JAKARTA - Spurred by the personal
intervention of President Susilo Bambang
Yudhoyono, Indonesia has brought to a dramatic end
a four-year dispute between US oil giant
ExxonMobil, the world's largest oil company, and
Pertamina, Indonesia's largest state enterprise.
The dispute involved rights to a massive oil
discovery.
The Cepu oil-and-gas block,
Indonesia's largest oil discovery in decades, has
estimated recoverable reserves of as much as 600
million barrels of high quality reserves and 2
billion barrels of lesser-quality reserves. The
field is also estimated to hold 11 trillion cubic
feet of natural gas. Tapping the find promises to
return Indonesia to the status of a
petroleum-exporting country,
and
Yudhoyono's bold intervention in the deal was
interpreted widely as a signal move towards a more
foreign investment-friendly policy regime.
Exxon, which joined with Mobil Oil in 1998
in the largest industrial merger ever, has been
operating in Indonesia since 1898. Its local
operations are integrated under the subsidiary
ExxonMobil Oil Indonesia Inc, which currently
operates Indonesia's Arun gas field and is also
developing a huge contested gas field near the
Natuna Islands in the South China Sea.
Yudhoyono, who pledged early in his term
to settle the protracted negotiations surrounding
the Cepu contract, intervened in big-bang fashion
last week, which came in the middle of a
high-profile visit to Jakarta by US Secretary of
State Condoleezza Rice.
The president
fired six of Pertamina's seven directors and
appointed Ari H Soemarno as the new director,
replacing Widya Purnama, who was widely viewed to
be at the core of the disagreement with
ExxonMobil. Washington had lobbied heavily for a
resolution, and the new contract signed on
Wednesday gives Exxon the lead role.
The
deal simultaneously represents a defeat for
nationalist elements in Indonesia's legislature,
suggesting that, contrary to the claim of his
critics, Yudhoyono does indeed have the political
will to take decisions in the national interest -
even if it means siding with foreign investors.
Dwindling reserves Although
Indonesia is Asia's only member of the global
Organization of Petroleum Exporting Countries
(OPEC) cartel, dwindling oil output and decades of
mismanagement at Pertamina has reversed the
country's energy fortunes, making Indonesia a net
oil importer for the past two years. While the
2006 state budget assumes oil production of 1.075
million barrels per day (bpd), the actual figure
dropped to an average of around 970,000 bpd
throughout last year.
Contradictory
regulations, security problems, bureaucratic
tangles and corruption, not to mention years of
well-documented mismanagement at Pertamina, have
stymied investment in new exploration in the oil
and gas sector and led to declining output -
although the Cepu agreement should go some way
towards restoring the global oil industry's faith
in Indonesia.
At a time when domestic fuel
consumption is growing annually at 4%-5% and
export demand for Indonesia's oil and gas is up
almost 20% year-on-year, the urgency for a
settlement with ExxonMobil was paramount. Current
crude oil reserves are expected to be depleted by
2018, and Indonesia is in desperate need of new
sources to boost production and resume its
position as a net oil exporter. Last year the
country had a massive US$7.3 billion oil trade
deficit.
At full production capacity,
which would require about $2 billion in new
investments, it is estimated by 2008 Cepu could
produce around 180,000 bpd. Analysts estimate that
once Cepu is fully online, it would increase
national production by some 20% and would restore
Indonesia as a net oil exporter.
In
Indonesia, the state owns all rights to petroleum
and mineral finds. Foreign companies participate
in the industry through production sharing and
work contracts, which historically have often been
prone to disagreement. Oil and gas contractors are
required to finance all exploration, production
and development costs in their contract areas, and
are entitled to recover those expenses through
sales revenues.
The enactment of new oil
and gas legislation in June 2003 ended Pertamina's
long-running regulatory role in the sector, which
critics said often led to a conflict of interest
with its production activities. The law
effectively ended the state concern's upstream
monopoly on handling exploration and refining
contracts, and last year its longtime control over
domestic distribution of fuel and petroleum-based
products came to a close. Pertamina's regulatory
role in the upstream sector was taken over by the
state-managed Upstream Oil and Gas Implementing
Body (BP Migas).
In January, a
high-powered business delegation from the US,
including representatives of oil companies
ExxonMobil, ConocoPhillips and mining giant
Freeport McMoRan, had pressed the Indonesian
government to review its taxation policy on
production sharing contracts and provide better
incentives for their exploration activities.
Specifically, they requested that the government
give a clear-cut policy and explicit job
descriptions for BP Migas and Pertamina, towards
the aim of preventing future conflicts of
interest.
BP Migas had earlier cited the
Cepu difficulties as motivation for a new
government plan to force foreign oil and gas
investors to provide multimillion dollar
performance bonds before they be allowed to sign
production sharing contracts. The state agency now
must approve all work and spending plans of
production sharing contractors, including the
Pertamina-ExxonMobil deal, and is responsible for
determining what expenditures can be counted as
expenses for oil and gas production operations.
New age contract The Cepu deal
cuts across Indonesia's geography in complicated
ways. Part of the Cepu block is in Blora regency,
Central Java, while another part is in Bojonegoro
regency, East Java. Under the new agreement,
Pertamina and ExxonMobil will each have a 45%
equity holding in the block, with the remaining
10% - legally considered a participating interest
- going to local administrations in East Java and
Central Java, distributed 6.7% and 3.3%
respectively.
ExxonMobil's local
subsidiary, PT Mobil Cepu Ltd, will operate the
block under a 30-year production-sharing contract
with the government, under the supervision of the
so-called Cepu Operation Committee (COC), drawn
jointly from officials from ExxonMobil, Pertamina
and local administrations. The committee will be
empowered to take decisions on operations,
development and budget, while Pertamina's
subsidiary, PT Pertamina EP Cepu, will be the
deputy operator of the block.
The
ExxonMobil deal had featured prominently in
Indonesia-US bilateral relations. On a visit to
Washington last year, Yudhoyono told US oil
executives that amendments to current laws
governing oil and gas deals were in the works,
which would offer more lucrative fiscal
incentives, including a revision of the current
15% to 85% revenue split between oil producers and
the government, as well as changes to the 35% to
65% split on natural gas deals.
For the
Cepu deal, Exxon's take will range from 6.75% to
13.5%, depending on global oil prices. Although
the contract's production split will give the
government and local contractor the same 85% and
15% shares, the deal stipulates that global oil
prices must average $45 per barrel or higher to
maintain that pay structure, an unprecedented
clause for an Indonesian energy deal. If world
prices fall below $35, the split would diminish to
70% and 30% respectively.
Political
energy In August 1990, Pertamina, which was
the governing Golkar Party's cash cow under former
president Suharto, granted a 20-year concession to
operate the Cepu block field to Humpuss Patragas
(HPG), then owned by Suharto's youngest son, known
locally as "Tommy", who is currently serving a
jail sentence for ordering the murder of a supreme
court judge. That deal was in cooperation with
Australian Ampolex, which at the time owned a 49%
stake in the field.
The deal was that HPG
would get 35% of its production costs rebated
after production. Pertamina and the contractor,
HPG, would split the revenue from any excess oil
produced over the agreed limits in the contract on
a 65%-35% basis. But after years of unsuccessful
exploration activities, HBG ran up severe debts
and encountered cash flow problems, and was later
forced to sell its 51% holding in the Cepu block
to the Indonesian Bank Restructuring Agency
(IBRA), a state-run asset rehabilitation agency
established in the wake of the 1997-98 Asian
financial crisis.
ExxonMobil Oil Indonesia
bought both HPG's and Ampolex's stakes reportedly
for around $90 million, through Mobil Cepu Ltd,
acquiring 100% ownership. Soon thereafter,
ExxonMobil discovered a huge reservoir of oil, the
largest found in Indonesia for decades, that
Pertamina had failed to hit on after nearly 30
years of plumbing the site.
Exxon said it
was willing and able to invest $2 billion to
develop the potentially lucrative field, but
because the initial work contract was due to
expire in 2010, the company sought a 20-year
extension under the original terms. Pertamina
proposed to act as the project's sole operator
during the first five years under a new contract,
a suggestion that Exxon flatly rejected unless the
state-owned company put in half the development
costs.
Despite the deadlock, Pertamina had
said it was willing to go it alone in developing
Cepu - even at the risk of facing a protracted
arbitration lawsuit. Widya Purnama, Pertamina's
president director at the time, said in October
2005 that the state oil firm had set aside $120
million to start drilling 30 wells in the Cepu's
Sukawati and Banyu Urip fields.
Indonesian
vested interest groups famously run exclusive
agendas, aiming to bolster narrow personal
benefits over broad national interests. Pertamina
has neither the capital nor the expertise needed
to develop such a major oil project, analysts say,
and Hestu Bagyo, head of Pertamina's Cepu block
exploration and production unit, has conceded this
point in public. Still, nationalistic
sentiments have run on high since the 1997-98
Asian financial crisis, often ensnaring foreign
investors. Other high-profile business disputes
with foreign investors, such as with Mexican
cement producer Cemex, US gold miner Newmont and
the one brewing with US mining giant Freeport,
reflect the risk to foreigners doing business in
Indonesia. But with global commodity prices
spiking up, foreign investors are nonetheless
seeking new deals in Indonesia's resource rich
territories, and hopes are that Yodhoyono's recent
intervention will mitigate the political risks to
new and existing investments.
Analysts say
the resolution of the ExxonMobil deal, which is
expected to start production in about 2.5 years,
will bring massive benefits to the central
government and also shore up newly-autonomous
local regions. At peak production, citing the
conservative future estimates of global oil prices
averaging $35 per barrel, the government would
earn as much as US$1.5 billion a year from the
deal - excluding the revenues that would go to
Pertamina as contractor.
"The project will
create jobs, and of course it will bring benefits
to the local economy," says Energy and Mineral
Resources Minister Purnomo Yusgiantoro. Exxon has
said it also plans to build roads, schools,
medical clinics and other infrastructure for the
project.
Marginal
dissent Nationalistic commentators had
demanded that Pertamina maintain sole control of
the Cepu block for the first five years of the
project, and thereafter manage it with ExxonMobil
managers on a rotating basis. American control
would amount to another form of colonization, they
claimed, and in any case they argued that
Pertamina's local staffing expenses would keep
down costs.
Although Yudhoyono's
intervention has broadly cheered foreign
investors, it's not yet clear that the
nationalists have been completely pushed into the
shadows. Over 400 Muslim protesters staged a rally
in front of the US Embassy on Tuesday, slamming
what they said was US interference in Indonesia's
domestic affairs, citing in particular
ExxonMobil's deal in Cepu and Freeport's
investment in Papua. The protesters were
predominantly from the Muslim radical Islamic
groups Hizbut Tahrir and Majelis Mujahideen, led
by convicted cleric Abu Bakar Baashir, the alleged
leader of the militant Jemaah Islamiyah
organization accused of masterminding the Bali
bombings.
It's not just Islamic radicals
that are making nationalistic demands, however.
Sutarjo Suryoguritno, deputy speaker of the House
of Representatives, warned that a ruling in favor
of ExxonMobil would be tantamount "to us being
colonized again ... I urge the government to
return to the true path. We should take a firm
stance, that the oil block is the right of
Indonesia and its people," he told reporters.
"We'll take every means, including legal and
political measures, to fight the decision," echoed
Tjatur Sapto of the National Mandate Party.
Yudhoyono, with his strong democratic
mandate, at least for now is firmly in control and
has shown no sign of being influenced by the
nationalist opposition. He has important backing
for his pro-foreign investment decisions from the
secular-minded Golkar Party, which commands the
most seats in the House of Representatives.
Agusman Effendy, chairman of the
commission responsible for mining and energy and a
political heavyweight from the secular Golkar
Party, recently said that it was essential that
the Cepu block start production as soon as
possible. "We should not lose the momentum."
Bill Guerin, a Jakarta
correspondent for Asia Times Online since 2000,
has worked in Indonesia for 20 years, mostly in
journalism and editorial positions. He has been
published by the BBC on East Timor and specializes
in business/economic and political analysis
related to Indonesia. He can be reached at
softsell@prima.net.id.
(Copyright 2006
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