[NGW Magazine] Andalas bullish on Indonesia prospect
This article is featured in NGW Magazine Volume 2, Issue 13.
Indonesia’s dash for cleaner power generation is encouraging producers to hook up with generators to turn otherwise stranded reserves into electricity.
UK-based Andalas Energy and Power is hopeful that its latest gas-to-power venture in Indonesia, targeting 250-500 MW of installed capacity fired by gas from proven fields, will generate billions in revenue for the company over the long-term.
CEO Dave Whitby says Andalas has an initial target of 250 MW of installed capacity, which would make it an established player in the power industry in Indonesia. “Assuming a $0.07/kWh power tariff, the life of project revenues from 250 MW installed would be in excess of $3bn,” he told NGW in June.
Indonesia is the home ground of the Andalas team which has worked in the country since 1990, primarily on monetising gas. Its strategy is to secure gas supply and to turn this into money by selling it to local Indonesian power producers, export pipeline owners or by developing independent power generation operations.
Whitby said when Andalas was formed, it was ‘only natural’ to focus on Indonesia, as the country had a number of gas fields whose reserves were otherwise stranded by the limited gas infrastructure.
“We also found the electricity transmission grid was suitably advanced and this led us to adopt the gas-to-wire strategy which we are now pursuing. Our focus on Indonesia is therefore due to both our extensive experience in the country and our identification of a major opportunity: one that matches our combined skillset perfectly,” he said.
Boost for IPPs
The shortage of gas for small and industrial users remains a growing concern in Indonesia, despite being a country with plenty of reserves. The main issues affecting progress are polices that the government is now revising in order to make them more friendly; and the lack of supporting infrastructure to receive supply. Indonesia’s natural gas output has fallen and it has seen lower exports as LNG production has come on-line in Qatar, Australia and now the US.
After announcing its 2006 policy to re-orient natural gas production towards meeting domestic needs, Indonesia dropped from the world’s largest exporter of LNG in 2005 to the world’s fifth largest exporter in 2014, behind Qatar, Malaysia, and Australia, according to PwC.
Electrification in Indonesia is just 88% of the potential demand, which is significantly below the southeast Asian average. The government aims to add 35 GW of power generation capacity by 2019, as well as achieve an electrification ratio of 99.7% by 2025.
This level of power generation will require immense investment from PT Perusahaan Listrik Negara (PLN), Indonesia’s power utility company, and private independent power producers (IPP).
The ministry of energy and mineral resources’ 2016 – 2025 Electricity Supply Business Plan estimates an investment of about $31.9bn by PLN, and $78.2bn from independent power plant operators (IPPs).
“The present government has set a bold target to add 35 GW of power generation. At the time this represented an estimated 60% increase in capacity,” said Whitby, highlighting that the IPP sector forms part of the overall growth strategy to hit the target.
Furthermore, he said, gas is a priority fuel source owing to Indonesia being a signatory to the Paris Agreement on climate change.
With this in mind, earlier this year the government announced Regulation 11/2017 which defined the concept of wellhead IPP and the related system of direct appointment, where the gas price is fixed at 8% of the Indonesian crude price but in $/mn Btu, not $/barrel – as opposed to open tender, when the gas price may be above that – for sales to the power sector. For power plants not at the wellhead, PLN and IPPs may purchase natural gas at a maximum price of 11.5% of the crude price, so almost half as expensive again.IPP operators are bound by power purchase agreements with PLN and must ensure there is enough as to run their power plants for 20 years. This gas could come from companies with production-sharing contracts or licensed traders, backed up by a gas sales purchase agreement detailing the source of supplies; volume and specification; price; contract period; price review; distribution mechanism; as well as rights and obligations of the parties.
“In order to utilise local undeveloped gas and to deliver low cost power into the grid, Regulation 11 clarifies the requirements to qualify for direct appointment in developing wellhead IPPs.
Direct appointment is important to Anadalas as the developer, as it fast tracks the process by which an IPP can be put into service,” Whitby explained.
Seeking local partnership
In Indonesia, Andalas plans to develop a portfolio of wellhead IPP projects targeting 250-500 MW of installed capacity fired with gas from proven fields. The firm proposed the wellhead IPP concept to Pertamina – Indonesia’s national oil company – as the best method to monetise their stranded undeveloped gas fields, whilst at the same time significantly improving electrification rates.
Following the discussion, last September, the duo inked an agreement to identify and pursue at least five projects from the vast inventory of undeveloped gas fields that Pertamina has in the Sumatran provinces of Riau, Jambi and South Sumatra that may be suitable for the IPP development. Despite an abundance of unexploited energy resources, these regions have some of the lowest electrification rates across the Indonesian archipelago.
Whitby said Pertamina has an IPP investment arm under the Gas Directorate which is mandated to invest in IPP projects. “Recently, the Jakarta-based company was awarded the contract to build the Jawa 1 IPP which is viewed as the largest IPP award in Asia today.
“Moreover, Andalas’ relationship with Pertamina is a long-standing one dating back to 2008 when members of the ADL team worked directly with Pertamina to complete unitisation negotiations in respect of the Suban gas field in South Sumatra,” he added.
TOE in the water
In March 2016, Andalas signed a deal with the operator, PT Akar Golindo, for 30% interest in the Tuba Obi East (TOE) oil and gas concession area, which it later named as one of a cluster of three gas fields suitable for its first IPP development. TOE is in the South Sumatran basin, some 30 km northwest of Jambi city in Jambi province.
A Gaffney Cline & Associates review estimates 43.7bn ft³ of prospective recoverable gas lie within the Air Benekat Formation at TOE. From a strategic perspective, a resource of this size would represent sufficient gas to support a 25-MW power plant for a 15-year period.
The other two fields, which are operated by Pertamina, are known as Karang Makmur and Simpang Tuan. Pertamina said that following the expiry of the TOE technical assistance contract, it will retain and develop TOE alongside the other two fields as a single integrated unit, the MJ Cluster, freeing Andalas from the field development costs.
Pertamina will fund the upstream development at the MJ Cluster which could cost above $50mn. Andalas believes it can create more value by concentrating its resources on progressing its wellhead IPP project and pipeline.
“The gas supply is the critical component to the wellhead IPP, and Anadalas has assembled a team of gas experts who have over 100 years of collective experience in the gas industry, 70 plus years of which are in Indonesia,” Whitby said. “IPPs are fairly common internationally, but in Indonesia, the wellhead IPP is a relatively new concept. The approach involves Anadalas and Pertamina converting the undeveloped gas into power and connecting the power plant to the national electricity grid.”
First project, new discovery
In December 2016, Andalas submitted its first gas-to-power project of two 30-MW wellhead IPP developments with Pertamina for government approval. It entails sourcing gas from fields included within the MJ Cluster and also the gas resources at TOE. The application followed the assessment of regional electricity demand, grid infrastructure and capacity; the evaluation and modelling of the gas resources; process design; financial modelling; and a feasibility study by the engineering division of PLN.
Results from the feasibility study showed that the IPP construction could start by Q4 2017 with a planned completion by end Q4 2018. While additional generation capacity is still required to satisfy power demand, gas supply from the project is sufficient for 20 years of IPP operation.
Moreover, power produced by the project can be connected to PLN’s system and can be absorbed by the Sumatra power network without any operational problems.
In addition to the initial project, in April, Anadalas also reported that further two new fields were discovered within Pertamina’s portfolio of gas assets in Central Sumatra that were suitable for IPP development. Pertamina’s sub-surface team is now carrying out a detailed evaluation of each project’s suitability to feed a future power project of sufficient size.
“There are a substantial number of gas fields in Sumatra that can supply wellhead IPPs. Anadalas therefore has a significant project pipeline to pursue and deliver value to our shareholders, Pertamina and the people of Indonesia. The wellhead IPP concept is core to Anadalas’ future,” Whitby said.
Even a small 30bn ft³ gas field can power a 15-MW power plant for 20 years, which equates to power being delivered to an additional 75,000 people, he said. By focusing on the wellhead IPP, Anadalas believes it can help solve Indonesia’s power crisis at the local level which is the primary focus of the present government.”
Opportunity for believers
The electricity market in Indonesia is characterised by growing demand. Indonesia is the fifth largest country in the world with 258mn people and an economy that has undergone rapid growth. So meeting the existing and expected demand means continual investment in the gas and power sectors.
In fact, Whitby considers Indonesia as an opportunity for ‘believers’. He said: “My best piece of advice is to spend time researching the opportunities and to identify an area where the company has expertise and to focus only on that. It will take some concerted time and effort to find your competitive advantage, but with focus and the will to succeed, Indonesia is a country that is both open for business and full of opportunity.
Today, there are a number of international players actively pursuing Indonesia’s gas market and making a significant contribution to the country’s power shortfall at a local level.
In June, Italian oil and gas company Eni carried out its first shipment of LNG produced for the Indonesian domestic market from the Jangkrik field, in the Muara Bakau block, Kutei basin, in the deep water of Makassar Strait.
The relatively small 22,500 m³ cargo left the Bontang liquefaction plant in East Kalimantan and sailed to Bali, where it was unloaded as part of a long-term LNG contract signed with Pertamina in June 2015.
Eni started gas production at Jangkrik ahead of schedule on 15 May 2017. The project comprises the gas fields Jangkrik and Jangkrik North East.
Gas produced is processed on the floating production unit (FPU) Jangkrik and then flows to the onshore receiving facility.
The Italian company operates the Muara Bakau production-sharing contract (PSC) in which it holds a 55% stake through its subsidiary Eni Muara Bakau. The other partners are French/Chinese Engie E&P with a 33.334% stake and PT Saka Energi Muara Bakau with an 11.666% stake.
Similarly, US major Chevron is developing resources in the Kutei basin, from 14 offshore fields in the shelf area within the East Kalimantan PSC and the deepwater West Seno field in the Makassar Strait PSC.
Last year, the basin’s Bangka field achieved its first natural gas production, which is the first phase of Chevron’s Indonesia Deepwater Development (IDD) project that the government approved in 2014. Chevron has a 62% interest in the project. The other joint venture partners are Eni with 20% and Tiptop Oil & Gas with 18% interest.
Located in the Kutei Basin off the coast of East Kalimantan, Bangka has a design capacity of 110mn ft³/d of natural gas and 4,000 b/d of condensate.
At full capacity, Bangka could supply 3% of total Indonesian natural gas demand, according to Chevron. Gas produced from the field is sent to the Bontang LNG plant for liquefaction.
Chevron’s IDD includes the Gendalo-Gehem project, which is also designed to meet domestic energy demand. It has a planned capacity of 1.1bn ft³/d of natural gas and 47,000 b/d of condensate. Chevron continues to work toward a final investment decision.
Making entry into the Indonesian domestic market is a newly established upstream company AziPac. Launched in 2014, it is backed by the Seacrest Capital Group, a global energy investor. AziPac is headquartered in Bermuda with offices in Singapore and Jakarta.
In May, the group announced that it will take over the Bone PSC offshore Indonesia, after partner Jadestone Energy pulled out of the license. AziPac first acquired 40% in the PSC in June 2014, through its subsidiary Azimuth Indonesia.
The remaining 60% is owned by the operator Mitra Energy, a Jadestone subsidiary. Subject to government approval, the agreement will see Jadestone transfer its 60% stake to Azimuth.
The Bone PSC is in Bone Bay, offshore South Sulawesi, and lies in water depths extending from the coast to over 2000 metres. According to AziPac, the block covers 7,516 km², equivalent to about 327 Gulf of Mexico blocks or 31 UK Central North Sea blocks.
The offshore area, which represent a fragment of Sunda Plate, is largely untested but there is gas production from nearby onshore fields in the same basin and drilling could start next year if low prices continue.
Audrey Raj