Criterium Energy plc (TSX:CEQ) Chief Executive Officer Matthew Klukas caught up with DirectorsTalk to discuss why Indonesia is an attractive market for oil and gas and how the company’s gas projects are helping drive its next phase of growth.
Q1: Matthew, what makes Indonesia such an attractive opportunity for oil and gas?
A1: This is a great place to start, and it really sets the stage for our broader strategy as a company. Indonesia is a great place to invest in oil and gas. I’ll break it down into four main reasons.
The first, you’ve got consistent demand growth. This is growing population, income levels are rising, industry is growing. This results in really strong energy demand growth. Indonesia is projected to be a top 10 economy by 2030 and top 5 by 2050, all while maintaining its place as a top 5 in global population as well.
The second reason is around energy supply and energy security. Domestic production cannot keep up with demand. Indonesia used to be a member of OPEC, in fact, but has since become really a net importer of oil and what this means for both the oil and the gas side, there’s actually a lot of available infrastructure around as well. That’s going to play key into our strategy, where we’re looking to tap these kind of stranded fields into underutilised infrastructure. This also leads to premium pricing. Indonesia typically gets Brent, it’s set on a monthly Indonesian crude price, but that really aligns with Brent and in many cases, we get a premium to Brent as well. On the gas side, you see high domestic prices in the $6 to $8 per MMBtu, obviously competing with importing LNG, which the country has as well.
Thirdly, you’ve got supportive government. So, they’ve set targets to nearly double domestic production by 2030. They’re supporting operators like us to double our production; this is whether this is increasing existing production or bringing developments on as quickly as possible. It’s a very pro-oil and gas environment.
Finally, the fourth reason, and arguably the most important, is the people as well. We have a really young and energetic population in Indonesia and our workforce there. The majors have come and gone, and they’ve actually done a really good job of training a lot of the staff and we can now benefit from that as well. We’re also working with our team to recognise the opportunities in Indonesia but finding a way to take ideas that have been used in other basins, let’s say that’s here in North America, where I’m based, and applying them to the fields in Indonesia. So, we call it technology arbitrage, but really, in many cases, it’s just best practice arbitrage.
Our team at Criterium Energy, we’ve worked in Indonesia previously, predominantly with Talisman Energy and a few other major companies. However, entering into Criterium in 2022, we’ve now become the operator of two PSCs, the Tungkal PSC onshore in South Sumatra, where we own 100%, as well as the onshore West Salawati PSC, where we own 100%. We also have a 42.5% non-operated working interest in the Bulu PSC, which holds a sizeable material gas development.
Q2: The company has come through a period of capital constraints, really, but the story today looks very different. What’s changed and what’s been driving that shift?
A2: Transformation is a great way to describe Criterium right now, and really, what it comes down to is growing and balancing our production, or diversifying our production. To date, we’ve produced between 800 and 1,000 barrels a day of oil. We’ve maintained this production through low-cost workovers and at $55/$60 a barrel, that cash flow was able to cover all our operating costs for the company, as well as produce some leftover for development.
We’ve recognised the opportunity to produce gas in Indonesia, and this sells into fixed long-term take-or-pay contracts. As I mentioned, the domestic pipeline gas is about $6 to $8 per MMBtu and we turned our attention to many of the discovered gas fields we had on our acreage, specifically within the Tungkal PSC in South Sumatra.
Now, our initial focus is a field called the Southeast Mengoepeh Field, and this is a 21 Bcf gas field and in one year, we’ve taken this field, which was discovered back in 2001, and we’ve re-entered the existing well. We’ve confirmed deliverability, we’ve received government approval, and we’ve agreed to key terms on gas sales agreements and secured vendor financing for the pipeline to be built.
So, the result is, before the summer hits, we anticipate bringing online about 6 to 8 million cubic feet a day of gas. On a BOE basis, that is more than doubling our production, and we’ll only have spent about $2 million net to Criterium to achieve this. So, that’s really the key to this near-term transformation, is balancing and diversifying our production to gas. That’s also going to do a lot with our cash flow and being able to invest in further opportunities as well.
Q3: How central is gas to that transformation? What role do you see it playing in the next phase of growth?
A3: It’s very central. For us, Southeast Mengoepeh transforms the company in a couple of ways. One, this will generate very stable and sustainable cash flow from this project and that gives us the predictability in being able to invest further, whether that’s in further development or strengthening our balance sheet as well. Ideally, it’s going to do both.
The best part about the gas is we see this as a very repeatable process. Southeast Mengoepeh is the first of many dominoes to fall. Underpinning this next phase of development with the commercial contracts from Southeast Mengoepeh, specifically the gas sales agreement and any of the facility and transportation agreements, this allows us to now repeat this process and bring on a few other gas projects. So, this is really central to our growth story, is bringing on these further gas projects.
Southeast Mengoepeh is first. We anticipate bringing on North Mengoepeh, which is an incremental 5 Bcf. This is going to bring another 2 to 4 million cubic feet a day by the end of the year. We have Macan Gedang, which is next, it’s 13 Bcf. Kiara is another field. We’re really excited about this one, we’ve mapped it at about 26 Bcf right now. What makes us really excited about this, though, is it’s only about a kilometre or two away from a main pipeline as well. So, again, the theme here is you’re seeing low cost to bring on these gas fields and these gas developments. It’s made possible by access to this underutilised infrastructure.
Finally, I wouldn’t want to get through this interview without talking about Bulu and the Lengo field within that. This is a field we’ve owned since 2022. It’s more sizeable, it’s an offshore development, it’s 365 Bcf gross, but it holds the same characteristics that we see onshore in South Sumatra. It’s discovered, it’s been fully appraised, and there’s nearby available infrastructure, lowering the upfront capital costs with the right plan of development.
So, in summary, this year is really transformative for us. It’s underpinned by these low-cost gas developments, which can more than double existing production this year. And we’ve got a pipeline of opportunities coming up behind it that we can use the same repeatable process to bring these online. Again, this hasn’t even talked about our oil fields yet targeting secondary recovery, which we do see a lot of opportunity on. We can shed some more light on that in some of our further discussions.
