Exxon, Pertamina reach agreement on Cepu oil block

Exxon, Pertamina reach agreement on Cepu oil block

Urip Hudiono, The Jakarta Post/Jakarta

U.S energy giant ExxonMobil Corp. and state oil and gas firm PT
Pertamina have officially reached an in-principle agreement to
settle their four-year dispute in developing the untapped oil-
rich Cepu block, officials said.

The two sides agreed on a participating interest and an
adjusted production sharing scheme.

Following the agreement, the two parties are expected to be
able to sign a joint ownership agreement (JOA) to develop the
Cepu block and a production sharing contract (PSC) with the
government within the next 90 days.

Exxon also agreed to pay Pertamina US$400 million as
compensation for extending its contract to develop the Cepu
block. The company will pay 75 percent of it in cash this year,
with the balance to be paid gradually over three years.

Head of the government negotiating team Martiono Hadianto
announced on Friday that all substantial issues had been settled.

"What remains now is working out the procedural details," he
said, and added that the team would give its report on the
agreement to State Minister of State Enterprises Sugiharto on
Monday.

Martiono said Pertamina and Exxon had agreed on a
participating interest for the Cepu block of 45 percent each and
a 10 percent stake for the local administrations where the oil
fields are located.

Located on either side of the border of Central Java and East
Java, the Cepu block is estimated to contain two billion barrels
of potential oil reserves and 11 trillion cubic feet of potential
gas reserves, and significantly, is expected to increase the
country's oil output by 18 percent.

As for the production split, Martiono said it would vary
according to the oil price at the time.

If the oil price averages over US$45 per barrel in any given
year, the production share will be 85 percent for the government
and 15 percent for the three parties of Exxon, Pertamina and the
local administrations.

If the oil price is between $40 and $45 a barrel, the share
ratio will be 80:20; and if the oil price is between $35 and $40,
the share becomes 75:25.

Lastly, if the oil price falls below $35 per barrel, the
production share becomes 70:30.

With such a scheme, the share for Exxon will be between 6.75
percent and 13.5 percent, while the government will get between
70 percent and 85 percent.

Under the previous contract between Pertamina and Exxon, the
production share was set flat at 80 percent for the government
and 20 percent for Exxon.

Negotiating team spokesman Rizal Mallarangeng said the split
scheme would fit the criteria of settling the dispute by
providing a win-win solution for all parties.

"According to the adjusted share scheme, if oil prices are
high, then the government will get most of the benefit," he said.
"If oil prices are low, the share shifts to the benefit of
investing contractors as an incentive for them."

Martiono added that in any situation, the share for the
government would always be the highest.