Adapt and survive in IndonesiaJune 11, 2020
Gary Selbie, president-director of Premier Oil Indonesia, talks to The Energy Year about how the company kept its offshore operations going after the Covid-19 pandemic began and how companies will likely adapt in the post-pandemic world. Premier Oil is an independent E&P company with interests in the North Sea, Southeast Asia, the Falkland Islands, Alaska and Latin America.
How did your operations in Indonesia get impacted by the Covid-19 crisis?
There are different aspects to our response. As you probably remember, things changed very quickly. We went through a period of about a week where we were planning how we could continue office-based operations. We were going to split the workforce into two different groups, have them working on alternate weeks and have the office thoroughly cleaned in between each week so we could keep the two separate groups of people isolated from each other. We spent quite a lot of time working on that. As we were just about to start that split rota, everyone started working from home, so we very quickly went to full-time working from home and closed the office in Jakarta.
As you’d imagine, that created a huge effort mainly in terms of IT and making sure that everyone had the equipment and the connectivity they needed to work from home. There were two or three days when our IT department was working almost around the clock to get all of that set up and tested. I have to say that it has worked very well. That was basically the end of March. We’re now into week eight of everyone working from home, and the same has been applied worldwide. All is the same in our UK offices in London and Aberdeen as well.
In terms of our offshore staff, again we went through a similar review process for our offshore crews because we have existing production in Indonesia which needs to continue under any circumstance. We went through that review process and basically have reduced our offshore manning levels and gone back to what we call “core crew” offshore. Any kind of discretionary or additional personnel offshore working on small projects have all been put on hold and we’ve gone back to core production and maintenance crews offshore.
We’ve also rolled out a whole protocol in terms of testing those offshore crews before they travel, and we’ve also had to put in place additional ways for them to travel within Indonesia to get to Jakarta so that they can actually catch the crew change flights because we don’t want any of the crews using public transport. In reality, we’ve had to send private minibuses all over Indonesia to pick up our crew, bring them to Jakarta and then do the same again when they come back onshore. It got further complicated in the last couple of weeks because all of the domestic air travel in Indonesia had been shut down.
We have some of our crews actually living on different islands who would have to fly on commercial aircraft to get to Jakarta to catch the crew change flight. Obviously, that’s no longer possible. Those guys are basically stranded at home in the meantime, and we’re restricted to only using our crew members who can get to Jakarta without flying, which in Indonesia is pretty challenging given the size of the country.
We’ve had to put all these additional measures in place, and I think we’ve been pretty fortunate so far. We’ve not had any confirmed cases of Covid-19 offshore. We’ve actually had three confirmed cases of Covid-19 from our office staff, but they’ve all recovered, are healthy again and are working from home.
That’s the Covid-19 response, which is ongoing. We’ve also started a work stream to plan how we will reoccupy the Jakarta office when it’s safe to do so, but that will obviously be driven by local restrictions in each country at the time.
There’s also the issue of low oil prices and how we’ve responded to the drop in the oil price. We’re predominately a gas producer in Indonesia; however, our gas price is linked to the price of oil, so when the oil price drops our gas price also drops. We’re having to deal with very low gas prices at the moment, much lower than we’re used to.
What has that meant for us? In terms of daily operations, it hasn’t really had any impact. All of our gas gets sold to Singapore through the WNTS [West Natuna Transportation System] pipeline, and we’ve been pleasantly surprised that the demand from Singapore has remained strong. Most of our gas is used for power generation purposes in Singapore, so of course the demand for domestic power is still there, and the drop in industrial energy demand appears to have been offset to some extent by an increase in domestic power demand.
Is that gas produced from the Natuna Sea Block A east of Malaysia?
Yes, that is correct. In terms of production volumes, they remain similar. Obviously, the revenue has dropped because of the drop in the gas price, but it’s business as usual in many aspects, especially for the offshore crews. We’ve got three offshore PSCs in three different areas of Indonesia that we operate. We have the Natuna Sea Block A, which is where our gas production comes from and where it is pretty much business as usual.
We have an exploration PSC called Tuna, which is right up on the border with Vietnam. We were planning to drill two appraisal wells on that block this year until this dual crisis hit. Of the factors we have had to consider, one is obviously the drop in the oil price and our desire to cut costs and defer expenditure where we can. The other one is that we’re still in advanced discussions with a new partner to come in and join us on that Tuna block, and I think that whole process has understandably been delayed because of the recent events.
We’ve also got serious concerns about starting a drilling campaign at the moment given current constraints on the global supply chain with travel restrictions, etc. The combination of these factors drove us to defer our drilling campaign from this year into next year. Unfortunately, we will not now be in a position to drill the two wells on Tuna until 2021.
Our Tuna PSC was due to expire in March this year, and we asked the government for a two-year extension; however, the government granted us a one-year extension until March 2021. Correspondingly, we were planning to drill the Tuna wells this year until the Covid-19 outbreak. Now, based on the current situation, we just don’t think it’s possible to execute the drilling program this year, so it will be next year now and that will require us to go back to the government of Indonesia again to secure a further extension. We haven’t done that yet, but hopefully, given the current extraordinary circumstances, they will be sympathetic to our request.
When looking at the macro dimension of this crisis, there is also the possibility that the oil prices – and therefore your gas delivery prices – will go up on the back of a return of consumption and of the US shale oil sector production taking a very hard hit because of those low prices. Are you looking into these scenarios?
Many people globally are dedicating a lot of time and effort into trying to answer that question right now. We’ve seen OPEC responding to the drop in demand, but I think the 10-million-bopd cut is probably not enough. It seems to be accepted that daily demand for oil in the short term has probably dropped by somewhere in the region of 15-million-18 million bopd. Even with a 10-million-bopd reduction, it’s not enough.
How quickly demand will pick up again is the key. A lot of companies are still in “wait and see” mode to see how long this Covid-19 situation will last. I personally think that even once the disease is under control, we won’t be back at pre-Covid-19 consumption levels for some time. I suspect it’s going to be years rather than months before we ever get back to those levels. I was just talking about it today with some of my colleagues on another call.
I also think this is probably going to change the way we work forever, in some respects. There were many people who didn’t know what Zoom or Skype were or never used them, but everyone’s realising how much you can do using these online meeting forums. Things such as business air travel may never get back to the levels they were at prior to this event.
I think a sensible assumption would probably be that the effects of this are going to be felt at least for the rest of this year, and quite probably well into next year as well in terms of oil prices. That’s how we are planning anyway: lower for longer. We think it’s going to be low at least for the rest of this year and quite probably well into next year before we start to see any significant recovery.
The other thing right now is that inventories are at all-time highs. Supply continues to outstrip demand, and every month any available storage is just being used. We saw at the end of April the crazy situation where the oil price went negative for a few hours, but it’s just because there’s nowhere to put it. These countries continue to produce and actually we’re running out of storage options. Even when demand outstrips supply again, it’s going to take some time for those significant inventories to be consumed.
From E&P to EPC and suppliers, everybody has been passing the pain over to the next guy. Who do you think stands to suffer the most in the oil and gas value chain today?
I think the midstream and downstream sectors have not really been affected yet, although they will be if this continues because ultimately the demand for the refined products has also dropped off. The downstream sector will be impacted in terms of lower volumes, but there is some lag there. We have been affected, but mainly in terms of a lower sales price.
A lot of the upstream sector will probably still be cautious following the previous oil price crash back in 2014-2015. Yes, we are hurting in terms of revenue, but most of the upstream sector is reacting to that by deferring any kind of discretionary activity (i.e. exploration drilling or projects that are not yet sanctioned). The people that are really impacted are the drilling service providers, as most exploration drilling has been cancelled or deferred this year, unless it’s already been committed to.
As I said, we’ve deferred our Tuna program by a year. We have a third PSC called Andaman, and we were planning to drill our first exploration on that deepwater block next year, which requires a lot of preparation and planning. We’ve already decided to defer that program too. We are also partners in an adjacent block with Mubadala Petroleum, and they’ve made the same decision. We were planning to drill using the same rig, and hence we have all agreed to defer it by a year into 2022.
That’s a common theme you’ll see across the industry, and those who get hit quickly are the drilling contractors. People who own and operate the drilling rigs and also the other service providers – the Schlumbergers, the Halliburtons and the Weatherfords. These guys are seeing massive cancellations and they’re having to drastically reduce their revenue forecasts. Many of them have already started significant reductions in their workforce.
Is this likely to trigger a consolidation movement in the industry?
Seeing an increase in consolidation and M&A activity would be an obvious conclusion, although if you look back at 2014 and 2015, I think a lot of people expected that at that time as well and it didn’t really happen. I think it also ties into the bigger picture of the energy transition story.
For several reasons, the oil and gas sector is not viewed as being particularly attractive as a long-term investment at the moment. You would typically expect to see venture capitalists coming into the business and trying to snap up distressed assets or even companies, but the whole sector is struggling to compete at the moment in terms of being considered as a sound investment opportunity.
What you might see now is more companies actually going bankrupt this time around, as this may well be the straw that broke the camel’s back. Many companies were able to refinance or restructure in 2014 and 2015, but this current downturn is even more severe; hence, it’s going to be a tougher test for a lot of companies.
Would you say that holding gas positions could be one way of seeing some light at the end of the tunnel as natural gas remains buoyant in the public mind as a clean fuel?
In terms of it being environmentally acceptable, gas is clearly preferred to oil and certainly to coal. What would be even nicer is if you had a fixed price gas contract. Over the years, we’ve always been quite pleased about the fact that we have a gas sales contract that is linked to the oil price. Typically, we would get prices which were higher than the domestic gas price in Indonesia. At the moment, however, that position is reversed. A typical gas price even on a long-term contract in Indonesia would be somewhere between USD 5 and USD 7 per million Btu, while right now we’re only getting USD 3.5-4 gas into Singapore.
We have guaranteed volumes through a take-or-pay clause in the contract, but there are no floors on the gas price so if the oil price goes to zero, then in effect the gas price would be zero. We would actually be better off during these volatile times if we had a fixed gas price contract, but we have enjoyed the good times, so we can’t really complain too much about the tougher times.
What sort of crisis exit strategy do you see for companies like yours, and what are going to be the main factors of resilience in this kind of environment for E&P companies?
It’s slightly different for each individual company, depending on how you’re structured and what your debt levels are. However, I think a common theme for everyone at the moment is cost reduction and deferral of discretionary spend. Anything that we don’t have to spend on, we won’t be spending on. We’ve possibly been distracted from it slightly by the current Covid-19 crisis and the need for everyone to work from home, but I suspect if we’d all been in the office like normal, we might have been going through a more in-depth review of our organisations and costs with a view to reducing them.
As a global community, we’ve all been completely disrupted by managing the Covid-19 situation. I think once the Covid-19 situation stabilises, there is likely to be a renewed focus on cost reduction and deferrals.
Do you expect some larger changes to take place on the back of this crisis?
I think for sure there’s going to be some changes in our industry, and I’d have to assume the same would apply to other industries; this may well change the way we work forever. As an example, we used to do a fair amount of international air travel. We would have corporate visitors from London coming over to Indonesia, and we would also fly across to London. I’d probably be there three or four times a year for various meetings, and apart from the cost-efficiency standpoint, even just from a carbon emissions perspective we’ve now proved that a lot of these meetings and discussions can happen remotely via Zoom, Skype or whatever. We’ll be doing that differently for years to come and possibly forever, which is a good thing from an environmental perspective as well. That’s probably one positive.
I think maybe we’ll also see a change also in terms of people having flexible rotas. In the past, there was this perception, rightly or wrongly, that when someone said they were working from home, they were probably just having a “sneaky” day off. We’ve now seen that people can do a meaningful day’s work remotely. In fact, I have personally found that in certain aspects it’s almost more efficient because you don’t have some of the distractions you would have in the office. In other ways, it will make everyone more comfortable with flexible working conditions and maybe people will work from home more than they have done in the past.
It is going to become the new norm to have a lot more virtual meetings and to adopt electronic approvals, etc. We’ve now got electronic signature systems in place, which we didn’t have in the past. The governments are having to respond to that. The Indonesian government is also now using electronic approval processes. These are all things that we didn’t do three months ago. It’s quite amazing actually how responsive everyone has been.
The red tape is still there in certain areas, but there will clearly be some long-term benefits that come out of this. There’s always a silver lining as they say.