Govt, expert at odds over impact of Cepu contract
The Jakarta Post, Jakarta
The government sees no problem with Pertamina's decision not to extend ExxonMobil's contract on the Cepu block, but an expert warned on Thursday that the decision would further hurt the country's investment climate.
Oil and gas authority BP Migas' chairman, Rachmat Sudibyo, said on Thursday that Pertamina's decision would not bring an adverse impact on the country's investment climate since the decision was legally acceptable.
"There won't be a problem if a contract is extended or not. A problem will only arise if a contract is terminated before its expiry date," Rachmat was quoted by Antara as saying.
However, Gatot K. Wiroyudho, the former director of Pertamina's division in charge of the supervision of oil and gas contractors, said Pertamina's decision had undermined the government's efforts to build a conducive investment climate in the country.
"The decision has sent a poor signal to foreign investors now operating in Indonesia as well as those willing to come," Gatot told The Jakarta Post.
Pertamina's new president Widya Purnama recently announced, that it had decided not to extend ExxonMobil's contract on the Cepu block and would operate the block by itself after ExxonMobil's contract expires in 2010.
ExxonMobil has invested hundreds of millions of U.S. dollars to find more than 600 million barrels of oil and between 700 billion and 1.25 trillion cubic feet of natural gas in the block, located on the border areas of Central and East Java.
ExxonMobil and Pertamina signed a head of agreement that would pave the way for both firms to set up a joint venture to operate the block after 2010 in July. The head of agreement was subject to an approval from the government.
However, rather than approving the head of agreement, the government reshuffled Pertamina's management in August.
The government is reportedly not satisfied with the amount of compensation offered by ExxonMobil to Pertamina in return for the extension of the contract. The compensation totalled US$400 million in grants and technical assistance.
Rumors in the industry that Chinese oil firms, which are now aggressively expanding their business in Indonesia, have approached Pertamina to jointly develop the block, offering a larger amount of compensation to the firm.
ExxonMobil has planned to invest more than $2 billion to extract the oil and gas deposits in the Cepu block.
The firm expected to produce 165,000 barrels of oil per day starting in 2006, from which the government will earn $2 million per day in revenue shares.
Pertamina meanwhile promised to start production on the block in 2012.
Gatot acknowledged that legally, Pertamina committed no wrong with its decision not to extend the contract, but, he said, a long-term contract, such as the one owned by ExxonMobil, should be treated with "greater flexibility" rather than with a strict legal approach.
"If, for example, Pertamina invests in Iraq and has spent a lot of money to find a significant oil deposit but could not exploit the deposit because its contract is going to expire, the firm will certainly be very disappointed," Gatot explained.