Industry Profie:Oil Industry in Indonesia

MARKET INTELLIGENCE REPORT ON

UPSTREAM OIL INDUSTRY IN INDONESIA

July 2009

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The world oil industry has expanded fast in the past four years with crude oil prices soaring to unprecedented high of more than US$140 per barrels early 2008.

Indonesia, however, failed to gain from the surge in the oil price as the country’s crude oil output has tended to decline over the past several years. The country even has become a net import of oil.

The past several years saw the country failed in reaching its oil lifting target as many oil wells have been too old with oil deposits almost depleted. Some major producers including Chevron, which operate the country’s largest oil fields in Riau, recorded a decline in output in 2008. Medco EP, the subsidiary of PT Medco Energi Internasional, the largest Indonesian private energy company, is also expected to post a decline in crude oil production in 2009.

The country’s oil lifting target set in the 2009 state budget is 950,000 barrels per day. In the first two months of 2009, production overshot the target attributable mainly to contributions from Petrochina Jabung, Pertamina EP and BP Tangguh.

The prospects of upstream oil industry depend much on success in explorations for new potential oil reserves such as the Cepu block in East Java.

Oil reserves dwindling

Indonesia‘s oil reserves in the past decade has declined although rising 2.8% in 2006 to 4,370 million barrels. In the following two years the proven reserves shrank again, down 8.5% to 4,000 million barrels in 2007 and to an estimated 3,700 barrels in 2008.

Potential reserves, however, still give hope of good prospects in the future. In 2008, potential reserves still reached 4,471.72 million stock barrels.

Central Sumatra holds the largest reserves

Central Sumatra holds the largest oil reserves of 4.163.75 million barrels. The second largest reserve is in the Cepu Block in East Java.

There are a number of areas with oil reserves of more than 500 million barrels each such as Central Sumatra, East Java, South Sumatra, Kalimantan, and West Java. Other than proven reserves of 3.7 million barrels in 2008, there are potential reserves totaling 4.5 million barrels .

The prospects of the country’s upstream oil industry in the country will depend on success in explorations.

Explorations decline in 2008

Seismic surveys are imports of tant part in oil explorations. There are two types of seismic survey – 2 dimension survey and 3 dimension survey.

In 2008, seismic surveys of 2 dimensions covered a total area of 452 sq. km all on shore – down from 30,335.67 sq. km in 2007 that included on shore surveys covering 23,522.17 sq. km and offshore surveys covering 6,833.5 sq. km. Meanwhile, 3 dimension surveys also showed a declining trend – down in coverage to 240 sq. km all onshore from 12,774.5 sq. km in 2007.

Among seismic surveys held in 2009 include 2 dimension seismic survey of offshore oil and gas deposits in East Muriah block in the Java sea in July. The surveys are expected to last two months.

The surveys will cover a total area of 4,999.97 sq. km. near the Bawean Island.

Crude oil production on the decline

The country’s crude oil production has been on the decline in the past several years as most of the wells have been too old and almost depleted. In 2008, however, the crude oil production (lifting) rose 3% to 358,718,699 barrels from 348,357,604 barrels in the previous year.

BP Migas said 85% of oil wells in the country have been too old with production shrinking 15% a year on the average. Discovery of new reserves is not enough to make up for the decline in the productivity of the old wells. Discovery of new reserves will support long term operation.

Short term increase in output could be made with the use of higher technology such steam flood technology for enhance recovery. The steam flood technology cold increase oil production by three times the production with primary recovery . The technology could also lengthen the economic life of an oil field.

The technology has been used in the oil field of North Duri Area 12 of PT. Chevron Pacific Indonesia (CPI) in Riau.

CPI uses gas supplied by ConocoPhilips for the steam flood injected to the oil well . The government has asked ConocoPhilips to supply its gas mainly for the steam flood application.

Another technology is infill drilling enhanced oil recovery (EOR) that could turn out extra production of up to 290 barrels per day from the entire wells of CPI

BP Migas, which oversees the operation of upstream oil industry, also seek to boost crude oil production by accelerating development of a water flood pilot project of Pertamina E&P in the fields of Kenali Asam and Bunyu.

Water flood technology would be used in the fields of Nglobo, Talangan Jimar, Tanjung, and Rantau.

The government has encouraged contractors holding the cooperation contract to boost production by developing old and neglected oil fields and abandoned wells.

Lifting fluctuating

In 2009, the government target for oil lifting is 950,000 barrels per day . The target was overshot in the first months of 2009 . The target was overshot in February, March and April, but production fell below target in January, May, June and July.

Averagely, the country’s crude oil production in the first seven months of this year averaged 925.13 barrels per day or well below the target .

Some producers report decline in production

Some producers suffered a decline in production this year. Apart from Chevron, which recorded a decline in output in production from its oil field in Riau, E&P Indonesia is forecast to suffer a decline in output from 33 thousand barrels per day in 2008 to 30 thousand barrels per day in 2009..

Medco, which has just sold its assets in oil blocks in Tuban and Tarakan, East Kalimantan, also recorded a decline in output .The Tuban block was sold to PT Pertamina and the Simenggaris block, Tarakan in East Kalimantan to Salamander Energy (Simenggaris) Ltd. Medco sold 25% stake held by its subsidiary PT Medco E&P in Tuban (participating interest/PI) to Pertamina, and a 21% stake in the Simenggaris PSC block . Crude oil production of Medco is expected to rise again only in 2011 when most of its key projects begin to come on stream.

Its seven key projects include a bio-ethanol project in Lampung to come on line in 2008, the Singa block in Lematang to come on stream in 2009, The A block of Aceh in 2011, the 47 Block in Libya in 2011, the Rimau Block in 2011, the Senoro Block in Toili in 2012.

Chevron Pacific Indonesia the largest producer

In the last four years, there was change in the ranks of oil producers in Indonesia. In 2006, PT Pertamina was the second largest producer , but its position declined since 2007 and in the first quarter of 2009 it was relegated in the list to the 9th largest producer .

Foreign oil companies - Chevron Pacific Indonesia (Chevron), ConocoPhillips (Conoco), China National Offshore Oil Company (CNOOC), and Petrochina – dominate crude oil production in the country.

Medco EP Indonesia (Medco) is the only Indonesian company among major oil producers in the country . It was the sixth largest producer in 2006 and the 5th in 2009.

Pertamina has continued to record a decline in output from 42 million barrels in 2006 to 9.05 million barrels and 7.7 million barrels in 2007 and 2008 respectively.

Chevron maintains the lead among the producers of crude oil in Indonesia although its has reported a decline in output in the past several years. In 2006, crude oil production of Chevron reached 176 million barrels. The production level dropped 4.5% to 168 million barrels in 2007 or 461.7 thousand barrels per day an down again to 4.2% to 161 million barrels or 441 thousand barrels per day in 2008. In the first quarter of 2009, the production of CPI reached 38.4 million barrels.

Other than Chevron, major produces include Total EP Indonesie (Total). Crude oil production of Total has fluctuated in the past several years. In 2008, its production totaled 35.1 million barrels up from 32.3 million barrels in 2007.

In the first quarter of 2009, the production of Total reached 8.9 million barrels or 297.4 thousand barrels per day.

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