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Indonesia and Exxon Reach Deal on Oil Field Joint Venture Set Up to Explore Reserve in East Java Region

Posted on: Tuesday, 14 March 2006, 09:00 CST

By Wayne Arnold

Peter Gelling contributed reporting from Jakarta.

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Ending five years of wrangling, Exxon Mobil appeared Monday to have cleared the last hurdle standing in the way of developing one of Indonesia's most promising oil deposits.

Exxon Mobil and Indonesia's state-owned oil company, Pertamina, announced in Jakarta that they had concluded a joint operating agreement that would allow the two companies to begin drilling for oil near the town of Cepu in eastern Java.

Due to be signed officially on Wednesday, the agreement calls for the establishment of a joint-venture company that will place executives from Exxon Mobil in charge of day-to-day operations while Pertamina will head a joint oversight committee.

The agreement overcomes demands by Pertamina that it take the first turn in alternating control of the Cepu field, a proposal rejected by Exxon Mobil as impractical. Unable to persuade Pertamina to budge and facing growing nationalist support for the company, President Susilo Bambang Yudhoyono of Indonesia fired Pertamina's president last week and replaced its board of directors.

"We are pleased with this agreement," said an Exxon Mobil spokeswoman in Jakarta, Deva Rachman. "This is a partnership which will allow us with the company to develop the Cepu block that will have significant benefits for Indonesia." With an estimated 600 million barrels of oil and peak output of as much as 180,000 barrels of oil per day, Cepu could reverse a long and steady decline in oil production that has turned Indonesia, Asia's only member of the Organization of Petroleum Exporting Countries, into a net oil importer.

Analysts also hailed the deal as a breakthrough for Yudhoyono's campaign to increase government revenue and revive foreign investment in his impoverished country.

The dispute over Cepu had come to embody reservations among foreign investors about the difficulties they face in Indonesia.

"This will be a real shot in the arm for an industry that hasn't been receiving a lot of investment," said James Castle, president of the business consultancy Castle Asia in Jakarta. "It's a real boon for business, and that will probably spill over into the attitude for overall investment in Indonesia." Oil is one of Indonesia's largest exports and one of the government's biggest sources of revenue. But Indonesia's oil wells are drying up faster than new fields are being developed. New exploration has been thwarted by reservations among oil companies about legal security, corruption and local unrest in Indonesia.

Cepu has long underscored the various obstacles and risks to exploration in Indonesia, partly because its history has parallels with Indonesia's turbulent political past.

Though Cepu was discovered more than a decade ago, Pertamina concluded that the field was largely depleted. It sold the right to scour the field it said later it had been forced to sell to a son of Suharto, Hutomo Mandala Putra, who is known as Tommy.

His company, also unable to recover oil, eventually sold the contract to Exxon Mobil. Exxon Mobil discovered in early 2001 that, far from being depleted, Cepu was one of the country's largest known oil reserves.

For years, Exxon Mobil and Pertamina argued about how to split the proceeds from Cepu. Indonesian oil has traditionally been extracted by foreign companies under 20-year revenue-sharing contracts with Pertamina, which until recently doubled as partner and regulator. Under these contracts, foreign companies typically keep a minority of the oil revenue, and Pertamina and the government take the rest.

In 2001, Indonesia adopted a new oil and gas law that replaced Pertamina's regulatory role with a new agency. To encourage new investment, the law also raised limits on how much foreign operators could share in the revenue.

But it took roughly four more years for Exxon Mobil and Pertamina to come to terms. Last September, the two sides finally signed a revenue-sharing agreement for Cepu that, unlike previous agreements, runs for 30 years. Exxon Mobil will have a 45 percent interest, much higher than the previous norm. The agreement also uses a novel revenue-sharing formula in which the government's take falls if oil prices drop below $45 a barrel

Negotiations broke down anew over the question of who should operate the site. Having promised when he took office in 2004 to end the impasse over Cepu, Yudhoyono stepped into the negotiations late last year, threatening to remove Pertamina's president, Widya Purnama, who was appointed under the previous administration of Megawati Sukarnoputri.

Last week, Yudhoyono finally made good on those threats, replacing Purnama with the company's marketing and commercial director, Ari Soemarno.

Exxon Mobil and Pertamina said oil could begin flowing from Cepu by late 2008. In addition to increasing the country's oil output, analysts said the agreement was likely to improve interest in upcoming tenders by the government for new exploration sites around the country.

The agreement could also catalyze progress on other projects, including plans to address Indonesia's shortage of refineries, analysts said. Pertamina and China's Sinopec, for example, have an agreement to build a refinery near Cepu, but that project has stalled amid the dickering over Cepu.

Whether the agreement will lead to more investment by Exxon Mobil and the world's biggest oil and gas investors, however, remains to be seen. Analysts said Cepu was a rare exception to a dwindling number of large deposits.

Exxon Mobil recently bid to explore prospective gas fields off the coast of Borneo, but increasing consolidation among the largest oil companies has made it uneconomical for them to invest in smaller projects, analysts said.

Source: International Herald Tribune

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