In the face of declining oil and gas production, the challenges for Elisabeth Proust lie not in whether reserves are present, but in whether it makes good economic sense to reach them. The Total E&P Indonesie president director spoke with GlobeAsia.
Elisabeth Proust, president of Total E&P Indonesie, takes a pragmatic view of the uncertain atmosphere following a decrease in oil and gas production in Indonesia, and believes that government regulations on the industry are about to change. “This often happens in other countries where reserves are running low,” she says. “The government usually takes a stronger grip to (increase) the share of exploration. I understand, and actually, it is reasonable.”
However, she emphasizes that it is important to maintain the investment climate, lest it become a vicious cycle: as the government tightens its grip, fewer companies are willing to explore for potential reserves in new areas, and production falls lower and lower. Another issue of note is that other countries are competing for exploration investment.
As an illustration, across Total E&P’s global operations, Indonesia is ranked second in production, but seventh in revenue. “This means that the other countries are competing to attract investors to explore. So while it is reasonable for the government to strengthen its grip when production is declining, it still needs to consider the effect of other countries,” she says.
One key concern on the part of exploration companies is that regulations be valid for the long term, simply because an investment in oil and gas exploration is a long-term one. Citing Total E&P’s new project in the Salawati Basin in West Papua as an example, Proust explains that results from a discovery of oil or gas in the next year will produce results in eight to 10 years.
“This investment is for the long term, at least 20 to 30 years,” she says. “So when the government formulates regulations pertaining to exploration, it should provide legal certainty that they will be valid for at least 20 years.”
Prior to 2001, Indonesian regulations on oil and gas exploration were simple, with high tax rates but a stable spread of profit. As a result, Indonesia was categorized as a low-risk market. All this time, the results of oil exploration were split 85-15 in favor of the government, while in gas exploration, 70% goes to the government, with 30% left for investors. After deductions for the cost of the exploration, the government still gets around 60% of the exploration yield.
“However, in the last two years, where there have been signs that the regulations are to be changed, there has been uncertainty for foreign investors,” explains Proust.
It is widely acknowledged in the oil and gas exploration business that every location is unique, and requires a different approach to exploration. Says Proust: “Like in the Natuna gas exploration field, the government and Pertamina chose us to explore it because we have experience in a block with similar characteristics in southern France.”
In the Natuna block, up to 70% of the gas trapped under the earth is carbon dioxide. This means that when exploration activity begins to drill into the earth, a large amount of the gas will be released into the atmosphere, which could be dangerous and harm the environment. The only way to remedy this is to re-inject the carbon dioxide back into the earth, to the old wells left from past explorations. “We even control where the gas flows after it is re-injected,” explains Proust.
Even with some commentators concerned with the fact that oil and gas are un-renewable resources and might run out soon, energy analyst Kartubi explains that Indonesia still has huge oil and gas reserves, but they are located in deepwater basins. If these can be extracted, he believes Indonesia will no longer need to import crude oil. “Incentivizing oil companies by cutting taxes in the exploration phase will attract them to take the risk and explore those areas,” he observes.
Proust, too, believes that it will be many years before the reserves really run dry. In her view, the real problem lies not in whether or not the resources are present, but in whether it makes good economical sense to get to them. “Firstly, there are already sources that are known, but difficult to explore. Second, with many places in the world still unexplored, there is always a possibility for exploration.”
She was not fazed when she assumed the top job at Total E&P in December 2008, choosing to go with a strategy of massive and intensive exploration, steering the company towards exhausting all exploration possibilities in existing blocks, looking into under-developed potential reserves, as well as considering new areas previously deemed unattractive because of high exploration costs.
“With this strategy, we explore four blocks at the same time, and not one by one. So if we find reserves, we get several possibilities at once. Our corporate strategy is to take the risk. If you do not take risks, you will never explore and never discover new resources,” she concludes.
Under her direction, the company increased its asset portfolio in Indonesia in 2010 by acquiring a 15% interest in the Sebuku product-sharing contract (PSC), the first gas from which is anticipated in 2013, and a 24.5% interest in two exploration blocks in the Arafura Sea, the Amborip VI and Arafura Sea blocks.
Last year, the company was awarded a 50% interest in the Kutai Timur coal-bed methane (CBM) block and a 100% interest in the South West Bird’s Head exploration block. Total E&P also acquired interests in the Sageri, South Sageri, Sadang and South Mandar deep-offshore exploration blocks.
As of the end of last year, Total E&P Indonesie had invested more than $25 billion in the Mahakam PSC, drilling more than 1,655 wells and generating $77 billion in net revenue for the state. Last year, the Mahakam block produced approximately 2.2 billion cubic feet of gas per day, representing around 82% of the Bontang LNG plant supply and 82,000 barrels per day of oil and condensates.
In addition to the Mahakam block, Total E&P is also the operator of the South East Mahakam and the Tengah blocks and has an interest in the Nilam and Badak units.
This year, Total E&P Indonesie plans to spend $2 billion on its business activities. Contributing 30% of Indonesia’s gas production, the company is the largest gas producer and the number four oil producer in Indonesia.
Underlining the long time-frame in the industry, Proust says “I don’t think I will enjoy the result of this massive and intensive exploration strategy. This is long-term business, and business sustainability is the keyword. So by the time some of these new explorations are producing results, I may not be in this position anymore.”
For the fifth largest energy group in the world with operations in 130 countries, the environment is never too far away from the minds of Total’s 130,000 employees. High-tech, high-strength exploration pipelines are used to ensure that there is no spillage, equipment is constantly maintained and staff training is high on the list of priorities.
One of Total E&P’s basic principles in this area is to occupy the smallest footprint possible, and to leave an exploration area in a condition as close to its former state as possible.
“In the Mahakam delta, where we have been exploring for 44 years, we have only used 3,800 hectares of land, 70% of which we keep green with trees,” says vice president for Total E&P Indonesie Judith J Navarro Dipoputro.
And with an onshore exploration project, which typically uses more space than an offshore one, due care is taken at every turn. As Proust see it: “In a place like the Mahakam delta, we try to do our job in as little space as possible, like in an offshore exploration. Yes, it would definitely be more costly and more difficult, but then we can get more time to explore from the government.” GA