Cepu Deadlock<\/p>\n
The devil is in the detail. This old adage warns of the
\npitfalls in agreements, especially when they involve big, complex
\ndeals. Nonetheless, it is flabbergasting that five months after
\nthe conclusion of an agreement-in-principle between state oil
\ncompany Pertamina and ExxonMobil Corp. in June for the
\ndevelopment of the oil-rich Cepu block in Central Java, the final
\ndeal has yet to be wrapped up.<\/p>\n
When ExxonMobil and a special government negotiating team
\nannounced a preliminary agreement in late June, it was hailed as
\na model for new production sharing contracts (PSCs) in the
\nhydrocarbon sector. So optimistic were the parties about the deal
\nthat both expected to work out the technical details for a final
\nagreement by September at the latest.<\/p>\n
But is now already December, and Pertamina and ExxonMobil are
\nstill deadlocked over the details of their joint operation
\nagreement. Pertamina even threatened last week to develop the
\nCepu block by itself, even at the risk of facing a messy
\narbitration lawsuit against the giant American oil company.<\/p>\n
No further details were immediately available as to the bones
\nof contention causing the stalemate, but we do know that the
\ncountry, already a net oil importer, desperately needs to develop
\nthe Cepu block as soon as possible as it is estimated to be
\ncapable of pumping 170,000 barrels of oil a day.<\/p>\n
It was the urgent need for additional oil reserves that
\nprompted the government to intervene early this year and set up a
\nspecial inter-ministerial team to accelerate negotiations after
\nPertamina and ExxonMobil became deadlocked after more than three
\nyears of negotiations.<\/p>\n
The agreement-in-principle that was achieved in late June was
\nconsidered the best for all parties. Under the contract,
\nPertamina and ExxonMobil will each have a 45 percent equity
\nholding in the block with the remaining 10 percent being held by
\nthe East and Central Java administrations. The production split
\nwould be based on a new, innovative arrangement whereby the
\ngovernment will take 85 percent of the output, and the contractor
\n15 percent if the international prices average over $45\/barrel,
\nand 70:30 if the oil prices average below $35\/barrel. Based on
\nthis sharing agreement, ExxonMobil's take will range from 6.75 to
\n13.50 percent, depending on oil prices.<\/p>\n
ExxonMobil has also agreed to pay Pertamina around $400
\nmillion in compensation for giving up its right to reclaim the
\nCepu oil field from ExxonMobil when its current contract expires
\nin 2010. About $2 billion in new investment will be needed to
\nbring Cepu -- estimated to hold about 500 million barrels of oil
\n-- to full-capacity production.<\/p>\n
Technical details and terms for the joint operation of the
\nCepu block should understandably be clear-cut so as to prevent
\nmisinterpretations. But failure to wrap up a final agreement
\nafter five months of negotiations is simply mind-boggling. Most
\nhad thought that the most complex elements of the deal were
\nsettled in June.<\/p>\n
Given the urgency of the government to conclude the deal,
\nPertamina's outburst last week that it might go alone in
\noperating the field was rather confusing. This emotional
\nexpression demonstrated that Pertamina and the government are
\nlike different entities with different interests.<\/p>\n
We understand that the terms of the joint operation agreement
\nshould be formulated in such a way to give autonomy to both
\nPertamina and ExxonMobil to manage their operating or production
\ncosts with a minimum of bureaucracy. On the other hand, the
\ngovernment, which in this case is represented by BP Migas
\n(upstream oil regulatory agency), is tasked with controlling
\nproduction costs because the government's take (share) from the
\nproduction-sharing contract (PSC) is based on output after
\nproduction costs are recovered.<\/p>\n
Hence, the provisions should be clear that costs claimed by
\nthe contractor are truly expenses needed for production
\noperations. It is also in light of controlling production
\ncosts that the government hired an independent surveyor
\ncompany to check equipment and machinery procured by oil
\ncontractors\/operators to ensure that their procurement costs
\nreflect normal market prices.<\/p>\n
But this issue is not entirely new to the government. Since
\nthe late 1960s, it has built up considerable experience in
\nsupervising oil contractors' operations, first through BKKA, and
\nnow through BP Migas. Moreover, as a 45 percent shareholder in
\nthe Cepu block, Pertamina itself will be very active, together
\nwith ExxonMobil, in the day-to-day management of the PSC for the
\nblock.<\/p>\n
It is imperative that the government, Pertamina and ExxonMobil
\niron out the joint operation agreement so that the hydrocarbon
\nresources at Cepu can be tapped as soon as possible for the
\nbenefit of the nation.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/cepu-deadlock-1447899208",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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