Interview: Minister Sugiharto sees progress in Exxon dispute

Exxon Mobil Corp. of the U.S. and Indonesia's state-owned oil and gas firm Pertamina have made "significant progress" toward resolving a long-running investment dispute that has tainted investors' perceptions of Indonesia, State Minister of State Enterprises Sugiharto said recently.

The government hopes to reach an agreement "as soon as possible" on extending Exxon's contract to develop the country's largest untapped oil field in Cepu, East Java province, Sugiharto told Dow Jones Newswires.

Pertamina's 11-member Cepu negotiating team resumed talks with Exxon late last month in a bid to resolve the dispute by an official May 20 deadline and Sugiharto said an agreement was likely within "months, not years."

"The mutual interest...(of) the government, Pertamina and Exxon is to monetize as soon as possible the strategic reserves that have been discovered on the Cepu blocks," Sugiharto said.

"That would also give certainty to any investors...(because) this (dispute) isn't good for Indonesia."

Exxon Mobil Oil Indonesia Inc. declined to provide specific comment on Sugiharto's comments, but instead released a statement to Dow Jones Newswires that said the firm is "committed to reaching an equitable and amicable resolution of Cepu issues...(and) bringing this important resource to market." The statement didn't elaborate.

Efforts to contact Pertamina's lead negotiator in the Exxon talks were unsuccessful

The dispute over the Cepu oil field, with estimated reserves of about 600 million barrels of crude oil, has been frequently cited as an exemplar of the policy confusion that's caused Indonesia's crude oil production to plunge in recent years.

Indonesia, the sole Southeast Asian member of the Organization of Petroleum Exporting Countries, turned into a net importer of crude oil for several months last year due to lack of investment in exploration and development. Indonesia is now mulling downgrading its OPEC participation to "observer" status as a cost-saving measure.

Exxon bought the rights to the Cepu field in 1999 from a company run by a son of Indonesia's former dictator Suharto. Shortly thereafter, the U.S. firm discovered that Cepu contained a commercial quantity of crude oil. However, development of Cepu has floundered on Exxon's inability to date to get an extension of its oil rights contract, which expires in 2010.

"It's not in our best interest to wait until 2010 (because) we badly need the crude for domestic uses," Sugiharto said.

The Exxon dispute, along with other high-profile business conflicts involving Mexican cement producer Cemex S.A. De C.V. (CX) and U.S. power firm Karaha Bodas Co., are complicating efforts of the government of President Susilo Bambang Yudhoyono to lure back foreign investors to help fuel a 6.6% annual average economic expansion target from 2004 to 2009.

Indonesia recorded a 26% year-on-year decline in approved foreign direct investment to $10.3 billion in 2004 due to investor perceptions of rampant corruption, shambolic infrastructure and an unpredictable judiciary.

Exxon and Pertamina's discussions to negotiate mutually acceptable terms for a renewal of the U.S. firm's contract hinge on agreement on the proportion of oil revenues the two companies will share, Sugiharto said.

"(Exxon's) already expressed certain requirements, but it's too early to mention to anybody the percentage they want because there's still a gap between what Pertamina wants in terms of percentage and split," he said, without elaborating.