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ASX: QPN) will benefit from an Indonesia Government decision to build a 90 trillion rupiah (A$9.5 billion) crude oil refinery in South Sumatra, where it is currently planning to drill its first exploration well.

Work is currently being carried out to confirm the suitability of the location and construction of the refinery is expected to start in 2013 with completion and start-up estimated in 2017.

The news comes as Quest prepares to drill its first exploration well in the Ranau production sharing contract (PSC).

The location of this initial well has been finalised and the drill rig and materials are now being sourced.

Quest said the decision demonstrated the significant increase in domestic demand for fuels and comes at a time when it is expanding its activity in the area.

It also marks a positive development for the South Sumatran oil industry, which over the past 12 months has seen multiple wells with commercial oil and/or gas shows.

This includes NuEnergy Gas’ recent drilling of two successful coal seam gas wells at the Muara Enim PSC about 100 kilometres north of Quest’s Ranau PSC as well as Pertamina’s Lavatera-1 gas condensate discovery that it made in February in the Pagardewa area about 50 kilometres to the north.

The NuEnergy wells supported the gas-in-place estimates of 7.25 billion cubic feet per square kilometre at Muara Enim, a result that Quest said improved the prospectivity of Ranau.

Meanwhile, the Pertamina find is evidence that Quest’s belief that large scale hydrocarbon discoveries in the greater South Sumatran basin are both likely in areas of limited exploration and can be quickly commercialised due to existing infrastructure and ready markets.

Improved gas market

The recent gas price hike imposed by Indonesia’s state owned energy company PT Perusahaan Gas Negara (PGN) will also improve the economics of any gas discovery that Quest makes.

PGN had recently announced that it has increased gas prices for its West Java customers by 49% to US$10.13 (A$10.39) per million British Thermal Units (MMBtu) following contract renewals with producers in South Sumatra.

This compares with the previous contract rate of US$6.80 per MMBtu and reflects the steadily increasing demand for gas to generate power in Java.

Quest said it expected contracted gas prices to be at a minimum of US$6.50 per MMBtu from 2014 onwards.

Ranau PSC

The 2123 square kilometre Ranau PSC is virtually unexplored though the existence of oil and gas wells in surrounding areas along with observed oil seeps are evidence of a proven petroleum systems in the area.

Studies carried out in conjunction with the Geology Department of Trisakti University have allowed Quest to identify four very lightly explored sub-Basins that form a significant extension of the prolific South Sumatra Basin and contain up to 3 kilometres of sediment with potential for oil and gas.

These studies have also delineated four structural leads within the Jaya and Ratu sub-Basins that Quest will further define as drill targets with 2D seismic.

South Sumatran oil and gas fields appear to occur in and around discrete sub-Basins that are the focus for disposition of oil and gas prone source rocks and as depocentres for reservoir quality sands.

Gas discovered at Ranau PSC can be commercialised through the nearby South Sumatra – West Java (SSWJ) gas transmission pipelines and processing infrastructure.

The SSWJ pipelines supply large markets in Sumatra, West Java and Singapore.

Oil can be commercialised through facilities located within 50 kilometres of the Ranau PSC. These facilities process and transport oil from the large, Pertamina-operated, fields to the north of the Ranau PSC.

Quest holds a 80% stake in Ranau and held cash and cash equivalents of A$2.06 million as at the end of March 31, 2012.