Mon. Jun 17th, 2024

Indonesia Hopes Mubadala Gas Discovery off Sumatra Draws Investment

Indonesia is hoping that a giant natural gas discovery off North Sumatra province will boost investment into its energy sector. But the path toward commercialization may face challenges, including those emerging from the presidential election next year, analysts said.

Mubadala Energy, an Abu Dhabi-based oil and gas company, announced on Tuesday that it has found the gas deposit of potentially over 6 trillion cubic feet in Layaran-1, its first deepwater well in the Andaman Sea, about 100 kilometers off North Sumatra.

Mubadala CEO Mansoor Mohamed Al Hamed said the finding fits the company’s plans to expand its portfolio of gas, often seen as a transition fuel toward clean energy.

“This development offers material commercial opportunities and adds momentum to our strategic growth story,” he said in a news release.

Indonesian regulator SKK Migas said the Layaran discovery follows another gas find by Italian energy major Eni in its Geng North-1 exploration well off the coast of East Kalimantan province on Borneo island. Eni in October said preliminary estimates indicated a potential for 5 trillion cubic feet of gas.

“The upstream oil and gas industry is recording a new history. Indonesia for the first time has obtained two … giant discoveries within the same year,” said Dwi Soetjipto, head of SKK Migas, in a news release on Tuesday.

“We’re optimistic this will put Indonesia back in international oil companies’ investment portfolios,” Soetjipto said. “The successive giant discoveries could hopefully be a game changer to the national upstream oil and gas industry.”

Global energy consultancy Wood Mackenzie (WoodMac) said in a note on Wednesday that the Layaran discovery solidifies the offshore North Sumatra basin’s position as “one of Asia Pacific’s most promising emerging deepwater hotspots.”

WoodMac has estimated an initial 3.3 trillion cubic feet of recoverable resources in the deposit, equivalent to over 580 million barrels of oil, which would make Layaran “the second-largest deepwater discovery globally in 2023.” It added that future appraisal success could significantly increase the estimate.

Andrew Harwood, director of corporate and upstream research at WoodMac, said the discovery gives Mubadala a significant opportunity for growth in Indonesia, adding that the company’s Southeast Asia portfolio is now “poised for expansion with high equity interests across the offshore North Sumatra basin.”

But he cautioned that despite the finding being “globally significant,” commercialization “remains difficult” due to the scale of developing it, while local demand within the proximity of the site alone is not enough to draw sufficient investment.

“Mubadala will need to explore new markets potentially through improved connectivity with the rest of Sumatra [island] or by restarting exports from the mothballed Arun LNG plant” in Aceh province, on the northern tip of Sumatra, he wrote. Pipelines to Singapore, Malaysia or Thailand could also expand Layaran’s potential sales market.

Munish Kumar, senior upstream analyst at WoodMac, said the discovery would test Indonesia’s efforts to streamline processes in its oil and gas sector and make the investment environment more favorable.

Layers of bureaucracy, occasional resource nationalism and policy flip-flops have for many years deterred major investments into Indonesia’s oil and gas sector. Harwood told Nikkei Asia in a previous interview that it could take between 10–20 years for a major oil and gas project in Indonesia to move from discovery to initial production.

The lack of investment is aggravated by pressures on oil and gas majors to decarbonize and therefore reassess their portfolios. That has led to steady declines in Indonesia’s oil and gas production despite continually rising domestic consumption, harming the energy security of Southeast Asia’s largest economy.

Kumar added that the conclusion of President Joko Widodo’s final term next October after 10 years in office “adds an element of uncertainty.”

Indonesia will hold its presidential election on February 14 to choose the successor to Widodo, who is constitutionally barred from seeking a third term.

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