Caltex's view on Pertamina 'faulty'

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.