Chinese companies broaden Indonesian oil and gas holdings

To help meet their country's demand for energy, state-owned Chinese companies are snapping up oil and gas fields across Indonesia, changing the face of an industry long the preserve of Western producers.

Last month, New York Stock Exchange-listed PetroChina Co. outbid four rivals to claim the Indonesian assets of Devon Energy Corp. for $262 million. PetroChina's move follows another high-profile Chinese foray into Indonesia: CNOOC Ltd.'s $585 million purchase in January of Spanish company Repsol-YPF SA's lucrative oil and gas fields scattered across the archipelago.

The acquisitions vaulted Chinese companies to the front ranks of Indonesia's energy producers, with CNOOC now Indonesia's largest offshore oil producer by virtue of the Repsol deal. Combined, CNOOC and PetroChina control about 12 percent of Indonesia's oil production of about 1.4 million barrels a day. Industry analysts expect to see more Chinese investment in Indonesia after the Devon and Repsol purchases are digested. "It's just a question of when and what they will buy," says a Western oil executive in Jakarta.

China's shopping spree illustrates its growing involvement in Southeast Asian business. The Indonesian deals give China access to energy supplies it needs to fuel its rapidly growing economy. And Chinese energy companies increase their reserves and hone their skills as they try to grow into globally competitive concerns. This is good news for Indonesia's beleaguered oil-and-gas industry, offering Jakarta a new source of investment funds and opening a potentially huge export market for oil and gas.

"There's good reason for Indonesia and China to get cozier," says Al Troner, a Seattle-based expert on Asia's energy industry. "Indonesia would not mind having Chinese capital, technically proficient labor and a potential market; and from China's point of view, it's not bad to have someone from outside the Middle East who is close by."

To be sure, it is too early to tell whether China's Indonesian gambit will prove to be an astute long-term move. Indonesia's oil-and-gas production is still dominated by established companies such as ChevronTexaco Corp., BP PLC and Unocal Corp. Chinese companies, like their Western counterparts, will have to contend with Jakarta's often-ambiguous resource policies and its weak legal system. The details of a sweeping new oil-and-gas law have yet to be worked out, for example, creating business uncertainty. A messy decentralization program -- which seeks to give more economic power to district and provincial governments -- and physical security are also concerns. A separatist rebellion in Aceh province forced ExxonMobil Corp. to halt operations for a few months last year, and a ChevronTexaco unit has faced demonstrations by local political activists in Sumatra.

What's more, the management skills of Chinese oil companies in a new and volatile environment haven't been tested yet. "Technologically, they are probably as efficient as anybody," says a Western oil-company executive. "But do they have as wide a breadth as someone like ExxonMobil who operates from the Arctic to the Sahara? Probably not."

For now, however, China's oil companies are upbeat and aggressive. And they appear less intimidated by political risk than many of their Western counterparts. Flush with cash -- thanks partly to recent successful international initial public offerings of stock -- CNOOC and PetroChina have heeded Beijing's call to help secure energy supplies for the country's economy. According to government estimates, China imports more than a fourth of the 220 million metric tons of oil it consumes each year. By 2005, imports are expected to climb 66% to 100 million tons.

A stake in Indonesian oil and gas fields gives Beijing a foothold in Asia's only member of the Organization of Petroleum Exporting Countries and the world's largest exporter of liquefied natural gas. "In East Asia, Indonesia still rules the upstream roost," says James Tham, a Perth-based correspondent with Upstream, an energy trade publication. "It's just a cold, hard fact that despite the political and social problems it has the most oil in the region."

Warmer political ties between Indonesia and China, punctuated by a flurry of recent high-level contacts, including a visit by President Megawati Sukarnoputri to Beijing, also have helped improve the investment climate. "There's a strong political message," says a Western energy expert in Jakarta. "[Former President] Suharto wasn't going out of his way to invite Chinese investment."

For Indonesia, which hasn't fully recovered from Asia's 1997-98 financial crisis, China's attention is welcome. Oil production has been falling since 1998. Political turmoil and policy confusion has led to a sharp decline in exploration for new wells. Between 1998 and 2000, petroleum-company expenditures fell 25 percent to $3.6 billion from $4.8 billion.

Meanwhile, Japan's prolonged economic problems have spurred Jakarta to seek new markets for its gas reserves -- including the Tangguh field in the eastern province of Papua, one of the world's largest untapped gas fields. Indonesia hopes to win the right to supply China's first LNG terminal in Guangdong with gas from Tangguh, which is being developed by BP. Tangguh is competing with Australia's Northwest Shelf and gas fields in Qatar in the Middle East to win China's business. Peter Best, Credit Suisse First Boston's Hong Kong-based head of Asian oil-and-gas research, expects Indonesia to sweeten the potential Tangguh deal by giving CNOOC a 10-20 percent equity stake in the fields. (*)