DRILLING

Cue cashes in on Indonesian potential: part 1

Mopping up after the majors has always been a favourite method for growing junior companies. With...

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By Brendan Egan

The potential of Indonesia has always been apparent. It is just that it has been so damn hard for juniors to effectively maximise the opportunities without losing the drill shirt off one's back. At this stage murmurs of agreement can be heard from burnt former shareholders of Matrix Oil.

The Asian eagerness to stitch up business partners, coupled with often suspect judicial and bureaucratic processes of the region also means a western company needs to instil into their local stakeholders a real sense of power and purpose behind their project.

It takes little to work out that an A$3.5 billion behemoth like Santos commands a tad more respect than the $18 million Cue.

Hence Bob Coppin and his team at Cue Energy have been more than happy for Santos to take the lead and provide the technical and corporate skills to bring into production Cue's 15% in the Oyong project in East Java.

The approach has worked for them in PNG, which BHP Billiton shareholders -- with painful memories of their costly exit from the disastrous Ok Tedi copper mine -- would suggest is also another high risk area.

Cue has been solidly banking around $4 million per year from their minor interest in the South East Gobe field and had lifted that last month by fine-tuning production at the oilfield.

Gobe oil produces gas when lifted to the surface, which needs to be re-injected for environmental reasons. The partners added more compressors with the capacity to inject 20 million more cubic feet of gas back down the reservoir, and have been able to increase oil production by 30% to 12,000 barrels of oil per day (bopd).

Coppin said Cue was now netting around 400bopd, and with the sales contract being unhedged, was making hay while the sun shone with the current high oil prices.

Santos’ project management has resulted in the sale of the entire gas reserves from the Oyong reservoir into an IPP (independent power producer) in East Java. A Heads of Agreement has been signed for the sale of the 90 billion cubic feet gas reserves, following an earlier Memorandum of Understanding (MOU). A gas sales contract is expected by the end of March which will formalise the 40-60 million cubic feet per day deal.

According to Santos’ preliminary development plan, the field south of the island of Madura will be drained via vertical wells at the crest of the structures to exploit the gas and horizontal oil wells targeting the lower oil column.

Two to three vertical gas wells will be drilled into the top of the gas reservoir, which was logged as having a 120m gas column.

There will also be two to three horizontal oil production wells drilled into the 38m oil leg beneath the gas cap. It is hoped this will yield five million barrels of oil, however, the partners are hopeful for more.

Both the gas and oil will be exported to shore via a multiphase pipeline with the oil being processed on a floating facility and barged away for sale. The gas will be reticulated to the power station.

Coppin said bankable independent consultant's figures on the reserves were expected soon.

The concern for an investor is whether the partners can repatriate their earnings from Indonesia – an issue Coppin and financial controller director Andrew Knox have clearly spent some time contemplating. Knox calculates the cash flows from Oyong should yield them around A$1 million per month.

At this stage the shareholders of the former Energy Equity can be seen nodding their heads in pained agreement.

"That's clearly an issue -- getting our money out of Indonesia. This is important to us because we plan to project finance our share of this -- to project finance as much as possible,” Coppin said.

“We will be getting irrevocable letters of credit in US dollars – not rupiah -- on as solid a bank as possible, but until the independent consultant's figures are in, it’s not worth finalising anything at this stage.”

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