Caltex's view on Pertamina 'faulty'

By R. O. Hutapea

JAKARTA (JP): PT Caltex Pacific Indonesia caused quite a stir when it cast doubt on the ability of state-owned oil company Pertamina to continue exploring and producing crude oil in Sumatra.

What made the announcement about Pertamina's stake in the Coastal Plains Pekanbaru (CPP) block, in the Riau province, even more startling was the source.

The statement came from Caltex President Director B. Hakim, the highest Indonesian executive to graduate from the oil mining department of the Bandung Institute of Technology.

The next disturbing development came when the statement was published in the media on July 22. It followed news of a non- extension to the CPP block's production sharing contract when it expires in 2001.

A further surprise came with a statement that the government would be disadvantaged. And what was at stake? Revenues amounting to US$2.1 million -- from the enhanced operation recovery (EOR) of 250 million barrels -- after the transfer of the CPP block to Pertamina. Pertamina did not have sufficient knowledge of EOR technology, it was said.

This is a very hasty conclusion. The facts show that Pertamina has for a long time been preparing its experts for EOR technology. This is done both through education abroad and by work experience in EOR research, development and operation activities. Involved are several associate companies abroad and at home, including Caltex.

This training is necessary for Pertamina, which operates old Shell and Stanvac oil fields in Sumatra, Java, Kalimantan and Irian Jaya.

Pertamina has even conducted EOR activities in the various oil fields it operates through technical assistance contract cooperation with a number of foreign companies.

It must be noted that the EOR technology in the oil industry is not a new one. It was widely applied in U.S. oil fields prior to World War II.

In Indonesia, Stanvac, a daughter company of Mobil Oil and Esso, conducted EOR activities at Talang Akar -- Pendopo oil field in South Sumatra -- in the form of gas injection for reservoir pressure maintenance.

As former technical director of mining at the Directorate General of Oil and Gas, I know that a number of other big oil companies, including Pertamina's production sharing companies, mastered EOR technology with reliable support from research and development.

It is necessary to remind the Caltex board of directors not to boast about EOR technology. They obtained this technology from their experience in the Duri and other oil fields in the Rokan block. The government largely cofinanced this from its share in the 1963 to 1983 work contract and the 1983 to 2003 production sharing contract.

Part of the Caltex experience in EOR was obtained by its affiliate company in the Kern River (Bakersfield) and in the San Ardo fields, both in California, and related research and development activities.

The success of EOR technology application is very field- specific. It is to a high degree determined by the nature of the reservoir layers of each field and that of the reservoir itself.

The EOR technology which was successfully applied at the Duri oil field, is for the greater part a result of research and tests made in that oil field, the cost of which was borne by the yield of the production sharing contract of the Rokan block. Furthermore, the EOR technology applied in Duri and Minas may not be suitable for the oil fields in the CPP block.

The final section of Caltex's statement is also extraordinary. It focuses on Caltex's level of efficiency through comparison of production/barrel cost between Caltex and Pertamina. This comparison does not specify the differences between the characteristics of the fields, reservoir layers and oil production managed and operated by each company.

Such a cost comparison between oil companies is normally not used to evaluate the level of efficiency and performance of a company or the capabilities of a company. At present it is not possible for Caltex to say that the oil production cost/barrel of Pertamina after starting the management of the CPP block in 2001 will be US$ 5 to $8 because there is no basis for it.

Caltex's reasoning for doubting Pertamina's capabilities in EOR technology is entirely untrue. And even if it were true, it does not need to be a condition for decision making. Caltex only needs to study the history of the development of Pertamina's liquefied natural gas projects.

If the government and the Pertamina board of directors in 1973 had followed the Caltex way of thinking, Indonesia's LNG giant projects would certainly not have developed in the way they have.

Ideas, thoughts, engineering of implementation, making of contracts and agreements related to Indonesia's LNG basic policies were in the hands of Indonesians in the first Pertamina LNG team. I played a role in those developments.

In the beginning, the ideas and concepts of the Indonesian side were not accepted by the production sharing contractor. Thanks to the team's perseverance and diplomacy, the ideas were accepted by all sides including international banks and financial institutes.

Indonesia's new LNG projects like Natuna and Wiriagar will also be developed in line with the previous LNG structure. Pertamina's acquisition of LNG technology took place through the purchase and hire pattern.

All sides need to exercise caution in reading the Caltex board's statement. It has been disparaging toward Pertamina and is not aware that the government and Pertamina officials are no longer laymen in the international oil world. An "investment regime" in Indonesia's upstream gas and oil mining activities was created by Indonesia itself and is now used in a number of countries.

Apparently the Caltex board was surprised to hear that Indonesia had decided not to extend the CPP contract. In previous deals, Caltex had always succeeded in convincing the government to agree to its proposals. There is, however, an adequate basis to refuse them. The extension of the production sharing contract of the Rokan block from 2003 to 2023, in 1990 to 1992, is an example.

Looking back at the oil production cost of the Rokan block in the 1993/1996 period, it has turned out to be not as high as proposed by Caltex during the discussions to support its proposal. It needs to be explained that some oil experts in the government and in Pertamina in between 1990 and 1992 wanted the production sharing contract of the Rokan block to start in 2003, to be given to a 50/50 joint company between Pertamina and Caltex for 20 years. Some other experts did not want the contract extended.

All the experts hoped that whatever would be decided by the government at the time, the decision would be taken after the discussions had finished.

The result was an extension of the production sharing contract of the Rokan block to Caltex, in which the government would have a greater share than the current one.

Caltex should have shown a more mature attitude upon hearing the government's decision on the non-extension of the contract.

The writer is former director general of gas and oil at the mining ministry.

Window A: This is a very hasty conclusion. The facts show that Pertamina has for a long time been preparing its experts for EOR technology.

Window B: If the government and the Pertamina board of directors in 1973 had followed the Caltex way of thinking, Indonesia's LNG giant projects would certainly not have developed in the way they have.