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INDONESIAN DEEP-WATER PETROLEUM EXPLORATION AND PRODUCTION -

ECONOMIC AND TECHNOLOGY PERSPECTIVE

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 IPA19-E-202

PROCEEDINGS, INDONESIAN PETROLEUM ASSOCIATION

Forty-Third Annual Convention & Exhibition, September 2019

INDONESIAN DEEP-WATER PETROLEUM EXPLORATION AND PRODUCTION –

ECONOMIC AND TECHNOLOGY PERSPECTIVE

Bonar Tua Halomoan Marbun*

Samuel Zulkhifly Sinaga*
Batara Pande*

ABSTRACT INTRODUCTION

Deep-water plays are high-cost ventures, yet they are
valid projects. The deposits are larger accumulations
and produce at higher rates due to better permeability
and constant pressure. This allows ultimate recovery
rates and extended drainage life of the reservoir.
Exploring and producing oil and gas from deep-
water discoveries require the availability of
extensive funds, the formation of the integrated asset
management team (IAM), the requirement of
specialized equipment, and awareness of risks and
challenges.
It is predicted that approximately 70% of
hydrocarbon reserve potential in Indonesia is located
in the offshore area (IPA 2017). The location of
Indonesian hydrocarbon potential is shown in Figure
1. Compared to the onshore and shallow offshore
drilling, deep-water drilling deals with more
challenges and risks (Denney 2000, Reid, Dekker, et
al. 2014). The degree of design and operational
complexity, difficulty, and cost are directly
proportional to the increase of water depth and
remoteness of the location.

Currently, there are several explorations and
discovered deep-water fields in Indonesia, such as
Abadi Field, etc., and several produced deep-water
fields, such as Jangkrik Field, West Seno, etc. During
2007-2016, the exploration investment in Indonesia
declined significantly. In addition, Indonesia is
ranked the lowest in terms of oil and gas investment
climate. Deep-water projects in Indonesia encounter
some critical challenges, such as expensive
investment cost (particularly exploration), less
attractive fiscal incentives, long period of
exploration, low investment internal rate of return
(IRR), etc.
This study discusses a model construction of
Indonesian deep-water exploration and production
challenges based on current data of economy and
technology. The model is based on all completely
basic necessity that may be attainable to oil and gas
industries: an experienced team of professionals who
possess the knowledge of the application of Front-
End Loading (FEL) methodology and phases, special
drilling, completion, and production devices,
procedures, and specialist, and economic and
engineering awareness and challenges. The model is
very helpful to identify the problems and challenges
which have to face for the next exploration and
development at Indonesian deep-water fields in the
near future.
Generally, a deep-water project in Indonesia needs
considerable time and processes from exploration
until first commercial production. According to some
deep-water projects in Indonesia, the exploration
process may take up to 10 years (SKK Migas; 2019,
Ditjen Migas n.d., IPA 2017). In addition, the
investment rate of return (IRR) of the deep-water
project in Indonesia is approximately 55% lower
than the IRR average of 30 deep-water gas projects
worldwide. On the other hand, the expense of drilling
one deep-water well can reach approximately US$
80-100 million, which compromises the economics
of deep-water projects (IPA 2017). This made
Indonesia ranked the lowest amongst the Association
of Southeast Asian Nations (ASEAN) countries in
terms of oil and gas investment climate, particularly
for deep-water projects which are less attractive than
the other countries (Figure 2). In addition, during
2007-2016, the exploration investment in Indonesia
declined significantly (IPA 2018). On the other hand,
the fiscal incentive in Indonesia is less competitive
compare to some countries shown in Figure 2.
Since 2013, the oil price decreased from more than
US$ 100 to its lowest approximately less than US$
30 in 2016, and currently, the price is approximately
US$ 65-70 (Brent oil in the middle of May 2019)
(Oilprice 2019). This situation affected the
petroleum industries worldwide (D'Souza, Basu and

* Institut Teknologi Bandung

Khurana 2018), including Indonesia. In Indonesia,
several companies hold and even cancel the deep-
water projects (exploration and development).
Bureaucracy, regulations, and political situations
also add the complication in managing the deep-
water projects (Hovem, et al. 2014).
DEEP-WATER PROJECT
Deep-Water Project Expenditure
To date, industries have tried to optimize the deep-
water expenditure to increase its attractiveness,
particularly due to the recent low oil price issue. The
deep-water project players in the Gulf of Mexico
(GOM) implemented strategies to reduce the
breakeven deep-water project costs from US$ 70/boe
in 2014 to approximately US$ 40-50/boe in the first
quarter of 2017, and are still trying to further
decrease the cost (Khurana, et al. 2017, D'Souza,
Basu and Khurana 2018, PwC 2018, Dekker,
McEvilly, et al. 2016) (Figure 3). The breakeven
deep-water project cost is calculated on the basis of
US$/boe that covers the cost to develop a deep-water
project from discovery until the production phase
with revenue (Dekker, McEvilly, et al. 2016). This
includes capital and operational expenditure
(CAPEX and OPEX), government part or takes in
GOM, and approximately 10% IRR. The analysis of
the breakeven cost project was provided by
McKinsey (Dekker, McEvilly, et al. 2016) (Wood
Mackenzie; 2014). Generally, the breakeven deep-
water project cost reduction was due to the decrease
of deep-water drilling rig and services rate, new
technology development, improvement in supply
chain management, improvement of the company’s
efficiency and optimization in project management,
also decrease of material cost. It is predicted that the
breakeven deep-water project cost can be reduced
further by applying strategies such as additional
efficiency of the plan and operational aspects of the
project, cooperation and collaboration amongst
deep-water players (partnership), more effective
company’s management, etc.
The deep-water development project expenditure can
be divided into three major categories, such as the
main production facility, subsea equipment, and
wells. The well expenditure is mainly from drilling
and completion, including exploration and
exploitation. Some of the main driving aspects of the
selection and design of these major categories are
(D’Souza, Basu and Khurana 2018, Dekker and Reid
2014, Reid, Wilson and Dekker 2014, Terashima, et
al. 2011):
1. Reservoir fluid, size of resources, and production
design define the basic engineering design for
drilling and completion of the well, type of
subsea equipment, and selection of production
facility such as offshore platform, floating
liquefied natural gas (FLNG), floating
production storage and offloading (FPSO), etc.
2. Reservoir location and geologic complexity and
geometry, either single compartment reservoir or
spread reservoir compartment. For a single
compartment, a single surface location or cluster
can fulfill the production. However, for the
spread reservoir compartment, more clusters or
separate subsea well are required for production,
hence more expenditure is needed.
3. Water depth, seabed morphology, possible well
location (remoteness and existing facilities), and
geohazards affect the selection of subsea
equipment, drilling and completion method, and
tools (including deep-water rig), etc. Subsurface
conditions and risks, such as high-pressure-high
temperature, troubled geological formations,
etc., have a direct impact on well design and
subsea equipment selection.
4. Health, safety, and environment (HSE),
commercial aspects, project lifetime and
constraints, regulations, and design flexibility
for changes in the future (e.g. production
increase, additional wells and facilities,
intervention, etc.).
Deep-Water Project Model
The importance of front-end loading (FEL) is to
define the conceptual design of deep-water projects
in the early phase during the planning and to
optimize the decision-making process (Batavia 2001,
Saputelli, et al. 2013). The FEL plays a significant
role in preliminary engineering design and risk
management before commencing the deep-water
project to assure the project can be executed
smoothly at estimated cost during later phases. The
deep-water project, in particular, deep-water drilling
exploration, deals with high risk and uncertainty.
Precise definition and scope of the project of the
deep-water drilling and assurance of control in all
phases of the project can reduce the probability of
schedule delay and cost overruns to occur (Dorgant
and Stingl 2005).
Exploration activities and drilling, including wildcat
and appraisal drilling, are important in defining the
potential resources in a deep-water area. The
deliverables of the exploration phase determine the
future conceptual design plan for the development
phase (Saputelli, et al. 2013). The expenditure of
exploration activities in Indonesia is fully borne by
the operator company and upon discovery, the
exploration cost will be included in the cost recovery
mechanism (for PSC system). It is extremely
important to optimize the exploration activities in
order to reduce the expenditure, particularly the
minimum drilling of exploration wells, maximizing
the seismic and other activities, etc. On the contrary,
the effectiveness of exploration activities is
increased such as by gathering all data required with
maximum quality. The conclusion of the exploration
project is vital for the next decision making, whether
to continue the project do the development phase or
abandon the project.
According to the work guideline set by Special Task
Force for Upstream Oil and Gas Business Activities
Republic of Indonesia (SKK Migas), upon the
discovery, an exploration area can be further
developed. A set of evaluation should be carried out
to move to the development phase. The discovery
should be based on evaluation of the following
aspects: geophysics (seismic), geologic and
petrophysics (logging, coring, etc.), and reservoir
(well testing, etc.) (SKK Migas 2018). The plan of
development (POD) then can be developed to fulfill
the technical and economic evaluation of a deep-
water field.
Figure 4 shows the resources classification
framework and sub-classes based on project maturity
(SPE; WPC; AAPG; SPEE; SEG; SPWLA; EAGE
2018). The figure shows the uncertainty of resources
and change of a field to be classified as a commercial
field for the development phase. According to
Petroleum Resources Management System (PRMS),
a set of evaluations should be made to determine the
discovery and commercial aspects of a field. Upon
the discovery, a set of evaluations must be carried out
to determine the commerciality of a deep-water field.
The evaluation covers the following aspects:
technical, economic, CAPEX and OPEX, regulation
and legal, HSE, government, etc.
When an exploration deep-water area is considered
for development, integrated asset management
(IAM) is established. This consists of following
crucial aspects: reservoir and subsurface
management, well construction (drilling and
completion), subsea equipment and surface
production facilities construction, and production
design and operation (including intervention
necessary) (Saputelli, et al. 2013). The objective of
the development phase is to maximize the production
and recovery of a deep-water project while
minimizing risk and uncertainty, optimizing
expenditure, and prioritizing HSE in all phases.
Figure 5 shows the basic components of IAM to
support decision making in the development phase.
Upon the discovery of a deep-water field, concept
selection is the next critical phase in the development
planning phase. The main activities in this phase are
to find and evaluate several development concepts
and scenarios that suitable to the deep-water field
(Dorgant and Stingl 2005). An optimum specific
development concept according to technical and
economic consideration is then selected. A series of
criteria shown in Figure 5 can be used as the basis for
development concept selection. Further, the project
phase can proceed to FEED and engineering detail
before execution.
DISCUSSION
The deep-water project deals with high risks and
challenges, complex design and operation, and high
difficulty. Compare to onshore or shallow water
fields, much higher capital is often required to
explore and exploit a deep-water project. Prior to
making an investment decision on a deep-water
project, the assessment of the company is necessary
to assure its capabilities, particularly the financial
aspect (Dekker, McNutt, et al. 2015). Large size
companies usually own more experiences and
expertise in managing large scale projects with high
availability of funds, either through a loan or own
funds. This provides more flexibility for the
company in scheduling and cash flow planning of a
deep-water project.
The investment made by the international oil
companies (IOC) in Indonesia generally declined
over the past decade (Inpex Corporation; 2018).
According to a survey performed by the Fraser
Institute in 2017, some improvement should be
considered in following crucial aspects: legal issue;
fiscal issue; tax system; trade barriers; law and
regulation problems, e.g. duplication and
inconsistency; administration issue, business and law
uncertainty, interpretation and enforcement issues of
law and regulation; land claim dispute.
A case study of an Indonesian deep-water project,
Abadi Field, was discussed here. Abadi Field is
situated in the offshore Arafura Sea, the eastern part
of Indonesia. The operator is Inpex Masela Ltd. (65%
participation interest) and the partner is Shell (35%
participation interest), and currently, this field is in
the development planning phase (Inpex Corporation;
2019, Inpex Corporation; 2015). The investment
value of the project is approximately US$ 20 billion
(IPA 2018, SKK Migas; 2019).
TABLE 1 shows the brief history of the technical and
legal activities of Abadi Field. The discovery in this
field was made in 2000, and since then, ten appraisal
wells have been drilled in between 2000 until 2014
to confirm the discovery of hydrocarbon (Raijo 2011,
Nagura, et al. 2003, Inpex Corporation; 2019). A lot
of challenges, such as technical, permit and
licensing, until the agreement of the development
concept, were encountered during exploration and
development planning phase of this field.
In 2007-2008, pre-FEED (Front-End Engineering
Design) work was performed and the concept
selection considered for the development planning in
this field was FLNG (offshore scheme) (Terashima,
et al. 2011, Orimo, et al. 2012, Muzaffar 2012). In
2010, according to the POD I, the field was planned
to produce approximately 130 MMSCFD gas in 2018
(Muzaffar 2012). According to the strategic plan of
Directorate General of Oil and Gas, Ministry of
Energy and Mineral Resources Indonesia, the Abadi
Field was planned to be produced in 2019 (KESDM;
2015, Ditjen Migas 2015). The estimated reserves
during the submission of POD-1 was approximately
6-7 TCF and the FLNG capacity was planned to be
2.5 MTPA.
After confirming the result of three appraisal wells
drilling in 2013-2014, the expansion of FLNG of 7.5
MTPA was considered in revised POD in 2015
(Inpex Corporation; 2015). However, in 2016, there
was further discussion on changing the development
concept selection to the onshore scheme (Ditjen
Migas 2017, Inpex Corporation; 2019). Currently,
the status of the deep-water project Abadi Field is on
the revision of POD I and pre-FEED work according
to the new scheme of development concept selection
(Inpex Corporation; 2018).
The development concept selection of a deep-water
project is driven by a series of key factors. A multi-
discipline team is required to define the optimum
concept selection (Beltrami, et al. 2015, Dekker,
McNutt, et al. 2015). A simplification in the
procedure, particularly the standardization of the
design concept of the deep-water project, can
accelerate the development phase. A research
performed in GOM showed that by standardization
and simplification, the time required from concept
selection design until the first production can be
reduced from 6-7 years to 5-6 years, on average
(D'Souza, Basu and Khurana 2018). In addition, the
capital expenditure can be optimized and reduced by
up to 20%. Reservoir and subsurface geologic are
one of the main driving aspects in most concept
selection plans, particularly in the deep-water gas
field. Several options are available, either offshore
FLNG, onshore LNG or others, however, a clear
procedure of concept selection must be established
first. The basic elements in Figure 5 can be used as
the basis for the concept selection and development
plan of a deep-water project.
CONCLUSION
According to research performed in this study, the
following important key points can be addressed to
improve deep-water project exploration and
development in Indonesia:
1. Reduce the license and permit complexity.
According to experiences in other countries (e.g.
Egypt, Brazil, and Mexico), practical and
effective procedures, particularly in granting
permit and license, will improve the
attractiveness of deep-water projects in
Indonesia.
2. Set attractive fiscal incentive and IRR and also
taxation system, particularly for large scale deep-
water projects.
3. Fix regulation and legal issues, such as business
and law uncertainties, duplication and
inconsistency of law, administration issues, trade
barriers, interpretation and enforcement issues of
law, land claim dispute, etc.
RECOMMENDATION
Following key points can be considered to improve
the deep-water project’s execution and
competitiveness in Indonesia:
1. Establish the general design concept for
developing the field that can be applied to
various types of deep-water reservoir and
environment. The general design concept is
based on past and recent deep-water projects and
similar large-scale projects worldwide,
particularly in Indonesia.
2. Proper risk assessment and management to
reduce uncertainty and minimize unexpected
expenditures. Set minimum standard and
approach for deep-water exploration and
 development projects to eliminate confusion and SURF Subsea, umbilical, riser, and
optimize the project schedule. This includes flowlines
standardization of design, equipment and tools, TCF Trillion cubic feet
and installation facilities of the deep-water
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3. Improve technical and non-technical aspects of
companies’ management to shorten the
necessary time from discovery to first
commercial production.
4. Promote cooperation and collaboration
(partnership) among deep-water players in
Indonesia. This can reduce the expenditure
(breakeven cost) and increase the effectiveness
and efficiency of a deep-water project. In
addition, risk and uncertainty can be reduced
also by sharing them with partners, particularly
financial risk. The cooperation is not only
amongst operator companies but also in service
and supplier companies.
5. Promote good climate for investment, such as
simplification in the permit and licensing,
improvement in fiscal and taxation system,
consistent law and regulation enforcement, etc.
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2011. "Methodology to Define Design Motion
Criteria for Performance of Floating LNG Process
Facilities." Offshore Technology Conference.
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doi:https://doi.org/10.4043/21292-MS.
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 TABLE 1

BRIEF HISTORY OF TECHNICAL AND LEGAL ACTIVITIES OF ABADI FIELD

(Inpex Corporation; 2019, Inpex Corporation; 2018, Inpex Corporation; 2015, Nagura, et al. 2003, SKK Migas; 2019)

Year Activity Note

1997/1998 Evaluation of Seismic data of approximately 2600 km performed in 1996 by Geco-
seismic survey Prakla was used to evaluate Masela Block. A 3500 km Australian open
file 2D seismic and 13 well data were also studied.
November- Block acquisition The operator company was granted the right to perform exploration in
December Masela Block (PSC).
1998
February- 2D seismic Performed 2D seismic survey (2948 km). Seismic data were also
March 1999 exchanged with Shell (Australian waters, south of Masela Block).
October Abadi-1 drilling Drilled Abadi-1, a discovery was made. Wireline logging and DST were
2000 performed, therefore, the presence of hydrocarbon was confirmed.
July 2001 3D seismic Performed 3D seismic (2060 km2).
March 2002 Abadi 2/2ST Drilled appraisal well Abadi-2/2ST. Wireline logging and DST were,
drilling therefore, and the presence of hydrocarbon was confirmed.
July 2002 Abadi 3 drilling Drilled appraisal well Abadi-3. Wireline logging and DST were
performed, therefore, the presence of hydrocarbon was confirmed.
2007-2008 Drilled 4 appraisal Drilled 4 appraisal wells. The presence of hydrocarbon was confirmed.
wells
Dec 2010 POD-1 The initial plan of development (POD I) was approved by authorities.
The submitted development scheme plan was FLNG plant with capacity
of 2.5 MTPA (offshore).
November Pre-FEED Performed subsea, umbilical, riser and flowline (SURF) and FEED
2012- work.
November
2014
2013-2014 Drilled 3 appraisal Drilled 3 appraisal wells. A greater volume of hydrocarbon (gas
wells reserve) was confirmed (Authorities certified this).
September Re-submission The POD was revised, a larger scale FLNG (capacity 7.5 MTPA) was
2015 POD-1 proposed.
April 2016 Change the Instruction from authorities to change the POD based on LNG
development development scheme plan at onshore.
scheme plan
June 2017 Discussion The Abadi LNG Project was recognized by the Authorities as a National
Authorities- Strategic Project.
Operator
September Discussion The project status was given “Priority Infrastructure Project”.
2017 Authorities-
Operator
March- Discussion Constructive discussions were performed between operator company
October Authorities- and the authorities, including pre-FEED based on LNG development
2018 Operator scheme plan at onshore with capacity of 9.5 MTPA).
May 2019 Discussion Negotiation between the Authorities and the operator company,
Authorities- agreement on framework POD, investment value, and profit-sharing
Operator scheme.
Figure 1 - Potential of hydrocarbon in Indonesia (IPA 2017, Memr, Wood Mackenzie, Reuters, Katadata
2017, Ditjen Migas 2017).

Figure 2 - Fiscal incentive comparison (IPA 2017, Wood Mackenzie 2017).

Figure 3 – Reduction of average breakeven deep-water project cost in GOM (D'Souza, Basu and Khurana
2018, Khurana, et al. 2017, Dekker, McEvilly, et al. 2016).

Figure 4 – Resources classification framework and sub-classes based on project maturity (SPE; WPC; AAPG;
SPEE; SEG; SPWLA; EAGE 2018).
 Figure 5 – Basic components of IAM to support decision making in development concept selection (Saputelli,
et al. 2013).

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