Govt, expert at odds over impact of Cepu contract

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.