Oil & Gas Indonesia: Production Mahakam Block to Fall in 2017
Total E&P Indonesia, subsidiary of oil & gas giant Total S.A., expects gas production at the Mahakam block (located offshore in East Kalimantan) to decline about 12.8 percent (y/y) in 2017 to 1,430 million standard cubic feet per day (mmscfd) from an estimated 1,640 mmscfd in 2016. Arividia Noviyanto, Vice President Human Resources, Communication, and General Services at Total E&P, informed that the decline in gas production is partly explained by better-than-expected output at the Mahakam block in 2016.
Total did not expect to see a stable production rate at the Mahakam block this year as wells are aging (and thus there is a serious risk that water will flow in the wells), while investments at the site have declined due to the unattractive low oil price and the fact that Total's contract to operate the Mahakam block expires at 31 December 2017 (but will not be extended). Nonetheless, this year's stable gas production at the block took the company by surprise. However, regarding gas output in 2017, Total doubts gas production can remain stable at the Mahakam block.
Meanwhile, oil and concentrate production at the block is estimated to decline 17.1 percent (y/y) to 53,000 barrels per day (bpd) in 2017 from an estimated 64,000 bpd in 2016.
Although details are still being discussed with Indonesia's upstream oil and gas regulator SKK Migas, Total plans to invest less in its activities at the Mahakam block in 2017. This is a logical choice as the year 2017 will be the last year for Total as the block's operator. At the end of 2017 the contracts of Total and Japan-based Inpex Corporation will expire (currently each company owns a 50 percent stake in the Mahakam block).
Last year the Indonesian government announced that the nation’s state-owned energy company Pertamina (and local governments) will become the new operators of the Mahakam oil and gas block per 1 January 2018. In order to avert rapidly declining production figures, Pertamina will already invest around USD $180 million in the Mahakam block in 2017, specifically in the drilling of 19 wells. Investment in development and maintenance is required to safeguard output at a steady pace. Noviyanto said Total will reduce its investment activities at the Mahakam block but emphasized that this is not related to Pertamina's takeover but is the result of low oil prices. When the oil price is below USD $70 per barrel, Total prefers not to drill new wells.
Although Total will assist Pertamina during the transition process ahead of latter's takeover in January 2018 (in this transition period know-how, expertise and experience will be transferred to Pertamina; this is important considering the complexities at the site), there remain concerns about Pertamina's technical and financial capacity to operate the vast and complex Mahakam block. Analysts would not be surprised if output drops steadily in the years after Pertamina assumes control.
Noviyanto also stated that fluctuating oil prices remain a major challenge for oil and gas companies in 2017. Although the OPEC recently agreed to cut oil production and the oil price has shown a rising trend, this rise will only start to have an impact on gas prices about three to six months later. However, it remains uncertain whether oil's recent growth trend persists.
Mahakam is one of Indonesia’s most important gas production sites. It is the main source of gas for Indonesia's Bontang liquefied natural gas (LNG) plant in East Kalimantan. Earlier, the Mahakam block also was a significant contributor to national oil production. However, its oil output has declined over the years.