Medco faced with aggressive local players

Early this year, the government offered 11 new oil and gas exploration blocks. Investors have shown mixed response to the offer. Sugiharto, finance director of oil and gas producer PT Medco Energi International comments on that matter in his interview with Bisnis Indonesia daily. Following are excerpts of the interview:

What did investors respond to the offering of the 11 blocks?
Asian investors like those from China and Malaysia are highly interested in the tender. They include CNOOC, PetroChina, Sinopec and Petronas, which may be considering to buy new assets in Indonesia.

Why are they so interested in investing in Indonesia?
Investors from the United States, Australia and Europe do not dare expand their businesses in Indonesia in a significant way due to Indonesia?s high sovereign risk. Actually, this is a good opportunity for Medco to take over their assets in Indonesia. There are long lists of assets to be sold. So, our competitors will be from Asia and the Pacific unless the current phenomenon does not continue.

What phenomenon?
We anticipate the emergence of more new players from Indonesia, which are inexperienced but dare pay high to acquire assets. The phenomenon has become visible. Local investors took up Sembakung and Kakap blocks. They are very aggressive and do not make careful calculations.

Is the current domestic situation supportive to oil and gas businesses?
Indonesia?s sovereign risk remains high, which could cause further rise in interest rates. Our production cost can be lower than in other countries, but in terms of financing cost we cannot compete with foreign players. Fortunately, a portion of our production cost is denominated in rupiah. In other words, we still can increase our efficiency.

How about Medco?
We may be able to compete with local players. But, our real competitors are those from Asian countries notably China and Malaysia. If we can become the least cost producer, we can win in competition with them. It is very important for us to produce oil and gas with the least possible costs. Until 2001, Medco was the least cost oil producer. Our funding and development costs reached US$2.69 per barrel.

Is Medco interested in the 11 oil blocks?
We are highly interested in some of the blocks. As a matter of fact, we have programs of acquiring new oil and gas blocks. We have seriously prepared funds for acquiring them. We have to anticipate a drop in oil production from our Kaji Semoga fields in Rimau block. We have been offered many oil blocks.

How far are you worried about the emergence of more local players?
What we are worried about is their failure to manage their projects. Their businesses are related to loans they have obtained from banks.

How about funding at local players?
I am not clear about it. As for Medco, we have allocated $300 million for our acquisition programs. We will spend the whole amount this year. The fund was derived from the issuance of our eurobonds. (*)