Upstream Oil and Gas Regulatory Body
BPH MIGAS Badan Pengatur Kegiatan Hilir Minyak dan Gas
Downstream Oil and Gas Regulatory Body
BTU British Termal Unit
DPR Dewan Perwakilan Rakyat
House of Representatives
MPR Majelis Permusyawaratan Rakyat
Senate
HYDROCARBONS Oil and Gas
RESERVOIR Subsurface Strata (Structure) Containing Oil and Gas
(normally sandstone or limestone)
FAULT Break in the Sub-Surface Structure
EXPLORATION Searching for Oil and Gas
EXPLOITATION Production of Oil and Gas
BLOCK Area where Contractor can search for and produce oil
and gas.
PSC Production Sharing Contract
JOA Joint Operating Agreement
JOB Joint Operating Body
TAC Technical Assistance Contract
OCA Operating Cooperative Agreement
BKPM Badan Koordinasi Penanaman Modal
Investment Coordinating Board
COORDINATES Longtitude and Latitude
NOTARIS Notary Public
NPWP Nomor Pokok Wajib Pajak
Tax Registration Number
SIUP Surat Izin Usaha Perusahaan
Trading Permit
TDP Tanda Daftar Perusahaan
Company Registration
PT Perusahaan Terbatas
Limited Liability Company
PPh Pajak Penghasilan
Income Tax (Private, Company, etc.)
PPN Pajak Pertambahan Nilai
Value Added Tax
MSCFD Thousand Standard Cubic Feet per Day
MMSCFD Million Standard Cubic`Feet per Day
STANDARD CONDITIONS 14.7 psi AND 60 Degree Faherenheit
PSI Pound Per Square Inch
DST Drill Stem Test
SPE Society of Petroleum Engineers

SECTION I
WORLD CONDITIONS

1.1 LONG TERM PRODUCTION FORECAST

Crude oil and natural gas throughout the world are still large but are finite and
production most likely will peak within this century. All, or nearly all, of earth’s
petroleum basins are believed to have been identified and most are to a large extend
explored. All, or nearly all, of the largest field have been discovered and are being
produced and production is clearly past its peak in some of the larger basins.

Production from maturing oil and gas assets drop annually even if properly
maintained. Secondary recovery processes can be applied but a drop in production
levels are inevitable.

World crude oil demand has been growing at an annual rate in excess of 2% in
recent years. Demand growth has been the highest in developing countries and
particularly in China and India and to a lesser extent Africa, due to rapid increasing
demand. This high growth in demand did not exist even a decade ago.

Presently available data predict a peak in world crude oil production somewhere mid
this century. It is difficult to predict, with reasonable accuracy, exactly when this will
happen since technical, political and economic changes beyond 30 years are difficult,
if not impossible, to conceptualize and quantify.

The followinng chart shows the forecast by the United States Geological Survey
Department.
 Forecast show a remarkably indifference to alternative resource estimates, even
adding 1 trillion barrels of reserves only moves peak world crude oil production, at
2% annual production growth, 10 years into the future.

1.2 OIL PRICE

The price of crude oil has increased from around 13 USD/Barrel in 1998 to over 90
USD/Barrel at present in current dollars (a 7 fold increase) and close to 60
USD/Barrel ( 4.5 fold increase) in 2006 dollars.

This price increase has partially been fuelled by conflicts, especially in the Middle
East but mostly by the increase in demand in such countries as China and India.

Although alternative energy sources are being developed, such as coal bed gas, tar
sands, coal into petroleum conversion, fuel cells, etc. etc. petroleum products will
remain the principle energy source for transportation, power generation, etc. for the
foreseable future.

In general predictions, compensated for inflation, currency fluctuations, etc. predict

that crude oil prices will be around the 60 USD/barrel level, in 2005 US Dollars, for
the foreseable future. This prediction is accurate today where prices at this moment
at USD 95/barrel are equivalent to around USD 60/barrel in 2005 dollars.
 Note: Prices in 2005 USD

1.3 SUMMARY

We feel that we can safely state that:

a) World consumption of crude oil and natural gas will increase annually for the
foreseable future.
b) Oil and gas are finite resources and that world oil and gas production will peak
mid to late this century and decline rapidly after that.
c) Prices for crude oil will remain around the 60 USD/Barrel, in 2005 dollars, for the
foreseable future in a best case scenario. Disruptions in supply or uncertain
political developments in the mayor oil producing countries can drive the price up
even further.
d) Alternative energy sources will be able to provide, eventually, for transportation
fuel needs. However crude oil and natural gas will remain in high demand for the
production of chemicals, medicines etc. and for those sectors where alternative
energy will either be to expensive or to inconvenient to use.

1.4 CONCLUSION

Investments where production is limited, sources are finite and demand continues
to increase will be very profitable indeed.
 SECTION II
INDONESIA

2.1 PRODUCTION & CONSUMPTION

Indonesia, traditionally an exporter of oil, now is a net oil importer due to ever
increasing local consumption and aging oil and gas assets. Oil production, several
years ago at the 1,600,000 barrels of oil per day now stands at less than 1,000,000
barrels per day. The government of Indonesia has called for an increase in oil
production to 1,300,000 barrels per day by 2009.

Table 2.01 Indonesian Crude Oil production vs Consumption

Indonesian production has declined due to maturing oil and gas assets and a
reduction in investments in the oil and gas sector in 1998 when oil prices reached a
low of 13 USD / Barrel. A price level where margins are so low, considering
production cost of 10 USD/Barrel, or higher, in most of the world.

In Indonesia his situation wa scompounded by the political unrest following the

downfall of, the then, President Suharto, who had ruled Indonesia, as a dictator, for
the last 30 years.

2.2 REQUIREMENTS

Increase in oil and gas production in indonesia is still possible, the eastern part of the
country, especially in the deeper waters, is largely unexplored and existing basins in
the western part of the country are not fully explored and developed.

Unexplored areas will require exploration to determine if, and how much,
hydrocarbons are in place. One must remember however that, never mind how
positive and promising survey data are, that actual wells have to be drilled to
determine if oil and/or gas are actually present. Surveys only indicate where oil
and/or gas could be present.
 Mature oil and gas assets, where production has declined due to depletion of
reservoir energy, can provide additional production by artificially increasing reservoir
pressure or introducing sweeping agents, called secondary recovery, such as gas
injection, water flooding, CO2 flooding etc.

The most promising areas for exploration are in the deep water parts of Indonesia,
especially between Kalimantan and Sulawesi, in the Malukku’s and around Papua.
However, exploration in such areas are extremely high and are therefor not
considered in this study.

Deep Water Production Secondary Recovery

2.3 FACILITIES FOR INVESTORS

To facilitate investment in the oil and gas industry the government of Indonesia has
taken several steps, such as:
a) The creation of BP Migas to manage oil and gas reserves instead of Pertamina.
b) Increasing production sharing conditions for investors.
c) Providing additional incentives for marginal fields and remote areas.
d) Allowing for direct negotiations besides the traditional annual bid rounds.
e) Allow joint ventures, with foreign partners, to be listed on the Jakarta Stock
Exchange.

For investors, several types of contract agreements are available such as:
a) Production Sharing Contracts
b) Joint Operating Agreements
c) Operating Cooperative Agreements with Pertamina for existing assets.
 SECTION III
LEGAL

3.1 CONSTITUTION

“All natural resources in the soil and waters of the country are under the jursidiction
of the State and shall be used for the greatest benefit and wellfare of the people”

(Article 33, Indonesian Constitution)

3.2 HOW IT WAS

Under Law 8/1971, Pertamina, the State Oil Company, was appointed to manage oil
and gas operations on behalf of the Government. This created an inherent conflict of
interest where Pertamina was in charge, and responsible for, managing the operation
of competing companies.

Under these conditions Pertamina, as company active in exploration and exploitation,

was also responsible for supervising and managing competeting competing
companies.

Pertamina, up to 1985, was also allowed to obtain foreign currency loans on behalf of
the Government. This lead to such wide spread mis-management, especially
gambling on the tanker market, and corruption that Pertamina was so deep in debt
that it almost bankrupted the country.

At that time the Government created BPPKA (Foreign Contractors Coordinating

Board) to manage and supervise foreign contractors in the oil and gas industry.
However, it placed this Board under control of and managed by Pertamina thereby
only creating additional bureaucracy.

What further complicated the situation was that President Suharto considered
Pertamina as his personal property and source for readily obtainable cash.

After President Suharto’s down fall, in 1998, investments in the oil and gas sector
dropped substantially. To increase investments the government decided to
dramatically change conditions and improve incentives for both domestic and foreign
investors.
3.3 PRESENT CONDITIONS

The Indonesian Parlament (DPR, Dewan Perwakilan Rakyat) in October 2001

passed a bill which removed Pertamina as the manager of oil and gas assets in
Indonesia. (Attachment “B”)

In July 2002, the then, President Megawati issued a Presidential Decree which
estalished an implementing body for oil and gas upstream operations , the Badan
Pelaksana Minyak dan Gas Bumi, or BP Migas for short, thereby ending the conflict
of interest where Pertamina regulated and managed the operations of its competitors.
(Attachment “C”)
Government Regulation 35, 2004 established the legal framework under which BP
Migas operates. (Attachment “D”)

BP Migas is a non-profit state legal entity and acts on behalf of the Government with
the main responsibilities off:
a) Control upstream operations.
b) Appoint sellers of the Government’s share of oil and gas.
c) Prepare and offer areas for exploration and exploitation.
 SECTION IV
CONTRACTS AND PROICEDURES

4.1 GENERAL

All contracts, for the exploitation of oil and gas in Indonesia are based on the
Production Sharing Concept. The investor takes all the risks and in return is
guarenteed a minimum net share of 15%, as a minimum, of the production. Operating
cost, and previous operating cost not yet recovered, are directly paid for from the
revenue obtained from produced oil and gas.

Revnue shares are now negotionable and can reach 49% depending on factors such
as remoteness of the location, potential of the area etc.

The following agreements are possible:

1. Production Sharing Contract.
2. TAC
3. Joint Operating Agreement.
4. Operation Cooperation Agreement.

4.2 PRODUCTION SHARING CONTRACT (PSC)

5.2.1 A cooperation contract for the exploration and exploitation of oil and gas
between BP Migas, acting on behalf of the Indonesian goverment, and an
investor, which can be either a national or foreign company. A sample PSC
agreement is attached. (Attachment D”)

5.2.2 BP Migas supervises the PSC on behalf of the Indonesia Government.

5.2.3 The Government and investors split the oil and gas produced by agreed to
percentages.

5.2.4 Operating cost are recovered from production revenue under formulas defined
by the PSC Contract. A more detailed flow chart is attached. (Attachment “D”)
 5.2.5 The contractor (investor) has the right, but not the obligation, to separately
dispose of and market its share of the oil and gas.

5.2.6 OTHER PSC CONDITIONS

a) Effective term of contract 20 years, extendable.

b) First Tranch Petroleum, (FTP) 15 to 20%
c) Domestic Market Obligation, 25% of equity (Contractors Share), full price
for the first 5 years, 10% of export price thereafter.
d) Interest Recovery, available
e) Depreciation, 14 years
f) Contractor to provide for abandonment of non-producing wells.
g) Up to 65%-35%, negotionable, additional incentives for marginal and
remote area blocks.
h) Cost Recovery up to 80% of the revenue after deduction of FTP. Previous
unrecovered cost can be carried forward until fully recovered.

4.3 TECHNICAL ASSISTANCE CONTRACTS (TAC)

4.3.2 A cooperation cantract for the exploitation and development of existing oil and
gas assets between BP Migas and an investor.

4.3.3 Revenue is split on a formula identical to PSC’s but with a base line. The base
line is the average production level, over the last 12 months, where the
operator only receives a lifting cost.

4.3.4 In accordance with Law 22/2001, existing TAC contracts will not be extended.

4.4 JOINT OPERATING AGREEMENT (JOA)

4.4.2 A addendum to the PSC agreement where Pertamina holds a 50% interest in
the contract.
4.4.3 Both parties, Pertamina ant the investor, establish a Joint Operating Body
where both parties can appoint representatives/personnel to designated
positions in the operating company as defined by the JOA.

4.5 OPERATION COOPERATIVE AGREEMENT

4.5.2 An agreement between Pertamina and an investor to operate and manage an

existing oil and gas asset, owned by Pertamina.

4.5.3 The investor is the operator supervised by Pertamina.

4.5.4 Revenue split is basically the same as for PSC agreements.

4.5.5 A PCA covers existing assets only and does not normally allow for
exploration.

A typical OCA is attached (Attachment “F”)

4.6 LIFE SPAN OF A TYPICAL AGREEMENT

The life span of a typical contract is 30 years.

Part of the original acreage has to be released at the following intervals:

- Year 3, 25% of the original acreage.
- Year 6, 25% of the acreage remaining after relinguishment 1.
- Year 10, 25% of the acreage remaining after relinguishment 2.

Commerciality, or the ability to develop and produce the block is granted after the
contractor can proof that commerically viable operations are possible based on
seismic data, geological data from exploration wells, electric logs and well test data.

The point in the contract life where commerciality is granted is not fixed but depends
on actual conditions. In average commerciality is granted somewhere between the
4th and 6th year of operations.
 SECTION V
OPPORTUNITIES

5.1 BASINS

Hydrocarbon potantial basins (Tertiary Sedementary Areas) are present throughout

Indonesia but form the point of view of a investor new to the oil and gas industry,
onshore exploration and exploitation in accessible areas is the best option.
Exploitation and exploration can be considered for Java, Sumatra, Kalimantan
(Borneo) and Sulawesi.

5.2 EXPLOITATION AND DEVELOPMENT

Pertamina has presently fourteen (14) fields available for a Operating Cooperation
Agreement. These are:
1. Suci Area – East Java
2. Kendal Area – Central Java
3. Tebing Area – South Sumatra
4. Uno, Dos, Rayu Area – South Sumatra
5. Tebat Agung Area – South Sumatra
6. Kamundan Area – Papua
7. Tanjung Barat Area – South Kalimantan
8. Sambidoyong Field – West Java
9. Perlak Field – North Sumatra
10. Ibul Tenggara Field – South Sumatra
11. Sungai Lilin Field – South Sumatra
12. Tanjung Tiga Timur Dield – South Sumatra
13. Wiragar Field – Papua
14. Bangkudulis Field – East Kalimantan
 Of these available fields and areas the Suci Block in East Java and the Tanjung Tiga
Timur Field in South Sumatra are the areas with the most potential.

Both the Suci and Tanjung Tiga fields are in areas with developed infrastructure
allowing for access.

The Suci block is in a densily populated area requiring close consultaton with the
local population, working with minimum disruption of daily life and without any impact
on the environment.

The Tanjung Tiga Block is located in a

active oil province, oil exploration and
exploitation since 1895, however the
area is densily populated requiring also
close consultation with local residents
and working without causing any
environmental damage. However
extensive Pertamina facilities and
pipelines making transfer of product to
Pertamina convenient.
5.3 EXPLORATION

Exploration Blocks, available in the 2007 open bidding process include three
blocks in Java, namely:
1. West Java
2. Centra Java
3. East Java

Geologically speaking, the blocks in Central and East Java offer the best
potential. The West Java Block will most likely contain mostly gas.
However, it is possible to direct negotiate with BP Migas for other blocks.
 SECTION VI
PROCEDURES

6.1 PROCESS TO OBTAIN A BLOCK FOR EXPLORATION

Concessions (or “Blocks”) are available through an annual, or bi-annual, bidding

process or though direct negotiations between the investor (“Contractor”) and BP
Migas.

For both processes it is a pre-requisite that the investor can provide proof that
financing is available to carry out an exploration and development program.
6.2 BUDGET COST
To obtain a block for exploration the following expenses apply:

1. Purchase data from Patra Nusa Data Max. USD 100,000

2. Performance Bond USD 500,000
3. Joint Study USD 500,000
4. Incentive Payment USD 500,000
5. Operational USD 1,400,000
Total Estimated cost USD 3,000,000

6.2.1 Purchase Data

Patra Nusa Data is a government company which holds all data regarding oil
and gas for all of Indonesia which is available. This is an official payment
made directly to the company.

6.2.2 Performance Bond

As per the flow diagram in Section 7.1. This bond is returned when the study
is completed.

6.2.3 Joint Study

Although it is called a joint study, the actual data compilation and correlation
is carried out by BP MIGAS staff. It is recommended to have an independent
verification of the data and conclusins which cost is carried under
“Operational”

6.2.4 Incentive Payment

Non recoverable and non-documented payments.

6.2.5 Operational
a) Temporary Office Space (Serviced Offices) to accomodate personnel
required for the study.
b) Transportation
c) Entertainment
d) Salaries for expert staff such as a geologist, geophysisist and other
consultants.
e) Representatation and miscelleneous expenses.
f) Cost for letter of award.

6.3 WHAT NEXT

6.3.1 The Investor decides not to continue.

If the Investore decides, after completion of the Joint Study, not to
continue it is possible to sell this data to a third party. One must keep
in mind that these studies do not proof or disprove the presence of oil
and gas in an area but merely provides a geological analysis of the
area, possible areas where hydrocarbons could be present, etc. With
the increased interest for exploration is will be relatively easy to find
an interested party.
 6.3.2 The Investor decides to continue
If the investor decides to continue, the following options are possible:
a) Develop the block alone.
b) Farmout a minority interest and operate or let the farm in party
become the operator.
c) Farmout a mayority interest and the farmin party ebcomes the
operator.
d) Sell the block to a third party.

6.3.3 Future Option

Under Indonesian law a joint venture can be listed on the Jakarta
Stock Exchange after three years of operations.

6.4 EXPLORATION BUDGET NUMBERS

a) 3-D Seismic Survey USD 60,000 / Km
b) Exploration Well, 4 each USD 15,000,000 each

6.5 OPERATING

6.5.1 The operating company can either be a national company, a foreign

company or a joint venture.

6.5.2 A company, under BP MIGAS rules, can only operate a single block. If
multiple blocks are selected a specific company must be established
for ech block. Each company must have individual facilities and staff.
 SECTION VII
ECONOMICS

7.1 IRR AND CASHFLOW

The attached (Attachment “A”), based on low estimate production rates and high
cost, long payback period but stil provides for a net IRR of 20%, with a cummulative
cashflow of 1 billion US Dollars over the contract period of 20 years. if a revenue split
of 85-15 is applied.

Fore new exploration at the moment revenue splits of 75-25 (Indonesia – Investor)
are more common. In such case payback will be the same but the IRR increases to
22% and produces an additional 200 million dollars over the life of the contract.

7.2 PRODUCTION RATES

For the assumed production rates, average conditions in Indonesia, with a success
ratio of around 60% for exploration wells in good areas, provide for initial production
rates of between 1500 and 2000 BPD or higher. Wells with rates of 5000 barrel of oil
per day and higher are not unheard of.

7.3 PAYBACK
One must keep in mind that the oil and gas industry is a capital intensive industry with
long payback. However, with oil prices at the present level, and likely to increase
even further, IRR’s are higher than can be realized in any other industry.
 SECTION VIII
DISPOSAL OF PRODUCT

8.1 OIL

If the block borders the sea in a remote area, the possibility exists to establish a
private export terminal. In such cases arrangements can be made that the contractor
markets the total production from the area.

For blocks located in-land, the oil is normally transported, stored and loaded using
Pertamina facilities which will handle this, if required for a fee. The level of the fee
depending on the area, distance and volume of the crude oil.

If Pertamina handles the transportation, storage and loading of the crude oil, the
Contractor (Investor) will be allocated his share from the mixed crude in the
Pertamina terminal adjusted for differences in quality, composition, caloric value etc.

8.2 GAS
Indonesia is facing a acute shortage of gas for local consumption and although gas
disposal can be a problem, especially in remote areas, there are several ways to use
gas as a revenue source. Possible options are:
a) Connect to a gas pipeline. A gas pipeline system exist, running through or near
most production areas, connecting Sumatra with Java.
b) Use the gas to generate electricity. PLN (State Electrical Company) forecasts
that an addition 35000 MW of additional generating capacity will be required.
c) Use the gas to produce LPG for local consumption.
d) In any case, use gas as fuel for in-house power generating to reduce cost.

Naturally, if gas is discored in large enough volumes a LNG (Liquified Natural Gas)
plant can be an option. One must realize though that such facilities are extremely
capital intensive and additional investment will be required in such a case.

In all cases, gas will produce revenue. It is merely a question of selecting the most
suitable solution for the particular area.
 SECTION IX
SUMMARY & CONCLUSION

9.1 SUMMARY

Investment in the oil and gas industry in general does carry a certain amount of risk.
Regardless of what survey data indicate, the only way to determine if oil and gas are
present is by drilling wells.

However, with oil prices at the 90 USD per barrel mark at the present and production
cost below 20 USD per barrel, investment in the oil and gas industry can be very
profitable indeed.

Even in Indonesia, with a Production Sharing Contract system, profit margins,

depending on the negotiated revenue sharing, of not less than 15% and up to 35%
can be obtained.

Indonesia, even under the most adverse conditions, has, up to the present, always
honored Production Sharing Contracts and settles the revenue sharing payments
promptly and correctly, as specified by the contract.

Risks can be minimized by investing in a Operations Cooperative Agreement with

Pertamina to manage one of their assets. Although hydrocarbons are proven in these
areas, the fields are smaller and lower production rates must be anticipated.

9.2 CONCLUSION

Investment in the oil and gas industry can be very profitable indeed.

The Production Sharing Contract in Indonesia limits the profit potential but margins
of, on the average, 20% net profit can be obtained with IRR normally also higher than
20%. Please refer to Attachment “C” for a sample cashflow summary for a PSC

Investors, using professional management for these operations, can make

substantial profits.

_______________________
R. Tangkong
Director