Commercial Challenges in

CBM Development

Mohd. Radzif Mohamed VICO CBM Commercial Manager

Indo CBM Conference

25th March 2014

VICO Overview

• VICO has operated in Kalimantan since early 1970

• Initial driving force behind LNG development

• Delivered over 12 TCF of gas to domestic and

export markets

• VICO operates both the Conventional Sanga

Sanga PSC & the Sanga Sanga CBM PSC

• VICO is a 50:50 JV between BP and ENI

operating 9 rigs this year

• Active CBM explorer in Indonesia and first to

produce and sell CBM gas to LNG and

for domestic power generation

CBM to Electricity

VICO is now supplying CBM gas to PLN.

The electricity from CBM gas powers more than 1,000 homes in East

Kalimantan.

This is the first CBM to Electricity Project in Indonesia.

Indonesia CBM Potential

• CBM potential in Indonesia is significant with GOI estimate of 450 TCF

• Majority of resource potential is in Kalimantan & Sumatra

• Commerciality and produceability yet to be proven

• GOI target of 500 mmscfd by 2015 unlikely to be achieved

Pro

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cti

on

& Im

po

rt (

MT

OE

)

Indonesia Needs CBM

• Strong GDP growth is driving increased energy demand

• Domestic conventional production is falling

• Without CBM Indonesia will become a net importer of gas

2004 began

Oil Imports

2022 potentially

begin Gas Imports

Source: IEA, WoodMackenzie Energy Markets Service Source: APEC Energy Demand and Supply Outlook 5th Edition (2013)

Historical Data: World Energy Statistics 2011 © OECD/IEA 2011

Indonesian Net Production and Imports

Recent Supply/Demand News

• Potentially large footprint • Low pressure requires many low gas

rates wells • Expensive well completion costs • CBM proven reserves largely follow

development

•Fiscal incentives •Regulations •POD & Reserves •Land Access •Financial capability •Large upfront capital with

long, slow payback period •Experience •Technical Expertise •Land Access (overlapping

issues) •Social issues •Access to technologies,

service companies, rigs •Open access pipeline •Attractive Gas Price &

flexible gas markets `

Commercial Requirement Technical Requirement

Appraisal and pilot drilling is continuous throughout the life of the project;

• Continuous drilling is required to determine the areas for development, achieve

production target and identify areas for relinquishment

• Also required to continually progress from resource to reserves and from 3P to

1P

• CBM Projects have to “Produce to Prove”

Reserve build up is unpredictable

• Unconventional projects needs a greater number of wells to determine

reserves.

• Adjacent well performance can vary wildly

Require PSC extension

• Longer economic payback period, closer to PSC expiry

GSA process

• Need to deal with uncertainty of reserves and the requirement to have booked

reserves prior to signing GSA

• Not efficient to have separate gas allocation/sellers appointment

agreement/GSAs with every phase of POD

Paradigm shift on POD

• “Ring fenced” approach will not be economic. – needs “Block Basis”

• “fit for purpose” POD for marginal business

CBM Commercial Considerations

Price Incentives

The current fiscal regime in Indonesia and the high initial

cost of CBM development will require a price paid for CBM

close to current Asian LNG prices.

– One of the reasons for slow development of CBM is that CBM

producers are not sure that they will be allowed to access the

international markets and be faced with significantly lower

domestic pricing, which would make their projects uneconomic.

– If the CBM gas is to be able to go into the domestic market,

initially, the Government needs to support prices that are similar to

export pricing (i.e. 13 to 15% slope).

– In the longer term, as happened in the US, as the Industry learns

about CBM development and infrastructure is built (including the

important service company scale) the development costs will fall.

But the current system means that pioneers, risk not receiving

such benefits of future reductions in development costs.

Keeping CBM Value in Indonesia

• With a CBM gas price of $13.7/MMbtu…

Only $1.8/MMbtu leaves Indonesia via Contractors vs. $20/MMbtu for Imported

MFO and $16/MMbtu for Imported LNG

Effective cost of gas to Indonesia is $8.4/MMbtu, $6.7/MMbtu project costs and

$1.8/MMbtu Contractor Take

Majority of $6.7/MMbtu Project Costs are within Indonesia creating additional

value through multiplier effect

• Domestic CBM at $13.7/MMbtu saves Indonesia $16bn vs. Imported LNG and

$27bn vs. Imported MFO for a 1.85 TCF project

20.0

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5.3

6.7

1.80

5

10

15

20

Imported MFO Imported LNG CBM Gas Price GoI Take Project Costs Contractor

Take

Fu

el C

os

t (U

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/MM

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)

Effective Gas Price $8.4/MMbtu

Government Support

Fiscal Policies to Promote CBM Development

• Need competitive gas price and flexible market to develop CBM - gas price similar

to Asian LNG prices

• Frontier business, need incentives for risks, appropriate and fit for purpose

technology.

• Investors need to be assured their investment will get sufficient return

Regulations

• Simple process and reduced number of permits, especially for land access

• Flexibility in procurement and budgeting

• Access to technologies, service companies, rigs

• Suitable POD for CBM,i.e. “Block Basis”

• Conducive tax regime

Others

• More flexible GSA for not only 1P but 2P and 3P reserves

• Encourage Open Access to pipelines

• Build infrastructure and important services to reduce the development costs

THANK YOU