U.S. oil giant, ExxonMobil Corporation (XOM) joined hands with PT Pertamina to develop the offshore East Natuna natural gas block in Indonesia. The deal is reflective of the companies’ effort to extract natural gas from this massive block located in the South China Sea.
The agreement did not specify any revenue sharing, but the Indonesian government ensured that gas from the block would be used to meet domestic demand. The selling price of the gas would follow international market trends to include investors’ interests in generating profits.
Jakarta-based Pertamina was seeking a few allies and expects to sign more such deals to develop the Natuna block. Other potential large partners selected by Pertamina include Petronas, Statoil ASA (STO), Chevron Corp (CVX), Royal Dutch Shell plc (RDS.A), Total SA (TOT), Eni SpA (E) and China National Petroleum Corporation. Importantly, Indonesia expects to begin gas production from Natuna in 2018.
Discovered in 1973, the East Natuna block (previously known as the Natuna D Alpha block) is estimated to have a reserve potential of 500 million barrels of oil and 222 trillion cubic feet (tcf) of gas. Of the total estimated gas deposits, only 46 tcf of natural gas is extractable owing to the area’s high carbon dioxide content. The extractable gas will serve approximately 41% of the country’s reserves of 112.5 trillion cubic feet as of the end of 2009.
East Natuna has been little explored over the years, mainly due to political disruption. ExxonMobil has been awarded a contract to develop the block in 1980. Later in 2008, the Indonesian government authorized Pertamina to explore the block following the government failed to reach an agreement with ExxonMobil on the revenue-sharing aspect.
Natural gas is gaining importance as an alternative energy all over the world. Natuna has the largest gas reserves in Asia, but its high carbon content requires complex and sophisticated technology to extract the fuel. Given ExxonMobil’s large, established exploration and production operations in all the major hydrocarbon producing regions worldwide, we believe the company is well equipped to accelerate the development process at Natuna.
However, access to new energy resources is becoming more difficult and ExxonMobil, like most of its peers, is facing headwinds to replace its reserve. Our long-term Neutral recommendation on the stock indicates that it would perform in line with the market.
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