INTERVIEW: Star Energy concerned with uncertainty

In a recent interview with Petromindo.Com, Bret Mattes, the chief executive officer of Star Energy Group, underlines that the government needs to provide more certainty to investors in order to attract them in investing in Indonesia. The following are the excerpts of the interview given to Petromindo?s editor Benget Besalicto Tnb.

What projects are you doing now in Indonesia ?

In geothermal, we?ve got contract with PLN (state-owned electricity firm) to develop 400 MW geothermal power plants. But we?ll do it step by step. Currently, we?ve already operated two geothermal units in West Java: Wayang Windu I and Wayang Windu II which respectively have a generation capacity of 110 MW and 117 MW. Now our plan, which is well underway, is to develop another one with around 130 MW. We?ll start drilling for that expansion in the second half of this year. And the project should be on the stream early in 2013.

What about the other projects?

In the oil and gas, we have Kakap, which has been producing for many years. Now production from existing producing fields is declining because it?s already old. And therefore, it also needs higher maintenance. But the problem with old blocks developed by major companies is that they tend to focus on big prospect rather than smaller prospect. But I think smaller prospect can also be important. As soon as I arrived two and half years ago I asked for a study of the block. We found that there are a lot of potentials that we could develop. Now, it should be producing 5,000 barrels of oil per day, and 60 MMSCFD of gas. But our target this year is to produce 4,000 barrels of oil and about 56 MMSCFD of gas. (Kakap is located in Natuna Sea , 490 km northeast of Singapore and 1,250 km north of Jakarta . Since 2003, Star Energy has been the operator of the contract area which covers 2,000 square kilometers in two separate blocks. The PSC contains oil and gas fields which are operated from four platforms with six subsea tiebacks. The contract for Kakap has been extended by the Indonesian government until 2028.)

Then Banyumas block in Central Java. Historically, the area had not had a large amount of oil and gas, but it has significant potential. It?s been a long way to drill. We?ve drilled deep, but we haven?t yet reached our target as it is apparently much deeper than we expected. We also want to drill another well. But before doing that, we need to find a partner. Currently our interest there is 100 percent. (Star Energy signed a farm-in agreement in November 2004 to acquire a 50 percent working interest in the Banyumas PSC. The contract, which is currently in the exploration phase, was signed in 2001 and is valid for 30 years upon discovery of commercial oil or gas.)

Then we have Sebatik PSC in Tarakan Basin, which is close to the Malaysian border in East Kaliamantan . It is low risk but expensive to develop as infrastructure there are not supportive enough. But it looks very promising. We?ll start drilling there this year. (Star Energy owns 75 percent interest and is the operator of the block, consisting of 35 percent onshore and 65 percent offshore. It signed a 30 year production sharing contract (PSC) in October 2005, and commenced exploration in an area which had been almost untouched for more than a quarter of a century.)

The new one to our assets is the Sekayu PSC in South Sumatra which we signed in January 2007. This is also low risk and significantly potential. We?re drilling a well there, Cerah one. But there has been flooding over there that disturb the operation. We?re in a standby to continue the drilling. Previously, we?ve done a joint study with Shell in the block. As you know, Shell was seeking for CBM projects across the country. I?m not sure whether they still go ahead with that. It could be potential for CBM. But currently, we?ll focus on the conventional oil and gas.

What is your plan for the next five years?

The way we?re looking to grow the company in the first instance is that to grow through the existing assets, as we know how good they are, and how much do we need to invest.

For expansion, we?re seeking more assets that can go into commercial quickly or already started production. This year we?ve planned to get one. We haven?t yet come to pursuing negotiations with certain companies. But we?re scanning for potentials.

So you won?t be interested in those still in exploration phase or those scheduled to be offered by the government soon?

Yes, definitely not. Perhaps, later in the future as we grow our cash flow, we?ll have high risk explorations in our portfolio. But certainly not now.

That?s in oil and gas. What about in geothermal?

As you know we?ve got contract from PLN to develop about 400 MW geothermal power plants in Wayang Windu. We?ve operated two units with total capacity of 227 MW, and currently in the process of exploring the third units with 130 MW that is hopefully in operation in 2013. After that we?ll be developing another unit.

What is the ultimate capacity of Wayang Windu?

It could be more than 400 MW. We?re not sure yet. We?ll know for sure after we?ve completed all drilling explorations. We could find the steam potential bigger than what we expected. It could be 400, 500, or 600 MW. But currently, we know for sure that it will be sufficient to allow us to develop at least 400 MW from the site.

Any plan to get other geothermal projects?

We?ve got another geothermal projects in Jailolo, Halmahera , Maluku. We?re now on a drilling exploration there. We?re seeking for a potential of 60 or 70 MW. Very likely the electricity from the site will go to mining industries that will be in operation there. But the place is very beautiful. So it will be very potential for tourism as well. We?ve received some fund from the US recently to develop it.

How much you allocate for your capital spending this year?

Let me check?.because I don?t remember?

In terms of policy, cost recovery, environmental regulations, taxation, how do you see oil and gas investments now compared with three or four years ago?

I think, it?s concerned with uncertainty. I?ve sit in forums a lot with foreign investors in Indonesia. They?re very disturbed with the policy. I can understand that. For them to make a decision, they need a certainty. The important thing is that for the policy to have a certainty. You may have difficult taxation regime, but as long as you know what it is then you can make a decision. So they need a certainty on the cost recovery, environmental law.

Are you going to be affected by the new environmental law?

No, we won?t be affected seriously. It just means we have to be more prudent and to put more efforts on complying with the regulations.

In terms of parameters they set, is it reasonable?

I think it?s hard, but it is manageable. But Indonesia is not unique on this. It happens in other countries as well. I think what attract everybody?s attention is that the new law make managers, directors annoying. That sounds very scary. Everything against it could be considered as crimes. So, again it?s concerned with uncertainty. When the environmental law was introduced, there was still ambiguity in it. We?re not sure how it should be applied to the oil and gas operators. So I think the government needs to put more clarity on it. But perhaps that?s normal as the government is going to issue 22 implementing regulations on the law.

Back to geothermal, what is your selling price to PLN?

In Jailolo it?s 17 cents per KWH. But there PLN will be small buyer. I don?t think it will buy all of our electricity as local demand there is very low. If PLN develops the transmission there that will be fine. But I think they are still preoccupied with projects in other areas. They need to increase electricity supply. So, we?ll be happy to sell the excess to others. Based on the new law, we have the right to sell direct to others if PLN does not buy all. But PLN has always been a good customer. We have a good relationship with them.

In terms of cost, in Wayang Windu further development will cost us U$$2.5 million for every additional megawatt. In Jailolo that could be $3 million or more. We?re working through it right now.

What about carbon trading? Have you pursued possibilities to get it in your projects?

For Wayang Windu II, which came on stream last year, we?ve applied to the UN for recognition. We can sell carbon emission reduction (CER) from the project. It is a recognition on the amount of carbon you displaced with the project. You need the right documentations to show them to the UN. Fortunately, we can do that in Wayang Windu II, but we can?t do that in Wayang Windu I. We already submitted the documentation in the middle of last year. We got some questions after that and we have to redo. We resubmitted it again at the end of last year. The carbon reduction from Wayang Windu II is estimated about 50,000 tons per month or 600,000 tons per year. That could earn, roughly, US$1 million per month. Probably less than that, depending on the market prices. The price could be around US$20 per ton and in secondary market $6 per ton. But the problem is that it is complicated, slow process and time consuming. A lot of projects failed. Other companies like Chevron in Darajat also experienced the same. It?s been more than two years. I?m not sure whether they?ve already got it. I also saw such complicated process when I worked with BHP, when I ran gas system for them. It has a group that tracks the carbon trading.

Actually there are two mechanisms. One is CDM, clean development mechanism, which is applied to economies like Indonesia. The other is joint implementation, which is applied to economies like Japan. But basically the outcome is the same. Early on, the UN made approvals very quickly, about two months. Then there is controversy within the UN on the process and approvals, assuming all are okay, were made in more than a year. We, as we?ve completed the documentation, we expect to get an answer soon this year. But we?re not sure when we?ll get it.

Is financing for the Wayang Windu III development already concluded?

Yes and no. When we did the Unit I we financed it through project financing. But project financing is restrictive. For example, almost every cash that you generated (is) swept by the bank. We need more flexibility. About two months ago, we issued high yield bond of US$350 million in the US market. It?s very successful. The market is very interested in geothermal project. About $200 million of the bond proceeds will be used to restructure the existing there. And the rest for developing the Unit III. That will be enough for drilling, and other initial works. And for construction, which will be next year, we?ll need, perhaps, another $150 million. Then, perhaps we?ll likely raise more funds through an IPO, maybe in Singapore , Hong Kong or in other markets. But we don?t know how much we?ll raise through the IPO, because until now we don?t know yet what to float, whether the energy company or the geothermal company. Different from Wayang Windu II, the development of Wayang Windu III will be more expensive. Roughly, we?ll need around $2.5 million for every one Megawatt development of Unit III.

Any plan to get other geothermal projects?

Yes we have plans. But nothing concrete yet. We?ll focus to get them in Java rather than in other places. West Java and East Java are particularly, more potential. If it is in Java, we?ll prefer it the same capacity with Wayang Windu. But if we see better opportunities outside Java then we?ll do. Probably in Sumatra is more potential.

What about Pertamina?s assets, because they have the best prospect in the country?

We?re interested. But we haven?t done it yet.

Considering that 60 percent of electricity under the Crash Program II will be derived from geothermal, what do you think should be improved to increase investments?

I think the biggest barrier to attracting investments is that there is no certainty, especially on tariff. Although we already won a bidding process with certain price, but still we have to renegotiate that with PLN. They have their own rule. We?ll only get a PPA after we completed feasibility study, that means after spending millions of dollars. I think investors want a certainty around the PPA, on what would be the outcome of tariff negotiations. PLN only wants to have the PPA after feasibility study, and there is no guarantee that they?re going to buy it. I think the PPA should be made before the feasibility study that costs millions of dollars. I think the best way to do it is by making it transparent. Electricity is such an important thing to this country. The country needs developers to come along. And developers need the market, PLN as buyer. We negotiate transparently how much is the tariff, and we know the potential return we can inform to shareholders. The tariff could be decided at whatever. But then we can calculate the economics of the project. We cannot commit to the economics of a project, if we don?t know the economics of the project. But things are moving. Investors might find it frustrating. But now we?re happy with new progress already made.

What do you think about the idea to insure the exploration risk in geothermal?

To be honest, I don?t really know what it means. I?m short of from the old school of oil and gas background. I think the issue with the geothermal investors is that they?re facing oil and gas exploration type of risk. Highly regulated market and regulated tariff.

But I don?t know how to insure it, other than by rewarding people for successful, proper PPA and reasonable income to asses. Compare with oil and gas, geothermal is easier. Oil and gas risk is bigger than geothermal. Geothermal is relatively low risk. (end)