No relief in Indonesian oil
slump By Phar Kim Beng
the price of oil hovering around US$40 per barrel, it is
easy to assume that the oil-producing countries are
laughing all the way to the bank. After all, the
Organization of Petroleum Exporting Countries (OPEC)has
affirmed that all its members can make do with $30 per
barrel. Indonesia, a seasoned player in the yo-yo market
of oil revenue, has been careful not to take the current
financial windfall too far, however, and for good
Although Indonesia currently holds
proven oil reserves of 4.7 billion barrels, this figure
is down by 13% since 1994. The decline has shown little
sign of leveling off.
A study released in August
2002 by Indonesia's Directorate General of Oil and Gas
shows that oil reserves in the Cepu block alone, in
Central and East Java, are close to 600 million barrels,
about half of which is considered recoverable. Yet
ExxonMobil, which has an exclusive contract to extract
the oil at Cepu, will not pump a drop.
finding much more oil than expected in 2001, ExxonMobil
had until recently been locked in negotiations with
Indonesia's national petroleum company, Pertamina, which
had demanded that ExxonMobil share more of the bounty.
The two oil giants were unable to reach an agreement
over profit sharing, with Pertamina demanding half the
field's output and ExxonMobil demanding that Pertamina
cover half the field's production costs. Additionally,
ExxonMobil wanted Jakarta to extend its technical
assistance contract, due to expire in 2010, for 20
Pertamina announced this week that it
plans to issue bonds to raise funds to finance
development of the Cepu oil block. The move was seen as
confirmation of earlier indications by the new
management of Pertamina that it will go it alone to
develop the block, and not renew ExxonMobil's contract.
"After 2010, we will do it ourselves. What we
need is money, and I prefer bonds," the Antara news
agency quoted Pertamina president Widya Purnama as
saying after a meeting with ExxonMobil.
Meanwhile, Indonesian oil wells are drying up
faster than new fields are being tapped. Having already
exploited its largest and most accessible deposits in
Central Sumatra, Indonesia is trying to persuade oil
companies to explore smaller, more remote sites. The
interest has been low. Faced with concerns about
security, corruption and local unrest, oil companies
have been holding out for a more stable political and
regulatory climate and more favorable terms. This is
obviously not a good sign, as the oil-and-gas sector
accounted for 25% of Indonesia's total export earnings
over the past five years.
As it is, Indonesian
crude-oil production has been diminishing from a peak of
1.5mbpd (million barrels per day) in 1998. In 2003,
Indonesian crude-oil production averaged 1.02mbpd, down
from the 2002 average of 1.10mbpd and continuing the
decline of the previous several years.
decline is due mainly to the natural fall-off of aging
oilfields, a lack of new investment in exploration and
regulatory hurdles unlikely to be addressed until after
the September 20 presidential runoff election.
Notwithstanding the ineffective Indonesian
presidents over the past five years, with president
Suharto alone accused of siphoning more than $4 billion
of Indonesia's oil revenue for his own family, all of
them nevertheless agreed that Indonesia's oil sector has
worked itself into a rut. Several measures have been
introduced to prevent Indonesia from sliding further.
Indonesian oil has traditionally been extracted
by foreign companies under 20-year revenue-sharing
contracts with Pertamina, which until recently acted as
both partner and regulator. Under these deals, foreign
companies typically keep a minority of the oil revenue;
Pertamina and the government take the rest.
However, under a law passed in 2001, the
government has sweetened terms for oil investors.
Licensing rules have been eased, tenders for exploration
rights made more transparent and revenue-sharing made
more generous. Oil executives say companies can now get
at least 35% of the production revenue.
Pertamina, the state body responsible for oil
exploration, has also come under some serious reforms.
President Megawati Sukarnoputri has taken steps to clean
up the company, replacing its top management and forcing
it to run as a corporation instead of a government
In 2003, the government created an
agency, BP Migas, to take over Pertamina's regulatory
role. Pertamina is scheduled to be privatized by 2006.
Though such incentives are attracting some new
investors - largely companies from Indonesia and
elsewhere in Asia - many others have been pulling out.
Among the departed are three US companies, Devon Energy,
Kerr-McGee and Occidental Petroleum, as well as
Repsol-YPF of Spain and Statoil of Norway.
is because efforts by the Indonesian government to
decentralize political power to the provinces have added
a new and unpredictable layer to investment
negotiations. Once completely cut out of oil revenue,
provincial governments are now entitled to as much as
Caltex, which produces half of Indonesia's
oil, making it the biggest player in the country, still
suffers routine pilferage of its equipment but says it
is otherwise operating normally. There is also the
continuing threat of insurrection and terrorism. Troops
were brought in to restore order when attacks against
ExxonMobil's employees in the province of Aceh forced
the company to shut down its operations for four months
in 2001, and the attacks have continued. To stem the
impact of major Western oil companies leaving Indonesia,
Jakarta has resorted to working with Asian firms, in
particular from China and Malaysia. Aside from boosting
production, the goal is to expand Indonesia's oil
reserves to 5 billion barrels, a figure that would show
that Indonesia is not on the wane.
2002, China National Offshore Oil Corp (CNOOC) became
the largest offshore oil producer in Indonesia, after
purchasing nearly all of Repsol-YPF's assets in the
country for $585 million. Pertamina is also a CNOOC
partner in each production sharing contract (PSC).
However, in 2003 CNOOC's production dropped 20,500bpd
(barrels per day), or 17.5%, from its 2002 level.
In April 2002, PetroChina also won the bid to
buy the Indonesian oil and gas fields of the
Oklahoma-based Devon Energy Corp, marking the first
purchase of overseas oilfields by China's top producer.
The fields produce the equivalent of 52,900bpd.
In June 2002, Petronas Carigali (Overseas) Ltd
acquired the entire share capital of Kerr-McGee
(Indonesia) Ltd (KMI) for $170 million, providing
Malaysia with its first oil production in Indonesia,
with five fields producing about 24,000bpd.
Pertamina has also been encouraged to venture
out. In early 2002 it signed a petroleum contract with
PetroVietnam and Petronas to explore and develop
hydrocarbon resources jointly in offshore Vietnam,
forming the first such alliance within the Tripartite
Still, the shrinkage of
Indonesian oil production is not relenting. Companies
producing from existing fields are attempting to
increase recovery rates and to prolong the life of the
fields. Caltex, which has the largest operation of any
multinational oil company in Indonesia, undertook a
steam injection project at the Duri field on Sumatra,
but nonetheless experienced a drop of about 71,000bpd in
production in 2003 over 2002. Half of the drop is
attributed to natural depletion.
To get out of
this morass, the only way is for Indonesia to explore
Cepu. With ExxonMobil cut out of that picture, Indonesia
could be hard-pressed to halt the decline in production.
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