Cepu block settlement looks good, for the time being<\/p>\n
Dadan Wijaksana, The Jakarta Post, Jakarta<\/p>\n
Fresh investment. That is what comes to mind when a government-
\nsanctioned negotiating team on the Cepu block revealed last week
\na deal had been reached with the U.S. energy giant ExxonMobile,
\nending a nagging dispute that had stalled the development of the
\noil-rich block since 2001.<\/p>\n
While a production sharing contract (PSC) -- the legal basis
\nfor the block's operators to start all the work -- would only be
\nsigned within the next 90 days, the in-principle agreement is
\nstill, by far, the most substantial results produced in the high-
\nprofile case.<\/p>\n
Above all, the deal, despite it being a preliminary one, will
\nbe seen as a stronger initiative to address one prevailing
\nAchilles heel that has for a very long time been a key concern of
\nthe business community -- uncertainty.<\/p>\n
It is no coincidence that the stagnant investment climate in
\nthe energy sector, as it is in most other sectors, over the years
\nhas occurred at a time when the country is struggling to restore
\ninvestor confidence.<\/p>\n
Despite being in dire need of funding sources, so that it can
\ngenerate more robust economic activities and push economic growth
\nup, certainty -- a foremost prerequisite to luring fresh
\ninvestment -- is not something this country has been very good at
\nproviding.<\/p>\n
In addition to traditional problems of security, confusing
\nregulations and labor issues, years of haggles and hassles in
\nsome key cases pitting the government against foreign companies
\nhave been largely to blame for the eroding confidence and poor
\nperformance in investment.<\/p>\n
Against this backdrop, the settlement of the Cepu block --
\nwhich contains huge oil reserves and could boost, at peak
\ncapacity, the country's dwindling oil output by more than 15
\npercent -- is imperative indeed.<\/p>\n
As not only does it highlight the government's commitment to
\nresolving a high-profile case of dispute with a foreign investor,
\nit also paves the way for the pumping of billions of dollars in
\nfresh investment into the largely untapped block, located on
\neither side of the border of Central Java and East Java
\nprovinces.<\/p>\n
With preliminary estimates showing that the investment needed
\nto develop the area may reach up to US$2 billion, before it
\nstarts producing in about three years, the deal should bode well
\nfor that objective.<\/p>\n
However, the impact will prove to go beyond that, as other
\ninvestors will see that the government is willing to go the extra
\nmile to provide legal certainty, and a climate conducive to doing
\nbusiness here.<\/p>\n
Meanwhile, as the big picture looks largely favorable, equally
\nimpressive is the deal itself with the government managing to
\nsecure quite a healthy production split scheme, even better than
\nmost of the existing oil contracts.<\/p>\n
The deal, under which Exxon is allowed to manage the block
\nuntil 2030, reveals that the production split would vary in
\naccordance with the movement of global oil prices, although the
\ngovernment would get larger shares one way or the other.<\/p>\n
State oil and gas company Pertamina will be awarded $400
\nmillion in compensation for extending the contract, which would
\notherwise expire in 2010.<\/p>\n
Under the adjusted split scheme, the share of Exxon will be
\nbetween 6.75 percent and 13.5 percent, while the government --
\ncounting the state oil company Pertamina and the local
\nadministrations' cuts -- will rake in between 86.5 percent and
\n93.25 percent.<\/p>\n
This allows the government to get the most benefit if the oil
\nprices are high, while on the other hand, provides incentives
\nalso to the investing contractors should the prices go low, as
\ntheir profit share will increase accordingly.<\/p>\n
The block is estimated to hold two billion barrels of
\npotential oil reserves and 11 trillion cubic feet of potential
\ngas reserves. At its peak, the area may produce up to 170,000
\nbarrels per day (bpd), or about 17 percent of the domestic oil
\noutput of slightly above 1 million bpd.<\/p>\n
With the oil output has been declining by an annual average of
\n5 percent in the past six years, exacerbated by the steady
\nincrease in fuel consumption at home, the Cepu block simply
\noffers great benefits that the government could not afford to
\nmiss out on.<\/p>\n
Increased oil output means less oil imports, be it in crude or
\nin processed fuel products, giving Pertamina an easier job in
\nsecuring domestic fuel supplies. Equally important is that, less
\noil imports mean less demand for dollars, and thus eases pressure
\non the rupiah.<\/p>\n
All seems to be working out fairly well.<\/p>\n
The government now has to work to ensure that the ironing out
\nof technical and procedural details for the final contract runs
\nsmoothly so that the official signing of the final deal takes
\nplace on schedule.<\/p>\n
Potential obstacles could, however, come from some House of
\nRepresentative legislators, and perhaps some of Pertamina's top
\nbrass, who have said they would reject any deal on Cepu,
\nquestioning the legal mandate and good intention of the
\nnegotiating team.<\/p>",
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