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.