SPE 167680

CBM Development Scenario Optimization for Production Sharing Contract,

Case Study: Sumbagsel Field, Indonesia
Felik Ferdian, PT Pertamina (Persero)
Adrinal Ilyas, PT Pertamina (Persero)
Vina Mediyanti, PT Pertamina (Persero)

Copyright 2014, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE/EAGE European Unconventional Conference and Exhibition held in Vienna, Austria, 25–27 February 2014.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents of the paper have not been
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Abstract

Indonesia according to research by Resource International Inc. Advance. (ARII) along with the Directorate General of Oil
and Gas – Ministry of Energy and Mineral Resources has potential resource 453 TCF of CBM which is divided into 11
(eleven) basin on the island of Sumatra, Borneo, Java and Sulawesi. The results of CBM product is expected to be a solution
to Indonesia’s potential energy shortages in the future relying on energy sources from oil and natural gas.

The utilization of CBM in Indonesia following the fiscal term of Production Sharing Contract (PSC) with a validity period of
30 years. CBM reservoir characteristics are different from conventional gas with smaller permeability, predominantly
adsorbed gas and under-saturated conditions require draining the water content (dewatering) before the production period that
requires careful planning to produce a viable project either in terms of technical, economic and commercial.

Simulations conducted in Sumbagsel Field in Southern Sumatra, Indonesia, seeking development planning optimization by
creating drilling scenarios of CBM wells with a certain amount of accumulation to get a good view of the economic
indicators of Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI) and Payback of Time (POT).
The results showed that CBM development can not be done with conventional gas development model approach which uses
‘chuck management system’ to control the production, while the properly management is required in the development of
CBM drilling where the number of production wells will be proportional to the increase of production. Knowledge of
reservoir characteristics and production optimization management of the number of drilling development wells during fiscal
term contract with the production sharing contract will result in the economic development of CBM.

Introduction

We always hear about terminology of unconventional gas, but many asumption is not precise with that understanding. Many
people assume that unconventional gas is gas which is different with generally conventional natural gas. Whereas, the
meaning of unconventional gas is a natural gas which has different reservoir characteristic than conventional hydrocarbon or
on other word it refers to unconventional reservoir. On unconventional gas development, it needs a special treatment or effort
to produce gas from its reservoir because the different of its reservoir characteristic. The permeability of reservoir is around
0.1 miliDarcy until 30 miliDarcy scale which can be categorized as low permeability and gas stored mechanism which is not
depend on free gas flow only but also adsorbed gas and need special drilling technique to produce gas therefore cost high
expenditure. For example, Coal Bed Methane (CBM) production with gas storage mechanism dominant on adsorbed gas
which is stored in coal matrix, so it will trough dewatering phase to reduce the pressure and critical desorption pressure will
be happened so the adsorbed gas can be produce from its reservoir. The time that needed on dewatering phase can occur
monthly or yearly depend on maturity and water saturation in coalification process.
2 SPE 167680

From single well reservoir simulation on Figure 1 show that CBM production will through several phase i.e dewatering
phase, production phase and declining phase. Production time will be occurred on long time period with short peak
production time compared with conventional gas and declining production will decrease slowly so that CBM production can
have the long life production from single well. Thus, on CBM development, to achieve the production to suitable with
companies’ economy, it needs more wells to be drilled. With more additional well, companies will allocate more cost and
make the project to be costly, so that to achieve optimum production and commerciality of CBM project, it needs the right
development scenario both technical and commercial.

Production Sharing Contract

Oil and Gas Development fiscal regime in Indonesia is performed based on Production Sharing Contract. The purpose of this
fiscal regime is to maximize the government take in and protect from the high risk of PSC implementain especially on
exploration phase. PSC’s implementation must inline with Indonesia Basic Law of 1945 especially on Article. 33, state that
all natural resources are controlled by Government and will be used for prosperity of the people.

Before PSC system, Indonesia has had two fiscal systems for Oil & Gas i.e Consession and Contract of Work. Consession
regime was implemented in Dutch colonial era until early Indonesian’s independence. It manage the production in
Indonesia’s area is owned by State and government will receive royalty which is generally percentage from bruto revenue
and tax. The involment of State or Government on Oil and Gas development is limited.

Contract Working regime was applied while Law article No 40 year 1960 on Oil dan Gas Mining. These regulation manage
on Natural Resources is owned by State. Companies’s status on oil and gas development is changed from consession owner
to state’s contactor. In Contract Working fiscal systems, State and Company will share the selling of oil and gas. Although
company is not act as an owner of the consession, management on operation still handle by company and Government will
act as regulator.

PSC scheme firstly valid while Permina signed sharing contract with Independence Indonesia American Oil Company in
1966. This contract was noted as first PSC fiscal term in oil and gas industry in the world. PSC applied is to ensure that State
will act as controller in oil and gas development.

The Production Sharing Contract is for thirty years. The exploration phase covers the initial 3 years as firm commitment and
another 3 years as exploration phase 2, although a further four-year extension to the exploration phase is available. Signature,
assistance and production bonuses are due under most existing PSCs. Signature bonuses, also known as award compensation
bonuses, are normally between US$0.5 million and US$5million, in this case signature bonus is US$ 2 million. Royalty,
called First Tranche Petroleum (FTP), is reduced to 10% before any deduction for cost recovery and the entire 10% revenue
is paid to the government. Exception for PT Pertamina, as national energy company, the FTP will be shared according to
their relevant share of pre-tax profit oil and/or profit gas.

Contractor is required to supply 25% of total production, multiplied by its pre-tax profit oil/gas entitlement percentage, but
capped at the amount of its combined share of FTP and profit share. Costs can be recovered from all remaining revenues after
payment of FTP. Most capital expenditures are depreciated 25% on a declining balance basis. Abandonment costs are
estimated for each field each year and divided by the number of years in the estimated life of each field. These amounts are
then added to the PSC level to generate an abandonment charge to the cost recovery pool.

CBM Development Scenario Optimization

Development of CBM is started from exploration phase with GGR study (Geology, Geophysic and Reservoir) and
exploration well to determine potensial area and then continued to drill the production well. Because of CBM production
characteristic which has peak production rate around 0.3 MMscfd per well, so it needs many well to achieve the cumulative
of ecomomic production. In this paper, the data of rate production per well is determined from simulation of regional
Geology data and field data.

From that explanation, it is required well prepared development scenario on CBM production so that it will be a good result
from both economic and commercial aspect. Following are comparison of CBM development simulation with has same of
total well, CAPEX and OPEX, but different scenario of development in PSC term, Figure 3 and Figure 4. Economic
indicators of project that used to apply the valuation of project are Net Present Value with discount factor 10% (NPV@10%),
Internal Rate of Return (IRR), Payback Of Time (POT) and Profitability Index (PI).
SPE 167680 3

Table 1. Simulation of CBM Development

Project Economic Indicators
Production
NPV @10% IRR POT PI
Model A 570 BCFG US$ 236 million 21.84% 11.9 years 1.87
Model B 504 BCFG US$ 180 million 19.28% 13.1 years 1.76

From the simulation above show that economic indicators of CBM project which are generated from CBM development
scenario model A delivers a higher gas production, value of NVP @10%, IRR and PI and also delivers shorter POT
compared with total gas production and others economical factor that is generated from CBM development scenario model B.
It shows that CBM development scenario model A is more effective and efficient than model B, so that will produce
production gas which is more volume and viable either in terms of technical, economic and commercial to be developed.

Conclusion

From the discussion and simulation of CBM development scenarios mentioned above it can be concluded that:
1. Approaching and specific treatment needs to be apllied in the development of unconventional gas due to the
different of reservoir characteristics compare to conventional gas.
2. On the development of unconventional gas, in this case is CBM, the amount of gas production will depend on the
number of development well. The more number of development wells deliver more number of produced gas.
3. Field development should be well prepared, effective and efficient to determine the feasibility of project based on
technical, economics and commercial perspective in unconventional gas development.

Acknowledgements

We thank Pertamina Management for permitting and supporting the data on this paper. A special thank we extend to our
colleges in Pertamina’s Unconventional Hydrocarbon team who gave us the ideas and invaluable comments that make this
paper available.

References

1. “Indonesia Coalbed Methane and Its Development Strategy”, Ministry of Energy and Mineral Resources –
Indonesia, 2010
2. Widodo, Lestantu. “The Economic of CBM Effort in South Sumatra and East Kalimantan Region”, Thesis, Magister
of Technical Management, University of Indonesia, 2008
3. Kurnely, Kun, Budi Tamtomo, Salis Aprilian, :A Preliminary Study of Development of Coalbed Methane (CBM) in
South Sumatra, SPE 80518, 2005
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Figure 1. Single well reservoir simulation

GROSS  R EVENUE
(GR)
FTP  Non  S hare
10% CR  =  100%(GR-­‐FTP)

E  T  S
100.00  %

GS CONTRACTOR  S HARE
25.0% 19.6429 80.36 75.00%

DMO
25.00  %

DMO  F EE
100.00  %

TAXABLE  INCOME

TAX
40 %

35.36 NET  CONTR.  S HARE

45%  of  ETS
45.00
GOI  
20 TAKE
10%  of  G R  +  55%  of  ETS
CONTRACTOR  TAKE
45%  of  ETS  +  CR
55.00
-­‐

Figure 2. PSC Flowchart

SPE 167680 5

Drilling  Scenario  Sumbagsel  Field

Model  A
50 350

40 40
40 280
35 35

total  well
30
30 210

well
20 20 20
20 140
12 12
10 10 10
10 8 8 8 70
5 5
0 0 0 0 0 0 0 0 0 0 0
0 0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Drilling Scenario
Development Task Core Hole Exploration Production Well Remarks
1 3 2 3 core hole, 2 exploration well, G & G Study
2 2 2 2 2 Core holes,2 Exploration wells, & 2 Prod.Testing wells
3 2 2 2 2 core hole, 2 Exploration wells, & 2 Prod.Testing wells
4 2 2 Prod. Testing wells, POD, Prod.facilities, etc
5 40 wells/year Development
6 40 wells/year
7 35 wells/year
8 30 wells/year
9 35 wells/year
10 20 wells/year
11 20 wells/year
12 20 wells/year
13 12 wells/year
14 10 wells/year
15 8 wells/year
16 5 wells/year
17 5 wells/year
18 8 wells/year
19 8 wells/year
20 10 wells/year
21 10 wells/year
22 0 wells/year
23 0 wells/year
24 0 wells/year
25 0 wells/year
26 0 wells/year
27 0 wells/year
28 0 wells/year
29 0 wells/year
30 0 wells/year

Total development wells : 316 wells

Figure 3. CBM development scenario model A

6 SPE 167680

Drilling  Scenario  Sumbagsel  Field

Model  B
30 350

280
20 20 20 20 20 20 20 20 20 20 20 20 20 20

total  well
20
16 210

well
12
10 10 140
10

70

0 0 0 0 0 0 0 0 0 0 0
0 0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Drilling
Jumlah  w ellScenario
Kumulatif

Development Task Core Hole Exploration Production Well Remarks

1 3 2 3 core hole, 2 exploration well, G & G Study
2 2 2 2 2 Core holes,2 Exploration wells, & 2 Prod.Testing wells
3 2 2 2 2 core hole, 2 Exploration wells, & 2 Prod.Testing wells
4 2 2 Prod. Testing wells, POD, Prod.facilities, etc
5 20 wells/year Development
6 20 wells/year
7 20 wells/year
8 20 wells/year
9 20 wells/year
10 20 wells/year
11 20 wells/year
12 20 wells/year
13 20 wells/year
14 20 wells/year
15 20 wells/year
16 20 wells/year
17 20 wells/year
18 20 wells/year
19 16 wells/year
20 10 wells/year
21 10 wells/year
22 0 wells/year
23 0 wells/year
24 0 wells/year
25 0 wells/year
26 0 wells/year
27 0 wells/year
28 0 wells/year
29 0 wells/year
30 0 wells/year

Total development wells : 316 wells

Figure 4. CBM development scenario model B