Getting Unconventional with Oil

What's going on?

PT Pertamina Hulu Rokan plans to start drilling unconventional wells in the Rokan oil block in Riau.

What does this mean?

In 1884, a 20-year-old Dutchman by the name of AJ Zijklert discovered oil in North Sumatra. Confident that his new discovery has great commercial potential, he began drilling and formed "The Royal Dutch Company", who later became Royal Dutch Shell.

Thus began the story of the first commercial oil production in Indonesia.

In the 100 years since that fateful moment, more oil reserves were found and developed. Oil exploration evolved into a booming industry, bringing significant income to private companies and the Indonesian government. Production reached a high of 1.7 million barrels per day (bpd) in 1991. Indonesia became a member of OPEC in 1962. (OPEC is a group of top oil exporting countries such as Saudi Arabia, Iran, and Qatar, who supplies 37% of global oil production).

But then a worrying trend emerged.

Oil production declined from 1.7 million bpd in the mid-1990s to less than half that by 2018. Petroleum revenue contributed to 25% of state revenue in 2006. Ten years later, it fell to a mere 3%. Indonesia became a net oil importer in 2004 and left OPEC in 2009.

So what exactly happened here?

Two main issues:

• Maturity of oil fields: As oil fields mature and oil reserve is depleted, production naturally declines. For instance, the Rokan oil block in Riau began production in 1951. At its peak, Rokan produced 700,000 bpd or 46% of national oil output. Now that number is down to 160,000 bpd. Without intervention, production is expected to decline by 26% each year.

• Lack of new investment: Oil price reached a high of $120 per barrel in 2012 and stayed above $100 in 2014. However, between 2014-2016, price dropped to as low as $30 driven by oversupply and slowing economic growth in China. The low price created less incentive for companies to invest money in new oil projects, including in Indonesia. Add to that the nationalist energy policy adopted by the Jokowi administration. For example, in 2018 the government decided to transfer the operation of Rokan block to Pertamina during an auction. The block was previously operated by Chevron since 1951. Government policy also mandates that 25% of oil produced are reserved for the domestic market, where prices are lower. Thus, foreign energy companies are reluctant to invest in Indonesian oil projects.

Meanwhile, Indonesia's crude oil consumption is steadily rising. As our economy grows, we need more oil to generate electricity and fuel our vehicles. With domestic production declining, we increasingly rely on imports to fill the gap.

Surely, there is a long-term solution. Well, the government is trying a few strategies with the aim of boosting production to 1 million bpd by 2030 (A very ambitious target! The current rate is at 700,000 bpd)

First, reduce bureaucracy and introduce a more flexible profit-sharing arrangement to attract new investment. New investment is needed especially in aging oil fields like Rokan. To get more output out of old wells, new technology such as Enhanced Oil Recovery (EOR) is vital, so Pertamina will likely partner up with private companies with the necessary technology and experience.

Second, develop unconventional oil wells. What's the difference between conventional and unconventional wells? Good question. Best to answer with a picture:

Drilling into conventional sources is like sticking a straw in a jelly donut — the petroleum is trapped in a single formation that just flows out under pressure.

Drilling into unconventional sources like oil and gas shale is quite different, more like tiramisu — the petroleum is in many layers that have to be individually tapped using horizontal drilling and fracking methods to open up the rock.

So far, we have tapped only the jelly donuts, now Pertamina is looking into the tiramisu.

If proved commercially successful, this will go a long way in solving our energy demand. Indonesia is estimated to have 7.9 billion barrels in unconventional oil reserve which so far have not been extracted due to the cost and complexity of such projects.

Why should we care?

Pertamina's effort to increase domestic production is necessary to reduce our dependence on foreign oil. The current crisis in Europe serves as a warning on the importance of reliable energy supply. Russia supplied the EU with 40% of its natural gas imports. Its invasion of Ukraine led to import sanctions and supply tightening, causing European gas prices to rise by 130% since February.

Having access to cheap and reliable energy source will not only fuel economic growth, but also immunise the country from geopolitical shocks like the one we see in Russia today. The government will have room to reduce its fuel subsidies — and perhaps reallocate the funds to more productive uses like improving the national education system and healthcare.

One can hope.

Until next time...

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