Industry ask for clear-cut rule on oil, gas block contract extension
Tuesday, February 25 2003 - 07:59 AM WIB
?The decision to grant contract extension to existing contractor(s) should be based on the criteria whether the extension will maximize benefit to the Republic of Indonesia and whether it would encourage optimum exploration and exploitation of oil and gas in the block,? said Hilmi Panigoro, president and CEO of JSX-listed oil and gas firm Medco Energi International in a seminar.
Hilmi said investor would need certainty before spending money to explore and develop oil and gas area and therefore would not be willing to invest in the last years of the contract in exploration and development.
?Therefore it is very important that current contractor be given chance to extend its operatorship in an oil and gas block to allow optimum exploitation in the block,? said Hilmi.
Hilmi said when Medco took over Rimau oil block in Central Sumatra from STANVAC in 1995, 8 years before the block?s contract expired; production from the block was 1,500 barrels per day. But in 1996, Medco discovered giant oil field in the block and despite lack of contract extension guarantee from the government, decided to spend some US$ 150 million in capital expenditure between 1997 to 2002. Now the block is producing more than 70,000 BPD and cumulative contribution to the government from 1996 to 2002 had amounted to $ 1.6 billion.
?Had Medco?s shareholders decided otherwise then government will lost its $ 1.6 billion share,? said Hilmi. Government finally granted 20 years contract extension on the block in 2001.
?But, if we were foreign company which operates on strict economic criteria, we would not be willing to take the risk of uncertainty.?
He suggested that the government also devised a regulation that would guarantee operator to be able to develop oil and gas discoveries it had made during the end of contract period.
?That will give operators incentive to continue exploring even at the end of their contract period.?
Under the Indonesian oil and gas law PSC contract is given for 30-years period and could be extended. But there are not clear-cut mechanism or guarantee that an oil and gas block?s contract would be extended. The lack of transparent contract extension mechanism has created confusion among investors. There is also no clear cut rule when contractors should apply for contract extension.
The latest example was when Caltex Pacific Indonesia-operated Coastal Plain Pekanbaru (CPP) block contract expired in 2001- despite appeal to give extension to CPI- it was given to consortium of State oil and gas company Pertamina and Siak regency-owned company. Oil production drops from around 50,000 barrels per day to around 35,000 BPD currently.
Hilmi, however, suggested that contract extension was not necessarily granted to the whole block.
?Extension could be granted to producing fields and discoveries only. But unexplored area within the block could be re-tendered,? he said.
?That way, dormant areas that were not explored under current operator could be explored by another investors.?
?He suggested that unexplored working areas of contractors such as VICO Indonesia, which had ceased exploration activities in East Kalimantan could be relinquish and retender to give way for other companies which were convinced that there are still upside potential in the area.
Meanwhile, executive director of Indonesian Petroleum Association Suyitno Padmosukismo said that ideally, contractor and the government should talk about contract extension 7 years before the contract expired and contractors should submit programs and analysis that would undoubtedly proof that the block?s economic value would be higher in the hand of current operator than to be given to other operator. He suggested that the government should be able to decide whether or not to extend the contract in two years.
Suyitno also warned that regional autonomy euphoria, where regional governments wanted to take over oil and gas operations in their respective area once the contract expired could have negative impact to Indonesian oil and gas industry as they have no competency in running oil and gas operations.
BP Migas chairman Rachmat Sudibjo concluded that actually, BP Migas preferred to give operators contract extension because current operators have technical know-how and cumulative understanding of their working areas. Rachmat said government is preparing government regulation that will clearly regulate the rule contract extension. (alex)