How the recently awarded exploration blocks complement existing developments in Indonesia

The recent awards of three blocks from the 2022 Indonesia Petroleum Bidding Round 4 capped a successful run of awards in the country since the beginning of 2022. Blocks awarded during this period include a mix of exploration and production assets. The majority of the blocks are located in mature basins such as South Sumatra, East Java and Kutei, indicating that investors are still looking at these areas as opportunities for lower-risk exploration and fast monetization. Interestingly, a few blocks stand out as they are located in relatively frontier areas although still not far from the historical centers of exploration, such as Agung I, Agung II and Bunga in East Java; and Offshore North West Aceh (ONWA) and Offshore South West Aceh (OSWA) in North Sumatra.

In terms of companies who won the new blocks, there is a combination of small local players and large IOCs. There is one new entrant, POSCO International, which was awarded the Bunga block in offshore East Java in partnership with Pertamina. This award is consistent with POSCO's aggressive expansion strategy for its E&P business in the APAC region, with recent exploration awards in Malaysia and the acquisition of gas producer Senex Energy in Australia.

It is remarkable to see BP expand its exploration portfolio in Indonesia with the Agung I and Agung II blocks, after taking over a non-operating interest in deepwater Andaman II block in 2020 and having focused on the Tangguh LNG development in the past few years. BP's new blocks, as well as POSCO's nearby Bunga block, are located in relatively deep and unexplored waters off East Java. These blocks are therefore in a good position to be potentially developed in a short time frame, in case of exploration success, due to the existing infrastructure and the high-demand market in the area.

Conrad Asia Energy's ONWA and OSWA blocks are also interesting ones to watch, as we will see the return to exploration in offshore Northwest Sumatra after five decades. Both blocks contain gas discoveries made in the 1970s. Back then, these finds were deemed uncommercial due to the lack of mature gas markets. Conrad has conducted extensive studies prior to the award and it estimates prospective resources in the order of multi-trillion cubic feet. It will now have the opportunity to prove this potential. Conrad is likely hoping to replicate the success at Duyung where the company appraised an old stranded gas discovery and brought it to the verge of production.

Other international operators, such as Eni and Petronas, reinforced their respective positions in the Kutei and East Java basins, near producing assets that the companies operate (Jangkrik for Eni, Bukit Tua for Petronas).

A few production blocks (Bertak Pijar Puyuh, West Kampar and Bawean) have been awarded to small local players. Likely these companies were attracted by the prospect of quick monetization through reactivation of shut-in fields, despite the relatively small volumes expected to be produced.

Pertamina's strategy

Pertamina was relatively quiet in the latest rounds of awards. The NOC only received two blocks in partnership with Eni and POSCO. Partnering with IOCs would enhance cooperation in terms of technical capabilities and likewise allow a large funding for exploration and future development expenditure, at the same time reducing risks. A similar case would be the deepwater West Ganal PSC which was earlier awarded to Eni, with Pertamina and Neptune Energy as partners. The West Ganal PSC has been created from two of the blocks that were previously covered by the Makassar Strait PSC (expired in January 2020). The West Ganal PSC contains the Maha field, that is earmarked to be developed as the next development to feed the Jangkrik FPU, after Jangkrik and Merakes/Merakes East.

A possible reason for Pertamina's reduced focus on the recent bidding rounds could be the company's increased spending to mitigate production decline in its mature fields. Pertamina is currently investing in extensive development drilling campaigns in various production blocks as well as enhanced oil or gas recovery (EOR/EGR) plans. Likewise, a key recent development which has boosted Pertamina's production is the Jambaran Tiung-Biru project that was initially expected to come onstream in 2021.

Pertamina's subsidiary Saka Energy won a new block (Sangkar) next to their flagship Pangkah asset, which will be the center of future developments in the case of exploration success at Sangkar. The Pangkah PSC has produced around 12,500 barrels per day of oil and 90 million cubic feet per day of gas as the result of West Pangkah and Sidayu fields development. There is another discovery in the Pangkah PSC that is potentially to be developed in the future that we assume could be a great synergy opportunity with any Sangkar discovery.

Conclusions and outlook

The improved fiscal terms and flexibility in the bidding process could have been a factor in the increased number of awards in the past two years. The re-introduction of cost recovery PSC terms next to the gross split regime has been also seen as a positive step by most investors. Likewise, the joint study approach has allowed companies enough time to study the assets prior to the actual bidding process. In fact, all the recent awards were derived from Direct Offer blocks. Financial commitments for newly awarded blocks have also gone back up after a significant drop in 2021. The trend for committed expenditure has generally followed the number of awards, with the exception of 2020 when the amount was driven up by the aforementioned West Ganal block. Signature bonus has registered a similar trend as total commitments, although the two curves have diverged over the past three years. This could be possibly due to the fact that signature bonus has been a biddable component, rather than pre-determined by the government, in licensing rounds since 2021.

Going forward, the government could be offering more blocks in immature or frontier basins, and a few focus areas have been identified in Eastern Indonesia for further evaluation. Unlocking new resources in these highly prospective areas will be key towards the country's ambition to reach production targets of 1 million barrels of oil per day and 12 billion cubic feet of gas per day by 2030.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.