INDONESIAN state oil firm Pertamina plans to raise crude oil production to 1 million barrels per day (mbpd) of oil equivalent by 2015, from 432,000 bpd currently, largely via acquisitions, its chief says.

It also plans to boost refinery capacity to 1.5 mbpd, from 1 mbpd this year, president director of Indonesia’s state oil firm Pertamina Karen Agustiawan says.

The sharp increase in oil production and refinery capacity, if achieved, would pave the way for Indonesia to cut the import of oil products and make substantial savings on its energy subsidy bill, which amounts to billions of dollars a year.
“Our main focus is on upstream, probably most of our investment will go to upstream,” Agustiawan says.

Pertamina has increased its planned investment in the upstream part of the business to Rp29.4 trillion ($3.18 billion) in 2010, from a previous estimated Rp26 trillion, rising to Rp34 trillion in 2011, but those figures do not include spending on acquisitions, she said.

The main focus of Pertamina is upstream

Agustiawan says Pertamina would use internal funds, bank loans and a bond issue to finance acquisitions and investments, and that the amount it would spend on acquisitions was “unlimited” in order to achieve its output target.

“If we have to find the financing we will find it,” says Agustiawan, who hopes that Pertamina might eventually be listed during her time as president director.

Pertamina has previously said it planned to raise $1.5 billion from a bond this year to finance its upstream activities.

Several upstream projects, mostly producing natural gas, are being developed, including projects in Sumatra and Java.

Agustiawan said Pertamina will boost its refinery capacity to around 1.5 mbpd by 2015 from about 1 million currently, which will mean it can stop oil product imports.

Pertamina has previously said it planned to boost capacity at its refineries in Balikpapan, Dumai and Balongan and also build new refineries in Banten and East Java No construction has started yet. Pertamina will add 200,000 bpd capacity to the 125,000 bpd Balongan refinery in West Java, she says.

However, Agustiawan says its Iranian and Malaysian co-investors want a 10-year tax break to build a refinery in Banten, West Java, adding that discussions over possible tax breaks have held up the project.

“If that issue is cleared, then I think there is no hurdle any more for Pertamina to go ahead with the project.”

“I think it should be tax free. This is the project to secure energy security,” Agustiawan says, adding that it was a matter of importance for the nation as a whole, not just Pertamina.

LACK OF INVESTMENT

Agustiawan says talks with Saudi Aramco are in the final stages over the import of about 200,000 bpd of Arab Light crude for Pertamina’s Balongan refinery expansion.

Indonesia has nine refineries with a combined capacity of around 1 mbpd, but those only supply 70 per cent of domestic needs with the rest coming from imports.

Indonesia’s oil production has declined on a combination of aging wells and lack of investment in developing new projects. Foreign investors have grown increasingly wary about committing to long-term projects because of a rising tide of nationalism and policy flip-flops.

Progress with two particular projects is being closely watched – Donggi-Senoro and Natuna – as investors are concerned about their commercial viability depending on whether the gas produced is exported, or sold to the domestic market at a much lower price.

More recently, Indonesia has indicated that gas sold to the domestic market may have to be sold at a higher price.

Agustiawan says that in both cases, the gas should be sold to both the domestic and the export market, and that it may be possible to raise the domestic gas price to an economic level as soon as next year.

In the case of Donggi-Senoro liquefied natural gas (LNG) project, Pertamina wanted to export 70 per cent of the gas production and sell 30 per cent to the domestic market, she said.

“All the investors outside Indonesia are looking at how the government is reacting toward this (Donggi-Senoro) project,” she says.

Indonesia expects to resolve the terms, conditions and partners for the giant Natuna natural gas project by September.

The Natuna D-Alpha block has about 222 trillion cubic feet (tcf), of which 46 tcf is thought to be commercially recoverable. The project will require about $40 billion for development.

In 2008, Pertamina named eight potential partners: Malaysia’s Petronas, ExxonMobil, Chevron and France’s Total, Royal Dutch Shell, Norway’s Statoil), and China National Petroleum.

“They are still negotiating on the final terms, once it has done we hope to sign the PSC (production sharing contract)... we hope to get this done this year.” Indonesia’s 2011 oil, condensate output may rise to 975,000 bpd.

Meanwhile, Indonesia says its crude oil and condensate could reach 975,000 bpd next year compared with 965,000 bpd this year.

“The production figure of 2011 is about 960,000-975,000 bpd,” upstream regulator BP Migas’ chairman R Priyono says in a parliamentary hearing. “Mostly it will come from existing fields.”

The country’s biggest producer Chevron Pacific Indonesia is expected to produce 370,000 bpd next year, Priyono says.

State-owned oil and gas company Pertamina may produce about 131,000- 133,000 bpd, French’s Total 94,600 bpd, ConocoPhillips’ Natuna block 61,000 bpd, Chevron Indonesia 23,000 bpd, and the jointly Pertamina-ExxonMobil may produce 20,000 bpd, he adds.

Although Indonesia has a target of 965,000 bpd for 2010, BPMigas says that the country might only pump 917,000 bpd this year, citing possible technical problems and a new environmental law that came into effect in April.

The regulation requires oil and gas contractors to lower the temperature of waste water from steam flood activity to 40 degrees Celsius from 45 C.

Failure to comply will result in legal action.

The implementation of the regulation is expected to see Indonesia’s oil and gas output decline by 50 per cent, Evita Legowo, oil and gas director general at the energy and mines ministry, said.

Indonesia has seen its crude output fall because of declining production at ageing fields.

The country failed to meet its 2009 crude and condensate production target of 960,000 bpd, pumping 949,138 bpd last year due to technical problems, Priyono said last December.

PERTAMINA PLANS IPO

Meanwhile, Pertamina plans to sell a 20 per cent stake in its unit, Pertamina Hulu Energi (PHE), via an initial public offering slated in late 2010 or early 2011, a senior official at the firm says.

‘We expect the IPO to be done by the end of this year,’ says investment director Ferederick Siahaan.

‘The funds will be used by PHE to finance acquisitions of oil and gas fields at home and overseas,’ he added.

‘We expect to raise Rp10 trillion ($1.08 billion) (from the IPO),’ he says.

Pertamina has said that it plans to boost production to around one million barrels of oil equivalent per day (boepd) by 2014, but a study shows that it can only produce 702,900 boepd by 2014 if it relies on organic growth.

The government has set a target of 965,000 barrels of oil per day (bpd) produced this year, but analysts said the target is unlikely to be met given aging wells and old machinery.

PHE is one of Pertamina’s subsidiaries operating in the upstream oil and gas business.

Currently, PHE produces as much as 53,500 bpd and 350 million standard cubic feet (mcfd) of gas per day, contributing around 30 per cent of Pertamina’s total production.

‘We are encouraging our subsidiaries to make an IPO and PHE is the most prepared subsidiary for this,’ he says.

Siahaan said that Pertamina was also preparing the IPOs of three others subsidiaries: PT Geothermal Energi, PT Pertamina Gas, and PT Pertamina Drilling Services Indonesia.

Pertamina is expanding its oil and gas exploration and production activities in a bid to achieve its ambitious production targets. Pertamina’s current oil and gas production is around 432,000 boepd, which it aims to increase to 700,000 boepd by 2014, according to president-director Karen Agustiawan.

Siahaan says that Pertamina could not rely on existing oil and gas reserves to meet this target. ‘We must carry out acquisitions to meet the target,’ he says.

Agustiawan has said that Pertamina was preparing for a big acquisition this year.

She refused to mention the field’s name, but said that the acquisition would be bigger than the acquisition of 46 per cent of BP’s stake in the offshore North West Java oil and gas field by the company in June last year.