Mahakam Signifies Indonesia’s Indecision on Upstream Investments

In operation since 1966, the Mahakam gas block in Indonesia has been an important cornerstone of the country's natural gas production, feeding a significant portion of LNG produced at the Bontang plant. As of 1 January 2018, operatorship of the block transfers to state oil firm Pertamina, taking over from Total E&P Indonesie which has managed the prolific block since 1968. As Pertamina prepares a US$1.8 billion plan to operate and perhaps boost production, the change of ownership is emblematic of the problems that Indonesia faces in revitalising its upstream industry.

The switch need not have happened. Total, with its Japanese partner Inpex, has repeatedly asked for a contract extension over the past five years. These fell on deaf ears during the presidency of Susilo Bambang Yudhoyono, and even under Joko Widodo, Total's proposed plan to extend its contract for five years beyond 2017 was met with indecision on the Indonesian end. Pertamina's Mahakam takeover is not a product of agreement, but out of legal necessity as the PSC ended. Even as Pertamina asserts that it could manage Mahakam on its own, it has left the door open to have Total and Inpex (or other new investors) to return under a new PSC. With Pertamina now absorbing most of Total's workforce at the block, there is still no directive from the government on moving forward with plans that could award Total and Inpex 39%, 30% or no share at all in Mahakam.

That sort of indecision bodes badly for Indonesia's efforts to boost its upstream production. With oil and natural gas output in chronic decline, and Pertamina unable to hold sway on its own, Indonesia needs foreign investment to stimulate growth. The government has made much show of new fiscal and regulatory incentives designed to attract international partners – the UAE's Mubadala Petroleum is reportedly interest in taking a Mahakam stake – but the proof is in the actual delivery of that. And the Mahakam debacle does not reflect well on Indonesia's ability to manage, maintain and magnify its upstream sector.

The Mahakam Block at a glance

Seven main fields – Handil, Bekapai, Tambora, Nubi, Tunu, Sisi, Peciko
Peak crude oil production: 197,000 b/d
Current crude oil production (2017 estimate): 52,000 b/d
Pertamina planned crude oil production (2018): 42,000 b/d
Peak natural gas production: 1.7 bcf/d
Current natural gas production: 1.36 bcf/d
Pertamina planned natural gas production (2018): 916 mmcf/d
Accounts for 82% of Bontang LNG supply
Estimated annual decline rate: 50-51%

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