Strong engagement in Indonesia

How does the new gross-split mechanism compare to the previous cost recovery?
I firmly believe that the combined capabilities of the E&P operators and the leading service companies have the potential to realise the required performance upside for the industry. The PSC with cost recovery has resulted in a procurement-driven approach. All aspects of project scope selection and technical design for new hydrocarbon developments are done by the operators’ technical teams. The work scope is then fragmented into a myriad of small parts and subsequently put out for bid by the procurement organisation, seeking the lowest price for each element and expecting that this will bring both the lowest project cost and the highest project value. These procurement-driven relationships (as mandated by the governing law) are continuously pushing technology companies to be tendering companies as we spend more time serving the procurement process than engaging our customers in value-driven conversations to reduce the total project cost and improve the project economics. The lack of flexibility in PSCs with cost recovery is the main obstacle to create the needed performance progress in Indonesia through collaborative model between operators and service companies.
The PSC with gross split was introduced by the government in the spirit of introducing change for the better by giving flexibility on selecting the product and service providers and moving away from the procurement-driven (lowest qualified to win) environment. It enables collaboration and commercial alignment with the operators where value and rewards are measured from the reduction of the total system cost and on improving the project economics. From the Schlumberger side, we are ready to engage on a completely different level and we are well advanced in evolving our company to excel in such a new industry environment.
The mechanism built in the PSC with gross split aligns with the spirit of the PSC, which is to develop the industry by bringing investments and expertise and enabling national capacity building to achieve the national economic agenda, which is social justice for all Indonesians.
Now we have the flexibility to offer our products and services where the merit is measured based on the reduction in cost per barrel and not solely based on a unit price.

How does the new model work in practice?
Let’s say an operator needs to drill 10 wells to achieve the production target. Under the PSC with cost recovery (procurement driven), the operator normally end up with over 15 different service providers in the project, so bringing operational synergy is already a challenge and time consuming. The required conversations among 15 different service providers around improving the project economics – such as by drilling fewer wells to deliver the production target, drilling faster to beat the AFE [authority for expenditure] or delivering higher reservoir contact to achieve higher production per well – will rarely happen as pursuing integrations with 15 different service providers with different technologies is already defined by the high barriers. Nearly all conversations under this situation are around operational excellence to avoid non-productive time instead of how to improve the overall project economics.
Enhanced oil recovery is a typical project that require much more interactions and flexibility between the operator and service companies; even much more than well construction-driven projects. Successful EOR projects around the world always carry two main aspects: high-level commitment from the government and operators, and flexibility on procurement of products and services to accelerate from lab tests to field executions. Without a high degree of flexibility, accelerating EOR projects in Indonesia will continue to be a challenge. Schlumberger’s EOR technical director, Omer Gurpinar, visited Indonesia recently and he was impressed with the EOR potentials in the country. His question was how to get the flexibility to accelerate EOR in Indonesia, which is still a question that I cannot answer.

What should be a priority for the upstream sector now?
The quadrupling of global E&P investments over the preceding 10 years has only yielded a 15% increase in global oil production. There is a need for the industry to lower the total unit costs and improve recovery. It is a priority and a new reality. Exploitation in Indonesia has been getting over 90% of the upstream budget, and from my discussions with the technical community the main challenge will remain defining the right reservoir models based on very good understanding of sub-surface rock and fluids. It is important to take a pause to revisit the field development plan, while continuing to push for higher efficiency in workover activity. If I look into the recent data, investment in 2018 will increase gas production, however the production outlook for oil will continue to be depressed as the natural declines are also accelerating. The country needs oil production from new projects. Estimated spending in exploration is a serious concern and soon will impact the quantity of the working areas and thus production. It takes time from exploration to the first oil and we need to urgently reverse this trend.

How can the industry re-energise and re-attract investment into the country?
That has been the key topic at the last two Indonesian Petroleum Association [IPA] convexes and I believe the IPA is the best entity to answer this question. From the service industry perspective, our main challenge is the low activity as the result of low commodity prices, PSCs entering late life, and very low exploration activity. Better pricing and terms and conditions are required for us to continue in the current environment. Indonesia has great potential and we are looking forward for improvements in 2018.

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