From: ReutersBy Ed Davies - Analysis
GAYAM, Indonesia (Reuters) - Exxon Mobil Corp's (XOM.N) Cepu find in this poor rice-growing area of Java was meant to revive Indonesia's flagging oil output, but nearly a decade later there has been barely a trickle of oil from the huge field.
Indonesia has the world's 10th largest natural gas reserves and 25th biggest oil reserves, while it ranks in the top ten for copper, gold, nickel and tin, but a poor investment climate has deterred new foreign interest to develop its rich resources.
The snail's pace of pumping oil at Cepu, which ranks among the U.S. major's top 10 projects worldwide, illustrates the multiple barriers foreign resource firms often face developing projects in Southeast Asia's biggest economy.
President Susilo Bambang Yudhoyono, who was re-elected in July, failed in his first term to lift flagging oil output or attract major new foreign investment in mining to boost output.
To reverse this legacy, analysts say he needs to move swiftly to cut red tape, clarify oil and mining regulations and curb excessive resource nationalism to attract more investment.
Ari Soemarno, former head of state oil firm Pertamina who successfully concluded negotiations with Exxon Mobil on Cepu after the project was delayed for years, told Reuters the government needed a firmer stance to ensure projects were not held up by political squabbles or policy flip flops.
"They should make a breakthrough in terms of mindset," said Soemarno, who is now involved in businesses that include energy.
The field, which straddles both East and Central Java, is due to eventually produce 165,000 barrels per day (bpd) when it hits full output, or nearly a fifth of Indonesia's current production.
Exxon used advanced 3-D seismic technology to find oil in Cepu in 2001 after other firms had given up the hunt, but then spent five years wrangling with Pertamina over control and the share of revenue.
Yudhoyono, who urgently wants to stop a slide in oil output as other fields age, eventually ended the deadlock by firing Pertamina's board, resulting in the two firms agreeing in 2006 to jointly develop Cepu with Exxon as operator.
POLITICS THREATENS PROJECTS
Indonesia, which also hosts top global energy firms such as Chevron Corp (CVX.N) and BP Plc (BP.L), has been offering new exploration rights and financial incentives for oil fields but has struggled to get more production on stream.
The country lacks the billions of dollars needed to exploit new fields -- now often offshore and difficult to access in deep waters -- but the involvement of foreign investors, who bring capital and technology, is a sensitive political issue.
Against this backdrop, Cepu may be the only major investment to add to oil production in the next five years, while gas projects in the pipeline also face uncertainties.
The future of a Sulawesi liquefied natural gas (LNG) project involving Pertamina, PT Medco Energi International (MEDC.JK) and Japan's Mitsubishi Corp. (8058.T) looks in doubt after mixed government signals on whether LNG could be exported or only used domestically meant the project may be uneconomic.
Exxon Mobil is also still involved in a dispute with the government over the operating rights of the huge Natuna D-Alpha gas project estimated to require about $40 billion investment.
Investor uncertainty has also been increased by a government move to revise a cost recovery scheme reimbursing oil firms for exploration and production costs under pressure from parliament.
Yudhoyono said in May he still supported gas exports and vowed legal certainty for investors, while also seeking to resolve tax issues which currently deter oil and gas investment.
Former Pertamina head Soemarno said authorities also needed to phase out budget-straining fuel subsidies, particularly now that Indonesia has become a net crude importer and has quit OPEC.
"The era of easy oil is over for Indonesia," he said.
There is similar uncertainty in the mining sector. Resource nationalism has often been prevalent, while a dragged-out process passing a new mining law has also put off investors.
The government is currently drafting regulations on the law, which was passed last year and replaced one dating from 1967.
Under the new law, miners will be put on shorter-term permits rather than longer-term contracts, while they will also have to process minerals in Indonesia and set aside coal for the domestic market. Foreign investors will also have to divest some of their shares in a mining project after a period.
Some foreign mining firms have shelved investment plans since last year. BHP Billiton (BHP.AX) scrapped a study to develop a nickel project in eastern Indonesia and also opted not to go ahead with a coal mine in Central Kalminantan. Chinese firm Tsingshan Mineral Company Ltd scrapped a $500 million nickel project in North Maluku in Indonesia.
Tortuous red tape tied to land ownership issues also frequently holds up resource and infrastructure projects in Indonesia, particularly in densely populated islands like Java.
"The biggest challenge right now is land acquisition. We could use all the help we could get," said Deddy Afidick, a spokesman for Mobil Cepu Ltd, a unit of Exxon Mobil.
Exxon Mobil has a team in Cepu currently negotiating with 3,000 owners to purchase 4,000 plots of land in an area where the average size of a plot is only a hectare, Afidick said.
Along with the complexities of land ownership on the ground, the involvement of local governments in an era of decentralization is now also a bigger issue for investors.
Energy Minister Purnomo Yusgiantoro said in a May interview that Cepu faced delays because of a dispute with the Tuban district over a pipeline and despite reports of a resolution a source close to the project said a permit has yet to be issued.
Six wells have been drilled for early production on Cepu's main Banyu Urip field, which is estimated to have reserves of 350 million barrels, including two to re-inject gas and water.
On a recent visit to the site, a pipeline from Well Pad "A" was being laid so that oil can flow oil to a nearby Gas Oil Separation Plant (GOSP), which is also under construction.
Some test production started in December and early production of up to 20,000 barrels per day (bpd) could begin in August, before cranking up to its peak by 2012, when more infrastructure including an on-site central processing facility is in place.
Tom Grieder of IHS Global Insight said the re-election of the market-friendly Yudhoyono should be positive for Indonesia's oil and gas sector, noting it must attract foreign investment to boost supply and distribution.
"This more than anything else will force the government to gradually improve investment terms for the oil and gas sector and start reducing fuel subsidies as the alternatives are shrinking state finances, rampant inefficiency and, ultimately, an oil and gas supply crisis," said Asia energy analyst Grieder.