Industry Trend Analysis - Meeting Upstream Spending Target Could Prove Challenging - MAR 2018

BMI View: Although higher upstream spending by Pertamina will be positive for Indonesia's embattled E&P sector which is in dire need of additional investment, the firm could struggle to deliver on its spending targets as various capital commitments across the entire oil and gas value chain continue to take a toll on its finances.

Indonesia's state-owned oil and gas company Pertamina's upstream strategy in 2018 will be centred on the development of domestic oil and gas assets, as it seeks to overturn rapid output declines at mature assets and offset declining foreign investment flows. The NOC plans to spend USD3.3bn on its upstream business over the next 12 months, an increase of 22.0% from the previous year. More than 40.0% of this (USD1.4bn) will be spent on maintenance works at the Mahakam block, offshore East Kalimantan, which remains Indonesia's biggest source of natural gas. Pertamina is scheduled to take over the block from current operators Total and Inpex when their concessions expire on December 31 2017.

Despite its ambitious investment target, Mahakam's output is anticipated to drop off under Pertamina's management (14.0% y-o-y in 2018, according to Pertamina estimates), as growing investment burden on the NOC constrains capital that could otherwise be spent on the giant, mature block. Due to this, Pertamina has repeatedly highlighted the need for additional investors for the Mahakam venture. Abu Dhabi-based Mubadala Petroleum has emerged as a potential farm-in partner, after negotiations to retain Total and Inpex's services fell through. Another USD1.5bn is budgeted to fund ongoing development works at the Cepu block, which contains the Jambaran and Tiung Biru gas fields. The fields are estimated to hold combined reserves of 71.0bcm, and could produce 3.0bcm of natural gas at peak. However, any commercial production remains unlikely before 2020.

Oil, Gas Output To See Firm Declines
Indonesia - Crude Oil & Natural Gas Production
f = BMI forecast. Source: EIA, BMI

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