High oil prices on opportunity for local firms to expand: Medco

High oil prices on opportunity for local firms to expand: Medco

After 25 years in business, publicly listed PT Medco Energi
Internasional is currently the largest locally controlled private
company in the country's oil and gas industry. Medco president
director Hilmi Panigoro spoke with The Jakarta Post's Leony
Aurora on the roles that local oil companies can play in
developing the sector and how to boost exploration in Indonesia,
which is in dire need of new discoveries amid the many depleted,
aging fields.

Question: After 30 years of booming oil and gas sales, why are
there still so few domestic companies of any significance?

Answer: When we talk about local oil companies, the bigger ones
are Medco, Energi Mega Persada (EMP) and Star Energy. Other than
that, we have Pearl, Bumi Siak Pusako, etc.

The oil business is a capital- and technology-intensive
industry. It takes time to find an Indonesian company with the
financial resources and risk appetite to mingle in this sector.
When production-sharing contracts started to be applied in 1968,
all major global companies came in. At the time, the Indonesians
either didn't have the money or the proper understanding of the
sector. People learned and in the 1980s, local companies started
to grow -- not as operators, but to provide supporting services,
like drilling, and Medco is one of them.

In the early 1990s, after these companies had gathered enough
capital, they entered into the core business of exploration and
production. Medco started cautiously by acquiring producing
blocks, then going into exploration. It's a natural evolution.
I'm not saying that it's too late. The success rate in
entrepreneurship is 5 percent, in other words if 20 companies
start, just one will survive. So we should be proud that 3 or 5
companies have made it so far.

We should strive, however, to move up the ladder. If we're a
local company now, in the next 10 years, we should be a regional
company, and in another 10 years a global one.

What are the challenges for local oil companies on a playing
field filled with major international players?

The soaring oil prices causes heavy competition in the industry.
Everyone wants to acquire assets.

We cannot win if we compete head-to-head with ExxonMobil,
CNOOC, BP, or others. They're too big. Therefore, we have to find
areas where we have advantages over the others. Medco focuses its
acquisitions in Indonesia on smaller assets -- those whose size
will not attract the major players. Sometimes, there are also
local problems that others are not willing to take on, but we
are.

Abroad, we look for areas that major foreign companies are not
interested in. For instance, there are problems now in the Middle
East and North Africa. We go there, where the competition is more
manageable.

One of the opportunities for local companies here is by
working with Pertamina, which has dozens, even more than 100
structures that have been identified, but are underdeveloped or
yet to be developed. It will need partners to develop the fields.
Small local companies can participate there. However, they need
to have the real intention of developing. There are many
companies that do not have the financial or technical resources
to develop oil fields, but they try to get the blocks just to
sell them afterward. They work merely as brokers. It's a
phenomenon that has occurred in the past few years, and it gives
a bad impression of local companies.

How are the high oil prices affecting local oil companies?

All of the companies get extra cash flow from the high oil
prices, and I think they should use it to conduct exploration.
Medco, for example, will invest at least US$200 million for
exploration in the next three years, including the $80 million to
be spent by Anadarko in a partnership with us. We haven't seen
extra efforts from (smaller) local companies, as the oil prices
have been high only in the past year. Perhaps by the end of this
year we will see more of them.

What incentive can be given to boost local companies' roles?

In my opinion as a member of the Indonesian Chamber of Commerce
(KADIN), the government should provide incentives for domestic
firms, by looking for smaller fields that big companies are not
interested in. It should give more privileges to local companies
to develop them by conducting a special offering.

What can the government do to encourage more exploration in
general?

Most exploration is currently being done in difficult-to-reach
areas. Most of the easier areas -- those onshore or in shallow
seas, and with established infrastructures -- are already
controlled. The problem lies in the eastern part of the country.
The sea is deep, the infrastructure is lacking, and the some
places are very remote. A well there can cost from $10 million to
$30 million. That is not in the local companies' league. They are
left to the big boys. Companies like ExxonMobil, Shell, BP, have
annual exploration budgets worth several hundred millions
dollars.

To get the investment, we have to compete with other
countries. Today, one of the determining factors is how
attractive the applied fiscal terms -- split, cost recovery etc.

Indonesia is in the worst 20 percent of countries as far as
those terms are concerned.

The second is the general investment climate, like security,
and legal certainty.

In the previous block offerings, the government offered oil
production splits of up to 30 percent for the contractor. Is that
inadequate?

We have to be more aggressive to win investment. Other countries
offer a 50:50 split. Malaysia has similar terms as us, but people
prefer to go there as the legal certainty and infrastructure are
better. Africa is even worse than Indonesia on security issues,
but the geological conditions are much more attractive. There,
the basins are vast and the reserves large.

So what is a good split for Indonesia?

The splits for the western areas should be left as they are now.
But to push investment in the eastern part, the government should
go to 50:50.