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Indonesia Tries to Jump-Start its Own Shale Revolution

Energy Tribunal, 26 June 2013

Indonesia’s state owned oil and gas major PT Pertamina has shale gas on its mind. The company is gearing up to explore for unconventional natural gas, amid Indonesia’s dwindling crude oil production.

On May 15, Pertamina CEO Galaila Karen Agustiawan signed a production-sharing contract for the Sumbagut block in North Sumatra. Pertamina will operate the block through its subsidiary PHE MNK Sumbagut and has up to six years for its first exploration and another four years for phase two exploration, according to the Jakarta Post. The block is estimated to hold almost 19 trillion cubic feet (Tcf) of shale gas.

Pertamina has already earmarked $7.8 billion to explore Sumbagut block and hopes to eventually produce gas by 2020.

The disclosure comes as troubling times for Indonesia’s oil and gas sector continue. The country was the world’s sixth largest net gas exporter in 2009, but failed to meet oil and gas production targets in 2011. In fact, natural gas shortages caused by production problems and rising consumption forced Indonesia to buy LNG spot cargoes to meet export obligations.

Though gas exports once formed the backbone of the Indonesian economy, according to many analysts the outlook for the country’s gas sector remains uncertain because of the ongoing decline of mature fields and increasing demand from customers both domestically and overseas. According to the US Energy Information Agency (EIA), Indonesia’s total primary energy consumption grew over 50 percent between 2001 and 2010.

The former OPEC member has also seen its glory days fade as a major oil exporter, experiencing a sharp decline in oil production since the mid-1990s amid decreasing oil reserves. In fact, Indonesia’s proven oil reserves have fallen much faster than any other country in the region and have fallen by 1.9 billion barrels since 1992.

Pertamina’s CEO said that shale gas is expected to support the government’s campaign to diversity the nation’s energy sources to curb dependence on crude oil. He added that most of the shale gas produced will be used for domestic consumption.

How much gas is really there?

Though Indonesia does have shale gas deposits, nobody knows how much. In addition, there are some wild swings in the estimates of the amount that the country really has. Last year the country’s Energy and Minerals Resources Ministry said that Indonesia had an estimated 574 Tcf of shale gas resources: 194 Tcf at Kalimantan Island; (90 Tcf) Papua Island, (48 Tcf) Java Island, while Sumatra is reported to have the largest at 233 Tcf, with 9 Tcf scattered across other parts of the archipelago. While they did not clarify, surely the ministry means gas in place as opposed to technically recoverable resources.

Edy Hermantoro, an upstream oil and gas distributor at the Energy and Minerals Resources Ministry, while speaking to media on June 13 about the government’s expectations to start opening tenders for shale gas field development in eastern Indonesia this year, said that the country had 1,000 Tcf worth of shale gas resources. Hermantoro said he was citing a study from Bandung Technology University.

However a new EIA report released June 10 doesn’t rank Indonesia in the top ten countries with technically recoverable shale gas. The number ten slot belongs to Brazil with 245 Tcf of technically recoverable gas.

Can Indonesia replicate the US Shale Revolution?

Perhaps the key question for Indonesia is: Can it replicate the US shale revolution? That depends on many factors and even whom you ask. Al Troner, President of Asia Pacific Energy Consulting (APEC), told Energy Tribune by phone that Indonesia could replicate the US shale revolution but it would take much longer and cost more than they might expect.

Troner said most of Indonesia’s problems with shale development would be similar to ongoing troubles in its oil and gas industry, mostly structural and also a complex regulatory environment. He also pointed to some major differences between US shale and Indonesia’s shale play.“

The US already has a gas/LNG network in place. But Indonesia, which is an archipelago, does not have such a network in place and to do so would require large sums of money,” he said.

Another major difference between the US and Indonesia is one of pricing, according to Troner. “Companies in the US have free pricing, a free market,” he said. “But in Indonesia companies there have government fixed price controls so there is less financial incentive. There is no market pricing mechanism.”

This is one of Indonesia’s primary hurdles (and several other Asian countries, including China) whose governments set domestic fuel prices. Fixed price controls limit company profits and discourage foreign direct investment (FDI) in these countries’ oil and gas sectors, resulting in inadequate infrastructure, and ironically for government energy planners that set prices, lack of resource development. According to International Monetary Fund (IMF) data, investment in Indonesia’s infrastructure is a paltry 3% of GDP, well below most of its neighbors. Troner said that in countries with fixed price controls it is hard to gauge exploration and production costs and companies can’t be certain what future revenue will be.

Another major difference between the US shale revolution and Indonesia’s fledgling shale ambitions is geographic. In the US most of the large shale plays are in the lower 48 states, but Indonesia is comprised of thousands of islands so it would cost even more money to construct pipes cross the water to connect the archipelago.“

Indonesia is not sure what is really there at this point and it’s not cheap to drill, especially far from population centers,” Troner said.“Yet the real problem with Indonesian shale development is regulatory,” Troner added. “If the government can’t get its natural gas regulatory situation in order how can it do so with shale?” –

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