Senior official concerned about Pertamina?s decision over Cepu block

A senior official at oil and gas upstream authority BP Migas voiced concern on Friday over state oil and gas company Pertamina?s refusal to extend ExxonMobil?s contract on the Cepu block, describing it as ?politically-motivated? rather than a wise decision based on a deep understanding about the enormous benefits that will come from ExxonMobil?s continued involvement in the block.

He made the statement as ExxonMobil Oil Indonesia (EMOI) confirmed on Friday that it had received the letter from Pertamina telling the subsidiary of the American energy giant ExxonMobil about its refusal to extend the Cepu contract.

?We can confirm that ExxonMobil has received a letter from Pertamina regarding the status of ExxonMobil?s and Pertamina?s negotiations concerning the Cepu Contract Area. We are currently evaluating statements made in the letter and plan to discuss these with Pertamina and the Indonesian government when meetings can be scheduled,? communications manager Deva Rachman said in a statement.

The Cepu block, located in the border areas of Central and East Java, was initially owned and operated by Pertamina. However, the firm awarded the operation of the block to a company owned by a son of former President Soeharto in the early 1990s and ExxonMobil later took over the operating rights in 1999.

ExxonMobil claims to have found 600 million barrels of oil reserves and between 700 billion and 1.25 trillion cubic feet of gas reserves in the block after drilling few exploration wells. Analysts believe much more reserves could be found there, should the firm continue explorations.

Pertamina announced its decision not to extend EMOI?s Cepu contract on Wednesday ? about two weeks after the government installed a new Pertamina management led by Widya Purnama.

After three years of negotiations, the old management had been actually get closer to a deal with the firm which has been operating in Indonesia for more than 100 years and invested in the country billions of dollars. In mid-June, ExxonMobil?s vice president for exploration and production Steven Greenslee and Pertamina?s upstream director Bambang Nugroho signed the head of agreement that will pave the way for both firms to jointly operate the block after the current contract expires in 2010.

According to the BP Migas senior official, who refused to be identified, the HOA was sent to Pertamina?s board of commissioners early July for approval. Had the board of commissioners approved of the HOA, Pertamina and EMOI still needed to sign three agreements before clinching a final deal: First, the transfer of assignment from Pertamina to EMOI and the transfer of 50 percent participating in the block to Pertamina; secondly, the cooperation agreement between Pertamina and BP Migas on the Cepu block; and thirdly, the joint-operation agreement between Pertamina and EMOI based on the HOA approved by the board of commissioners.

?At a glance, the decision by Pertamina?s board of directors not to extend the EMOI contract looks right. A decision apparently driven by nationalism and patriotism, taken at the time when the country is preparing for the second round of presidential election,? the official said.

He however noted that the decision was based on wrong understanding about the current system of Indonesia?s oil and gas industry.

Under the Oil and Gas Law of 2002, Pertamina is no longer an authority in the oil and gas industry and the technical assistance contract system, under which ExxonMobil now operates the Cepu block, should be converted into the cooperation contract under the management of BP Migas, which has taken over Pertamina?s authority over the upstream sector. TAC is a contract system under which Pertamina allows a contractor to operate its concessions with productions to be shared by the contractor and Pertamina.

This means after EMOI?s TAC on the Cepu block expires in 2010, the block must be returned to the government and there is no guarantee that the government will give the block to Pertamina.

The official also noted that Pertamina had actually approved the plan of development presented by EMOI for the Cepu block in 2001, when the state firm still held the authority over the sector. The decision by Pertamina not to extend the contract could then spark a lawsuit by the American firm.

Should the government extend EMOI?s Cepu contract, the firm is expected to produce 165,000 barrels of oil per day starting from 2006, from which the government could gain $2 million per day in production sharing revenue. The decision not to extend the contract will thus deny the government the chance of gaining the revenue.

The official also said the decision not to extend EMOI?s Cepu contract was also in conflict with the government?s current drive to attract foreign investment.

?The decision has also expanded the list of the government?s inconsistencies towards business deals with multinational companies and this risks an economic and political intervention by the U.S. government,? he said. (Bodega)