After the exit from Makassar and Rokan assets, Chevron Corp. is now also considering pulling out of the long-delayed, multibillion-dollar second phase Indonesian Deepwater Development (IDD-II) project in East Kalimantan.

The San Ramon, Calif.-based oil and gas major is contemplating to sell its holdings in IDD-II project to focus on better business opportunities. “The [IDD-II] project was not able to compete for capital in the company's global portfolio,” said Sonita Purnomo, manager of corporate communications at Chevron’s Indonesian subsidiary, Chevron Pacific Indonesia.

“We have received approval from [regulator] SKK Migas (Special Task Force for Upstream Oil and Gas Business Activities) to open IDD project data room in an effort to find a buyer,” the manager added.

Chevron’s Indonesian subsidiary holds 63% participating interest with operatorship in IDD-II project, while Eni SpA and Sinopec own the remaining.

The second phase IDD project covers development of Gendalo and Gehem gas fields in Ganal and Rapak concessions respectively, which sit near Bangka oil and gas field developed as part of the first phase (IDD-I).

Gendalo and Gehem fields, located in water depths of approximately 6,000 ft (1,828 m) in Makassar Strait, are estimated to hold potential gas reserves of more than 2 trillion cubic feet. 

SKK Migas deputy head Fatar Yani Abdurrahman confirmed that the operator had informed the possibility of changes in consortium structure for IDD-II project without providing the details. “IDD is looking for a partner. I don’t know [whether] Chevron will be out [of the project] or not, but the structure of the consortium will be changed,” he told the local media last week.

The sale consideration is in line with the Chevron’s global strategic plan that focuses on “high return and lower risk investments.”

Chevron indicated in its budget plan for 2020 that in view of a downward revision in longer-term commodity price outlook, it would “reduce funding to various projects and evaluate its strategic alternatives for these assets, including divestment.”

“We are positioning Chevron to win in any environment by ratably investing in the highest return, lowest risk projects in our portfolio. This will be the third consecutive year with organic capital spending held flat at $20 billion,” Chevron Chairman and CEO Michael Wirth said last month.

The IDD-II project, which the operator was pursuing its development till a few months back, has turned out to be less attractive because of the new regulatory policies introduced by Indonesia's nationalistic government-headed by Joko Widodo.

The changes in production sharing contract (PSC) from cost recovery to gross-split have exposed the cost-intensive deepwater projects like IDD-II to more risks in terms of project cost and internal rate of return.

Under the gross split-based PSC, gross production is shared between the state and contractor based on production splits without a cost recovery mechanism. The gross-split PSC provides 48% share in total gas output and 43% in oil to the operator/consortium, while the remaining 52% and 57% are for the state.

The operator had sought incentives, such as additional share in output, extension to the existing PSCs and investment credit for the project development, considering the greater associated risks.

SKK Migas deputy chief Julius Wiranto confirmed that Chevron sought an additional share of 10% over and above its due share under the PSC for the two concessions.

It asked for an extension of Rapak and Gamal PSCs by more than 10 years as the existing ones are to expire in 2027 and 2028. Although the existing PSCs have seven to eight years to go, the contract extension is crucial because it will provide a longer payback period to the developer.

The regulator, however, has agreed to provide the incentives to the operator in accordance with the prevailing rules and regulations in the country.

Indonesia’s regulatory policies for the oil and gas sector are seen as nationalistic favoring the state-run and local companies over the global ones. They have already forced the companies like Total SA to exit from the producing Mahakam asset in favor of Pertamina. Chevron pulled out of Makassar block last year and agreed to handover Rokan asset to Pertamina in 2021.

Exxon Mobil Corp., according to a report, is weighing an option to sell its 45% stake in Cepu Field in East Java, the largest oil-producing field in Indonesia, to focus on better business opportunities.

Industry analysts acknowledge that existing developers have almost lost interest in further exploration and development in Indonesia due to regulatory instability and an uncertain investment climate. Questions are raised on the issuance of a regulation (GR 1/2019) on deposit of export proceeds from the oil and gas producing assets in an Indonesian bank only.

Almost all major global companies have ignored the two bidding rounds launched by the Indonesian government last year.

“Gross-split PSC scheme is not suitable for Indonesia's upstream sector, where there are a large number of low-margin, high-cost fields and very capital-intensive projects located in deep water frontier areas. Incentives will play a significant role in the development of the industry,” said Tumbur Parlindungan, former president of Indonesian Petroleum Association.

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