OPINION: Pertamina?s decision over Cepu needs review
Monday, August 30 2004 - 05:02 AM WIB
The decision by Pertamina?s board of directors not to extend ExxonMobil Oil Indonesia?s (EMOI) technical assistance contract (TAC) over the Cepu block has surprised oil and gas industry players in Indonesia. Pertamina?s new board of directors made the decision at the time when they are holding an intensive campaign to assure that public that they will build Pertamina equal to Petronas and crack down on the mafia in fuel distribution and others. In view of the various problems that urgently need solutions, such as the payment of Karaha Bodas Company?s claims, Pertamina?s cash drain caused by the rise in the global oil price and the worrying increase in the state budget?s subsidies for fuel, Pertamina?s board of directors? policy not to extend EMOI?s TAC over the Cepu block after it expires in 2010 needs a review as to see how much the policy will impact investment decisions in Indonesia?s oil and gas industry and Pertamina?s business in the future.
We well understand that any high profile business decision such as the one concerning the operation of the Cepu block by such an important organization as Pertamina, will bring an impact on the industry, in this case on the oil and gas industry.
The negotiations between Pertamina and EMOI on investment in the Cepu block started in 2001. It was a tough negotiation as both parties were fighting to get the maximum benefits for themselves. EMOI wants a guarantee for its investment, which reportedly could reach US$2.6 billion, while Petamina wants a larger portion of the output of the Cepu block because it thinks the concession had belonged to it before it was taken over Humpuss Patragas in 1987.
The talks between Pertamina and EMOI over the Cepu block were getting close to a conclusion when Pertamina?s board of directors led by Ariffi Nawawi submitted the agreement that had been reached to Pertamina?s board of commissioners for an approval in early August.
From pure business point of view, the ability of Pertamina and its business partner to reach an agreement after a tough and long negotiation should be considered as an achievement. Anyway, both parties have managed to come to a business solution that is acceptable to any of them.
After a long negotiation, the demands and requirements, which Pertamina had been fighting hard for, had been finally agreed upon by EMOI, off course with concessions that are acceptable to the latter. Among the demands, the most important is that Pertamina will get a 50:50 share in the contractor?s revenue from the block, an increase from the about 26 percent share previously proposed. In compensations for the share split, EMOI is obliged to:
? Provide $2.6 billion in investment for the development of the field
? Provide the investment obligation of Pertamina for the first year
? Gradually provide a grant and technical assistance for Pertamina which will cumulatively total $400 million
? Give Pertamina a chance to develop business alliance with EMOI outside Indonesia as long as Pertamina is interested and capable
EMOI, in return, will get a contract extension for 30 years. A contract extension is quite important for an investor like EMOI to ensure a legal certainty for its investment. This means: since the agreement that had been reached through the above-mentioned negotiation has been annulled by Pertamina?s new board of directors, the legal certainty which is the basis of any investment decision and long-term relation has been nullified.
In the past several years, there area several cases that reflect uncertainty faced by investors, including those concerning Karaha Bodas, Kaltim Prima Coal divestment, Prudential, Newmont and others.
Thus, it is logical that EMOI will challenge the decision by Pertamina?s board of directors over the Cepu block at the international arbitration. Normally, any disagreement over contract between disputing parties will be settled through negotiation. However, if one party takes a unilateral decision, the alternative to settle the dispute is arbitration. And as the Karaha Bodas case has been showing, EMOI, a multinational giant, has a greater stamina than Pertamina.
Furthermore, Pertamina does not actually have any more authority to extend or not to extend a contract on a concession. Under the Oil and Gas Law of 2002, such an authority now lies with BP Migas. However, given that analysts and industry players are still concerned about BP Migas? performance, a fair decision which will give business certainty with regards the operation of the Cepu block, is apparently hard to come by in the near future.
If this happens, when will the real sector be back into motion?
Under the production-sharing scheme of the Cepu block, the production split that will be earned by the government will amount to $7.6 billion throughout the production period at an average price of $22 per barrel. The government should thus wait until after 2010 to start receiving the revenue since EMOI still holds the contract on the block until 2010.
The writer was the former exploration and production director of Pertamina as well as the former chief of Pertamina?s Foreign Contractors Supervision and Management division, which was later renamed the Production Sharing Management Directorate. He is now a lecturer at the Trisakti University. The above article is a translation of his work sent to Petromindo.Com.