Despite its sometimes mixed reputation, in part due to complex regulations, corruption woes and growing economic nationalism, Lion Energy chairman Russell Brimage told Energy News recently that Indonesia was a fantastic place to do business.

"If you understand how the system works you are virtually ensured success," he said.

Lion's team has a long history of working in the country, and the company itself has been an active participant since the 1980s, however in the past few years a series of events have put a new team in place at the junior, under the leadership of Brimage and managing director Kim Morrison.

They have big plans to take Lion to the next stage in evolution, by boosting its conventional assets, both in terms of production and exploration, and getting the company into a leading position in terms of the blue sky potential of Indonesia's Sumatran shale basins.

Morrison is an enthusiastic believer in the company's ability to pounce, with the former Shell employee having joined Lion via the merger with Asian-focused KRX Energy in 2013.

The new Lion brings in the unconventional focus and the under-explored South Block A permit, which is the medium to long-term upside offered by Lion's long-standing exposure to the Seram (Non-Bula) production sharing contract.

Oseil

As small as its interest is, which is dwarfed by partners CITIC (51%, Kufpec (30%) and Gulf Petroleum (16.5%), last year the 2.5% stake brought in a handy $2 million to cover overheads.

There are three parts to the Seram (Non-Bula) PSC: the existing Oseil oil field, the exciting Lofin oil and gas discovery, and an exploration upside that has barely been scratched.

Seram is producing around 75 barrels of oil per day for Lion (net), or some 25,000bbl per annum, and it has manageable costs, even with the $1 million Lion spent drilling the Lofin-2 well.

"We get good margins, operating costs are $US25-30/bbl, and the nature of the block is that there was a lot of money spent early on in the block development, they over-engineered it, so there is a large cost-recovery pool to recover, so about 94.5% of the revenue from that block is flowing directly to the JV," Morrison said.

"It is some of the most profitable oil you can get anywhere".

The oil is exported to Singapore, and there should be more of its soon with the JV midway through a 10-well development drilling program targeting total production of 4000-4500 bopd.

Lion has revised its projections for the 2015 calendar year to 2900bopd average, above the forecast of 2500bopd average used in the 2014 calendar year.

The rig used at Lofin is planned to join the program and the remaining five wells should be complete early in the new year.

Morrison says it is far better for Lion to own its fractional share of the project than not, given it provides a mix of revenue and credibility in dealing with the government and potential partners in Indonesia, and the company tried to punch above its weight around the joint venture table.

"We attend all the JV meetings, and we have a drilling expert on our advisory panel who was involved in planning the last well (Lofin-2), and while we have a small stake we do get listened to.

"We would like to expand our position there, and we think there is a huge amount of potential in an underexplored area."

The geology is complex, so picking the velocity and interpreting the seismic can be difficult, but when it is done correctly it can result in discoveries like the Oseil-2 western flank fault block.

"That's why we are able to drill all these new development wells and get our production up," he said.

"I think there is a whole series of these accumulations and untapped potential out there, and I think if we were the operator we might be a lot more aggressive than the current operator, but the JV works okay, and CITIC is getting after things, and we have our say as best we can."

The just completed Lofin-2 well, reportedly the deepest onshore well drilled in Indonesia, resulted in a new large discovery that the partners are just starting to think about how it can be commercialised, but it could easily boost revenues from the PSC dramatically.

The drilling has now defined the gas-water contact, and there is a significant gas column of 1300m in the Manusela Formation that flowed 15.7MMcfpd gas and 171bcpd.

The PSC expires in 2019 and the joint venture is in discussions on strategy for the extension or new PSC over the area.

Underexplored

Lion also has an interest in the underexplored South Block A, where there are number of interesting targets, two joint study areas which should be completed by year's end, and it is seeking two more unconventional blocks.

South Block A (35%) has some shallow oil potential, and some deeper overlooked gas-condensate potential, and Lion hoped to control the overlapping unconventional potential.

In the conventional chase it is a big area with a limited exploration density, however Medco has an adjacent discovery in Block A, Matang-1, reportedly around 100-400Bcf, potentially the largest discovery in the nation in 2013.

It has resulted in a reported $US2 billion, 13-year gas contract for the domestic gas market.

"We have prospects and leads that look similar," Morrison said.

The Exxons and Mobils of the world gave the wider area a shake in in the 1970s and 80s, but they followed large company strategies, making 10MMcfpd discoveries, then plugging the wells and walking away because they were not big gas discoveries sufficient to support the LNG plants.

They've left behind a lot of potential.

"For a smaller company, going into areas where bigger companies have been, is an excellent strategy," Morrison said.

Work has progressed during the quarter on well planning for the high impact Jerneh prospect, which is expected to cost just $US6.5 million, considerably less than US$10mil plus previously estimated.

Jemeh has P50 prospective resources of 223Bcf, and 5-6MMbbl of oil and condensate.

An even lower cost option is Amanah Timur-1 on the Paya Bili project.

Unconventionals

The unconventional upside is early stage, but is the equal of anything in the region, Morrison said.

"You have some of the richest source rocks in the region," he said.

"We have looked at all the Indonesian basins, and they stack up with any onshore basin in the region. The Central Sumatran Basin is a 13-14 Bbl province and the North Sumatran basin is 25 trillion cubic feet and 1.6BBl … and they rank right up there with major basins in the region.

"There is quite a lot going on in Indonesia with the unconventional terms, and they (the government) recognise that they need to have far better terms than the conventional PSCs, and they are close to finalising those terms," Morrison said.

Shale and tight potential has only been a focus since 2012, and Indonesia is keen to replicate the US experience.

Indonesia defines unconventional hydrocarbons as rocks requiring stimulation to flow.

Recognising the complexities and higher costs, the government is now trying to define how cost recovery and relinquishments will work given the different nature of the business.

Lion has initially launched its focus in areas that overlap with its own interests in South Block A or its partners, Bukit Energy and New Zealand Oil and Gas with two joint study areas and two applications.

"We don't underestimate the challenges of unconventionals. I think the early wins in the unconventional space are fields that are almost conventional, a little tighter, which need a bit of stimulation, and the pure shale plays will be longer term," Morrison said.

"We are looking at a number of tight plays in Indonesia that in Australia or the US would be considered almost conventional plays, but they will fall into these new guidelines, and will attract better terms, and that will attract the industry."

Lion is hoping to close deals on new leases this year for short-term conventional and longer-term unconventional projects, and it is looking for additional some near-term production assets which it is hoping to finalise some transactions this year.

"Right now, because of the nature of the industry, Indonesia is opportunity-rich, and because we are on the ground there, with our advisors and our owners, because Lion is essentially 60% Indonesian owned, we can generally present ourselves as an Indonesian company, so we are very much in the deal flow, specifically in Sumatra," Morrison explained.

OPEC

Resource-rich Indonesia, southeast Asia's largest economy, was an Organization of the Petroleum Exporting Countries member for almost 50 years, until it became a net oil importer in 2009 as domestic demand for liquids soared, production dropped and the government is keen to rejoin the cartel.

It has been forced to turn some of its LNG terminals into import terminals, but is working to turn its fortunes around. It has reinvigorated its regulatory body, and is seeking to boost production by enticing exploration.

It is understood some OPEC members have backed its application to have its suspension lifted.

The OPEC statute states that "any country with a substantial net export of crude petroleum" can become a full member, although it will accept associate members.

Ecuador has set a precedent for Indonesia, by suspending its membership in 1992 and rejoining in 2007.

Indonesian oil production has fallen from 1.6MMbopd in the 1990s to the point last year it was importing 689,000bopd just to meet domestic needs.