Cepu, Indonesiaâ€™s largest oil block, is the nationâ€™s best hope for lifting its sagging crude production, which has fallen to less than one million barrels per day. But the ongoing drive to reach peak output of 165,000 bpd at Cepu had been anything but smooth this year, with bureaucratic tangles and skyrocketing costs nearly bringing the project to a standstill.
Exxon Mobil discovered Cepu on the border area of Central and East Java in 2001 and the block is estimated to hold 600 million barrels of oil and 1.3 trillion cubic feet of gas. According to the operation agreement struck in September 2005, peak production was to be reached by 2012 but development has crawled along because of land disputes, trouble securing construction permits and rows over which company would lead the operation.
Production finally began in late August but the flow of oil has been slow, rising to 20,000 bpd before being halved by the refit of a refinery. Taking these difficulties into account, Exxon has pushed back the target for reaching peak production to 2014.
The block is being jointly developed by Exxon and state energy producer PT Pertamina, with each holding a 45 percent stake and the balance going to local administrations. Under a revenue-sharing deal, the government claims 85 percent of revenue with the rest going to contractors.
Industry observers have blamed Cepuâ€™s lead operator, Mobil Cepu Ltd. - Exxonâ€™s local unit - for the slow progress, while the central and local governments have been criticized for doing little to clear obstacles to production.
Dirgo Purbo, an energy analyst from the Bandung Institute of Technology, said upstream regulator BPMigas should get tough on Exxon over the delays. â€śThey have had one-and-a-half years to develop the project, but things are still behind schedule,â€ť he said.
The House of Representatives Commission VII, which oversees energy, has repeatedly urged the government to review Exxonâ€™s capacity to develop the block and to allow Pertamina to lead the project instead.
Karen Agustiawan, the state oil producerâ€™s president director, has said it is ready to take over as soon the government says so.
Dirgo said the government should give Exxon an ultimatum that if its fail to reach peak output by the target date, full control of the block should be handed to Pertamina.
Despite the chorus of criticism, Exxon claims to have undertaken extraordinary efforts to lift output. Peter A. Hiskins, Cepu operations manager, said in November that land acquisition has been the major roadblock, with the lead operator also unable to secure construction permits for vital production facilities.
When the government demanded that output accelerate to 20,000 bpd in August, Exxon didnâ€™t have the land to build a pipeline to its adjacent production facility, so it was forced to take the stopgap measure of running 2.2 kilometers of pipe over an alternative route at great expense.
â€śWe couldnâ€™t get the land in time. At the last minute, we managed to get land in another area, so we routed the pipe through it to install the pipeline in time,â€ť Hiskins said. â€śWe know peopleâ€™s opinion about us but if you see what we have produced despite the land issues, it has been an amazing effort.â€ť
Another complication is that crude from Banya Urip, Cepuâ€™s only field in production, contains high amounts of wax, sulphur and carbon dioxide so the pipeline to carry it required advanced design. A special chemical had to be injected into the pipes to ensure that the oil did not turn into a shoe polish-like solid during transit.
In addition, gas must be used to lift the oil in the wells to the pipeline before it can be transported to refineries. Exxonâ€™s initial production facility is capable of storing 20,000 bpd, but the oil major says demand from buyers has not reached that level, further slowing production.
The output is sent to PT Tri Wahana Universalâ€™s refinery as well as the Mudi processing plant, owned by Pertamina and PetroChina, but the plants have not yet reached full capacity.
The TWU plant, which has a capacity of 6,000 bpd, has been offline since November for testing. The amount of crude sent to the Mudi facility ranges from 10,000 bpd to 12,000 bpd.
Exxonâ€™s ambition to get back on track rests on building a peak production facility just north of the block but here too progress has been slow.
The construction timetable is dependent on government approval for the engineering, procurement and building plan. The oil major said that after receiving clearance, the construction may take three to four years, meaning peak output would be reached by 2014 at the earliest.
Upstream oil and gas regulator BPMigas, which has publicly questioned Exxonâ€™s competence, has confirmed the proposal is under review by the Energy Ministry. Achmad Lutfi, BPMigasâ€™s deputy chief of planning, said the technical details must be studied carefully, taking into account differences from the initial plan of development.
Exxon is also waiting to get the green light for an offshore storage facility in the Java Sea with capacity of 1.6 million bpd to 1.8 million bpd. â€śWe want to build it as soon as possible, but we need the government to release the approval,â€ť Hiskins said.