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No relief in Indonesian oil slump
By Phar Kim Beng

With 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 reason.

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.

Since 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 years.

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.

The 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 agency.

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.

This 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 15%.

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.

In January 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 Cooperation Arrangement.

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.

(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact for information on our sales and syndication policies.)

Sep 4, 2004

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