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2 Indonesian gas potential burns
dimly By Bill Guerin
JAKARTA - A series of contractual
production-sharing and long-term-supply spats
pitting the Indonesian government against
multinational energy companies and big natural-gas
importers in Japan has recently tarnished
Indonesia's reputation as a reliable business
partner. It has also undermined the gas sector's
overall earning potential - crucially at a time
when global prices have surged to near-record
highs.
Indonesia has some of the largest
known pools of natural gas in
the
world, with total estimated reserves of 187
trillion standard cubic feet (scf), according to
the Energy Ministry. Local gas production in 2006
amounted to 8.1 billion scf per day, of which 46%
was dedicated to domestic demand for power
generation, fertilizer production and other
industries, while the rest was exported mainly as
liquefied natural gas (LNG).
Significantly, Indonesia's deep pools
remain largely unexploited and rising global
energy prices have substantially upped the market
incentive to drop new wells. That's apparently
what French oil giant Total SA, currently one of
Indonesia's largest gas exporters, assumed when it
announced last week plans to invest US$6 billion
over the next five years in its existing
operations at the Mahakam Delta oil-and-gas block
in remote East Kalimantan province.
Yet no
sooner had Total announced its investment plans
when Mines and Energy Minister Purnomo Yusgiantoro
said the government would likely seek to amend the
company's existing production-sharing contract,
including the agreed 70%-30% government-contractor
split over revenues, which is to expire in 2017.
The minister said the amendments to the contract
would seek "what's best for Indonesia".
Total has said in response that it sees no
reason to amend its current contract, and that it
expects to make a fair return on its new
investments. Both sides are believed to be in
behind-the-scenes negotiations, but if those break
down, lawsuits are not out of the question. Total
expects to earn $9 billion in profits from its
Indonesian oil and gas operations this year.
Looking inward Yet the
government's ham-fisted efforts to strike a
balance between meeting domestic demand and
fueling exports have alienated many foreign energy
companies. For years LNG could not compete with
oil-based fuels in the local market because of the
government's fuel-subsidy policy. Recent cuts in
the oil subsidy have sparked new domestic demand
for natural gas, which is expected to grow 6% this
year.
Along with other producers such as
Chevron, Total has been pressing for a government
decision on better pricing for the gas it supplies
domestically. Multinational producers are required
to sell 25% of their gas draws to local companies,
often at prices one-third lower than they would
earn in global markets from processed LNG exports.
That's dampening multinational energy companies'
desire to invest in Indonesian gas fields when
they may be forced by the government to supply
local markets at lower prices than exported gas
commands.
President Susilo Bambang
Yudhoyono has promised to review regulations that
could compensate producers for supplying more gas
to the domestic market. "The government will
consider various new fiscal incentives such as
value-added tax and import duties, as well as tax
reforms, to lure more investors to the country's
gas sector," he told policymakers and industry
leaders last week at the annual IndoGas conference
in Jakarta.
But several high-profile cases
where the government has pushed contract
negotiations to the brink with various
multinational oil-and-gas companies have raised
serious concerns about the sanctity of contracts.
Oil and gas deals signed by former authoritarian
president Suharto almost invariably included a
right for foreign energy companies to extend their
contracts after exploration activities. Those
deals, however, are gradually coming undone under
Yudhoyono's self-proclaimed business-friendly
administration.
In 1995, the Suharto
government granted US energy giant ExxonMobil 10
years to develop the oil and gas field at Natuna
D-Alpha, and agreed it could retain 100% of the
revenues it earned from eventual gas-production
activities. ExxonMobil invested $400 million in
exploring the block and reportedly discovered 46
trillion cubic feet of recoverable reserves, and
total gas potential in the area is estimated at 80
trillion cubic feet. Its local partner,
state-owned Pertamina, meanwhile, invested $60
million as a 24% minority partner in the
public-private joint venture.
Jakarta last
week terminated ExxonMobil's 1995
production-sharing contract, which was up for
renewal in 2005, and handed responsibility for
development to Pertamina. ExxonMobil claims it
complied with all requirements in the 1995
agreement, which included the reserved right to
extend the contract twice for two-year periods.
ExxonMobil has had a particularly rough
ride in Indonesia. A five-year dispute between the
company and government over ownership and
operating rights to the $2.6 billion Cepu
oil-and-gas field in Central Java was only
concluded last year through an adjusted
production-sharing arrangement and Yudhoyono's
personal intervention. The provincial governments
in Central and East Java, which had contested the
company's right to the resources, were given a 10%
participating interest in the new deal.
Because of Cepu's rich resources, including
more than 2 billion barrels of potential oil
reserves, which if efficiently tapped would
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