Cepu block settlement looks good, for the time being

Cepu block settlement looks good, for the time being

Dadan Wijaksana, The Jakarta Post, Jakarta

Fresh investment. That is what comes to mind when a government-
sanctioned negotiating team on the Cepu block revealed last week
a deal had been reached with the U.S. energy giant ExxonMobile,
ending a nagging dispute that had stalled the development of the
oil-rich block since 2001.

While a production sharing contract (PSC) -- the legal basis
for the block's operators to start all the work -- would only be
signed within the next 90 days, the in-principle agreement is
still, by far, the most substantial results produced in the high-
profile case.

Above all, the deal, despite it being a preliminary one, will
be seen as a stronger initiative to address one prevailing
Achilles heel that has for a very long time been a key concern of
the business community -- uncertainty.

It is no coincidence that the stagnant investment climate in
the energy sector, as it is in most other sectors, over the years
has occurred at a time when the country is struggling to restore
investor confidence.

Despite being in dire need of funding sources, so that it can
generate more robust economic activities and push economic growth
up, certainty -- a foremost prerequisite to luring fresh
investment -- is not something this country has been very good at
providing.

In addition to traditional problems of security, confusing
regulations and labor issues, years of haggles and hassles in
some key cases pitting the government against foreign companies
have been largely to blame for the eroding confidence and poor
performance in investment.

Against this backdrop, the settlement of the Cepu block --
which contains huge oil reserves and could boost, at peak
capacity, the country's dwindling oil output by more than 15
percent -- is imperative indeed.

As not only does it highlight the government's commitment to
resolving a high-profile case of dispute with a foreign investor,
it also paves the way for the pumping of billions of dollars in
fresh investment into the largely untapped block, located on
either side of the border of Central Java and East Java
provinces.

With preliminary estimates showing that the investment needed
to develop the area may reach up to US$2 billion, before it
starts producing in about three years, the deal should bode well
for that objective.

However, the impact will prove to go beyond that, as other
investors will see that the government is willing to go the extra
mile to provide legal certainty, and a climate conducive to doing
business here.

Meanwhile, as the big picture looks largely favorable, equally
impressive is the deal itself with the government managing to
secure quite a healthy production split scheme, even better than
most of the existing oil contracts.

The deal, under which Exxon is allowed to manage the block
until 2030, reveals that the production split would vary in
accordance with the movement of global oil prices, although the
government would get larger shares one way or the other.

State oil and gas company Pertamina will be awarded $400
million in compensation for extending the contract, which would
otherwise expire in 2010.

Under the adjusted split scheme, the share of Exxon will be
between 6.75 percent and 13.5 percent, while the government --
counting the state oil company Pertamina and the local
administrations' cuts -- will rake in between 86.5 percent and
93.25 percent.

This allows the government to get the most benefit if the oil
prices are high, while on the other hand, provides incentives
also to the investing contractors should the prices go low, as
their profit share will increase accordingly.

The block is estimated to hold two billion barrels of
potential oil reserves and 11 trillion cubic feet of potential
gas reserves. At its peak, the area may produce up to 170,000
barrels per day (bpd), or about 17 percent of the domestic oil
output of slightly above 1 million bpd.

With the oil output has been declining by an annual average of
5 percent in the past six years, exacerbated by the steady
increase in fuel consumption at home, the Cepu block simply
offers great benefits that the government could not afford to
miss out on.

Increased oil output means less oil imports, be it in crude or
in processed fuel products, giving Pertamina an easier job in
securing domestic fuel supplies. Equally important is that, less
oil imports mean less demand for dollars, and thus eases pressure
on the rupiah.

All seems to be working out fairly well.

The government now has to work to ensure that the ironing out
of technical and procedural details for the final contract runs
smoothly so that the official signing of the final deal takes
place on schedule.

Potential obstacles could, however, come from some House of
Representative legislators, and perhaps some of Pertamina's top
brass, who have said they would reject any deal on Cepu,
questioning the legal mandate and good intention of the
negotiating team.