Easwaran Kanason

Co - founder of NrgEdge
Last Updated: July 31, 2017
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Business Trends
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In a double blow to Indonesia’s attempt to boost its natural gas production, supermajor ExxonMobil and Thailand’s national oil company, PTTEP have both pulled out of the East Natuna project within days of each other last week. This leaves state oil firm Pertamina as the only player left in Southeast Asia’s largest undeveloped gas resource; a role that it cannot afford to undertake alone.

In a statement, PTTEP said that ‘under current production sharing contract terms and market conditions, commercialising the hydrocarbon resources in this area would be difficult,’ as it confirmed its pullout after the results of a Technology and Market Review (TMR). ExxonMobil’s statement was more terse – stating in a letter to the Indonesian authorities that East Natuna was ‘uneconomical for the company under current terms.’

There are two ways reading into those statements. The first is the market conditions are tough. East Natuna is located on the southern edge of the South China Sea, where the border between Malaysia and Indonesia kinks upwards unexpectedly. Not only is this area isolated (and claimed by China), it is also far away from any existing infrastructure – requiring either a floating production unit or long pipelines, both of which will be expensive. The payoff was once worth it – reserves at East Natuna are estimated at 222 tcf, of which at least 46 tcf is recoverable. But high carbon dioxide content (exceeding 70%) requires expensive processing that needs significant capex. With an estimated price tag of at least US$40 billion, East Natuna needs LNG prices of US$10-15/mmBtu to break even – and that’s hard to justify when Asian spot prices are now languishing at US$6/mmBtu.

The second is more pointed – the ‘current production sharing contract terms.’ Under the current Indonesian PSC structure, natural gas producers have to meet a Domestic Market Obligation (DMO) – that at least 25% of the production must be supplied to the local market. There is leeway for the government to demand more if the need arises. That is a huge chunk of output taken away from any project. Upstream producers in Indonesia have long championed reform to the DMO, arguing that it stifles investment. But Indonesia needs the DMO as well – its domestic consumption is growing and its argument is that Indonesian resources should also stay in Indonesia instead of being exported; at subsided prices, of course.

The first can change, depending on market conditions, but money is on LNG prices in Asia to remain below the range required by East Natuna, with the tsunami of Australian, American and Canadian LNG on its way. The second is tougher – the Indonesian government has tried for years to streamline its PSC structure to balance both domestic requirements and stimulating investment. But it will have to, sooner of later, if it wants to reverse the chronic decline in Indonesia upstream output. In the meantime, the long-running East Natuna project has claimed two other victims. Discovered in 1973, the first PSC to develop it was formed by Pertamina and pre-merger Exxon. Over the next four decades, Petronas and Total would be involved in various other attempts to commercialise the discovery, with ExxonMobil and PTTEP now giving up as well. ExxonMobil did offer an olive branch, stating that it would help with technology and technical assistance if needed. Indonesia replied that it might make a ‘special incentive’ to keep the project viable. That would have to be a very special incentive indeed; but given projected market conditions, possibly still far from enough to keep the project alive. East Natuna remains a pipe dream, for now.

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indonesia pttep pertamina exxonmobil natuna gas lng pipeline gas prices
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