Eni On A Roll In Indonesia

About: ENI S.p.A. (E)
by: Callum Turcan

Eni S.p.A. played a key role in bolstering Indonesia's gas production at a time when the country was turning to foreign supplies of LNG.

Going over Indonesia's natural gas sector.

Covering Eni's successes in the country.

Commercializing oil & gas discoveries is the ultimate goal of the upstream industry, and that's just what Eni is doing.

The Italian oil & gas major Eni S.p.A. (NYSE:E) has been operating in Indonesia since the 1960s, and is a key player in the Southeast Asian nation's natural gas sector. By bringing two offshore natural gas fields online ahead of schedule, Eni has helped shore up Indonesia's gas supplies at a time when the nation was considering significantly ramping up its LNG imports to meet domestic demand. Let's dig in.


Indonesia's annual GDP growth averaged 5.3% from 2000 to 2018, which is part of the reason why the nation's natural gas demand has grown from 3.2 Bcf/d in 2000 to 3.8 Bcf/d in 2017. Wood Mackenzie sees Indonesia's natural gas consumption hitting 5.3 Bcf/d by 2035.

Readers should note that Indonesia's natural gas network has some idiosyncratic quirks to it that are worth keeping in mind. While certain regions in Indonesia, namely the producing basins, have established natural gas pipeline networks (gathering, distribution, transportation), plenty of other regions do not. In order to ship domestic gas supplies across the 14,000 islands that make up Indonesia, the nation utilizes liquefied natural gas technology.

This is different than what is seen at America's natural gas industry, which aside from the occasional delivery of LNG to the East Coast, relies heavily on long-haul pipelines to connect producing basins to domestic buyers. It is much cheaper to route natural gas by pipeline than to go through the arduous process of liquefying, re-gasifying, and then piping those supplies to end buyers (usually).

Indonesia sources the vast majority of its LNG supplies from the four LNG export terminals currently operating in Indonesia. Coincidentally, four existing LNG import terminals enable parts of Indonesia with no nearby sources of gas production to gain access to domestic energy supplies. Unified energy distribution systems are hard to come by due to the logistical nightmare of such a task. A new floating LNG import terminal is being developed at Bantaeng, South Sulawesi, Indonesia.

Due to outperformance at Eni's Jangkrik development, Indonesian government officials expect that the country won't need to turn to significant amounts of foreign LNG imports to meet domestic demand (and its LNG export obligations) until at least 2020. This is why Pertamina, Indonesia's state-run energy company, is actively looking for ways to sell/trade/swap the LNG supplies it has secured from America and elsewhere under long-term contracts (what happens in this situation is Pertamina simply resells those volumes on the spot market or enters into agreements to effectively trade those volumes with third-parties).

How Eni fits in

Eni owns 55% of the Jangkrik venture, and acts as the operator of the Muara Bakau Block under a production sharing contract that covers the Jangkrik and Jangkrik North-East gas fields. The firm discovered gas at the offshore Jangkrik field through an exploration well drilled in 2009, which was followed up by an appraisal well in 2010. Another exploration well discovered the offshore Jangkrik North-East field in 2011. Combined, both fields house 1.3 trillion cubic feet of recoverable natural gas resources.

Located in the Kutei Basin, gas production from these fields is processed by the Jangkrik Floating Production Unit (which appears to be able to handle both natural gas and condensate volumes). From there, natural gas travels along a 48-mile pipeline to an onshore receiving facility, both of which Eni built. After reaching the onshore facility, natural gas is carried by the East Kalimantan Transportation System to the Badak LNG export terminal in Bontang, East Kalimantan, Indonesia. Due to higher gas delivery volumes to the Badak LNG terminal, Indonesia was able to better meet domestic demand while continuing to fulfill its export obligations. First-gas was reached at the Jangkrik development on May 15, 2017.

Readers should note that the Badak LNG facility has eight LNG trains at the site, making this quite a large LNG export hub. However, only four are still operating. One of the operating LNG trains was recently upgraded to handle lean gas supplies. The reason for this upgrade is that the Jangkrik development is producing lean gas, which produces a larger amount of LNG than wet gas (which includes production streams with NGLs). This enables the Badak LNG facility to process wet gas (from the Mahakam Block) and lean gas (from the Jangkrik Development) production streams separately, which is more efficient. Pertamina is the key shareholder of Badak LNG.

Originally, the Jangkrik development was expected to have a peak gas production capacity of 0.45 Bcf/d gross. That peak production rate has since been revised upwards to 0.62 Bcf/d due to operational outperformance and other factors. Eni originally commented that at 0.45 Bcf/d, this project would add 83,000 BOE/d gross to its production base. Considering the project is producing 38% more gas than expected, that is now closer to 115,000 BOE/d gross (using Eni's conversion ratio). Note that Eni appears to be using a 5.4 Mcf:1 BOE conversion ratio (instead of the conventional 6 Mcf:1 BOE).

To keep the momentum going, Eni is moving forward with developing the offshore Merakes gas field. Located 21 miles to the southwest of the Jangkrik FPU, Eni plans to utilize existing infrastructure in the region to reduce development costs. Two wells, one exploration well in 2014 and an appraisal well in 2017, indicate that the Merakes field houses 2 Tcf of recoverable lean gas resources. Eni is the operator of the East Sepinggan production sharing contract which covers the field and owns 85% of the venture, with Pertamina owning the remaining interest.

Eni envisions drilling six wells at the Merakes field and tying production from those wells back to the Jangkrik FPU through subsea pipelines. Natural gas production is expected to begin in 2021. Initially, the venture will produce 0.16 Bcf/d of natural gas, rising to 0.39 Bcf/d gross at its peak. Using the 5.4 Mcf:BOE conversion rate, that is equal to 72,000 BOE/d gross. These gas supplies will run from the Jangkrik FPU to the onshore facility and ultimately to the Badak LNG plant. As Eni has a large economic interest in both upstream developments, the company has plenty to gain.

Final thoughts

Indonesia has an enormous amount of existing LNG export capacity, strong domestic gas demand that continues to climb higher (a new LNG import terminal will help out on this front), and tons of economical natural gas resources worth extracting. Eni S.p.A. has a long history of operating in the country and has shown itself to be a very capable upstream operator. Turning exploration successes into commercial cash flow generating properties is the ultimate goal of the upstream industry, and that is just what Eni is doing in Indonesia.

Eni S.p.A. is right to keep the momentum going, as favorable macro factors combined with solid operational execution should enable the Italian energy giant to earn nice returns on its Indonesian investments. Thanks for reading.

Author's note: Some of the companies mentioned above don't trade on a major U.S. stock exchange, which come with their own sets of risks and rewards. Always do your own due diligence before investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.