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IndonesiaÆs state oil and gas firm PT Pertamina and US oil giant ExxonMobil Corp are expected to officially sign today (March 15) an agreement to jointly operate the Cepu oil block.
This could end a highly-political, protracted, four-year dispute over the $2.6 billion plan û but the end is nigh call has been sung out before to develop the country's biggest untapped oil field, which straddles the border of East Java and Central Java.
And as has been said every other time Pertamina and ExxonMobil appeared close to getting down to brass tacks of actually producing oil, which isnÆt expected til 2008 anyway û analysts tout it as good for the state of the nation.
ôBeyond the benefit to IndonesiaÆs trade account from higher oil exports, which will not be seen until 2008, the deal should raise investor sentiment and inflows of confidence-sensitive capital,ö argues Tim Condon, head of Asia research at ING Financial Markets.
Under the proposed agreement, Pertamina and ExxonMobil will form a joint-operating organization to be known as Cepu Organization that will run the oil and gas block under a 30-year production-sharing contract with the government, in which each company would jointly hold 45% interest in the block. The remaining 10% would go to the local governments. The two companies forecast that they would start producing crude oil in 2008 with daily output estimated around 165,000 barrels per day û and that would account for around 20% of Indonesia's total daily output.
Indonesia is the only Southeast Asian member of the Organization of Petroleum Exporting Countries, or OPEC, but it recorded a $7.3 billion oil trade deficit last year thanks, in part, to the unresolved Cepu oilfields case.
"The development of the Cepu block must be done as soon as possible for the sake of national interest," newly appointed president of Pertamina, Ari Soemarno, told reporters in a joint press conference in Jakarta on Monday (March 13).
But that national interest û attracting foreign investment and producing more oil -- has weighed heavily on officials for years.
So why now?
President Susilo Bambang Yudhoyono, politically savvy enough to see that an unresolved Cepu does not boost FDI incentives or help the OPEC-member nation reverse its decline in oil production, has been working behind the scenes û and out in the open -- to end the dispute.
For example, Soeamarno was appointed the state-owned company's CEO on March 8, replacing Widya Purnama, who had firmly insisted Pertamina should be the operator of the project. The government fired all but one of its seven directors when it appointed Soemarno, a career Pertamina executive whose previous post was marketing director, as the new top official. This latest board is the fourth management team at the company in the last six years.
Yudhoyono may have upped the pressure to sort Cepu out in light of US Secretary of State Codnoleezza RiceÆs two-day visit this week and before British Prime Minister Tony Blair visits at the end of March as the president seeks to portray Indonesia as a smart investment destination.
Given the latest FDI numbers, Yudhoyono needs to get the word out. The Investment Coordinating Board announced last month that FDI approvals for the first month of the year were steeply down to $463 million (from $872 million last year).
Another reason Yudhoyono may want to see the oil dispute settled may be negative press surrounding IndonesiaÆs Adaro coal mines and the ensuing litigation in Singapore, which draws attention to the struggles of doing business in Indonesia.
Indeed, this is a long, drawn out story. ExxonMobil bought the rights to the Cepu oil field in 1998 from a company run by Tommy Suharto, one of the sons of Indonesia's former dictator. The US company later discovered that it contained an estimated 250 million to 500 million barrels of oil reserves but it was unable to develop the block, however, because of a tussle with Pertamina over how to share profits.
Acccording to the latest proposed plan, ExxonMobil will hold the posts of general manager, operating manager and deputy planning manager in the joint organization, while Pertamina will hold other key positions, including deputy general manager, deputy operating manager and planning manager. A committee to be controlled by ExxonMobil and Pertamina will oversee the organization, and has the authority to make and decide on operational plans, working programs and budgeting.
But we have been here before. Agreements have been announced û and then, a stumbling block appears.
Critics of ExxonMobilÆs participation steadfastly argue that Pertamina is capable of producing the oil on its own û often the none-too-subtle subtext is: We can do it, we donÆt need foreign intervention and we certainly donÆt want to give foreigners any money for digging up our own national resources.
Consider that last week both legislator Dradjad H. Wibowo of the National Mandate Party, and House of Representatives energy commission member Ramson Siagian argued that Pertamina should operate the field itself. Siagian argued that Pertamina had the financial capability to operate the disputed block by itself.
In a discussion in the House last week, he said that Pertamina could use last year's government dividend of Rp 12 trillion ($1.3 billion) to finance the block's operation.
"It could use the dividend to finance operation before delivering the money to the state budget," he said, quoting the 2006 state budget law. He went on to say that it could also use that money to improve its technology.
The day before, on a Jakarta talk show entitled Metro TV, the head of Pertamina's Cepu block exploration and production unit, Hestu Bagyo, said that his company would be unable to operate the block alone due to a lack of technology and finance.
So just a week ago û politicians were sounding off that Pertamina should still have total control. ThereÆs no reason to expect them to stop speaking out against the Pertamina-ExxonMobil agreement. A deal may be due to be signed tomorrow but 2008 is a long way off.
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