Medco to move into offshore and geothermal sectors: CEO

Medco to move into offshore and geothermal sectors: CEO

Established by businessman-turned-politician Arifin Panigoro
in the 1980s, PT Medco Energi Internasional Tbk has become the
largest privately owned national energy firm, with an oil output
of 80,000 to 90,000 barrels per day. Today, the firm is
controlled by New Links Energy Resources, a joint venture between
the Panigoros, Thai firm PTT Exploration & Production and Credit
Suisse First Boston. The Jakarta Post's Johannes Simbolon
recently interviewed the firm's CEO Hilmi Panigoro, Arifin's
younger brother, on the firm's plans.

Question: What is the focus of Medco's attention in the next year
or the medium term?

Answer: The oil business is a nonrenewable one. Thus, in the
short and long term, we shall strive to strengthen our capability
to replace the reserves that have been exploited and add new
concessions for growth. We can do this in two ways: by boosting
exploration and by acquiring new fields.

Q: How much has been prepared for the acquisitions?
A: Early this year, we issued bonds and raised US$250 million.
All the proceeds are dedicated to the acquisitions.

Q: Where are you going to carry out the acquisitions?
A: In Indonesia. We see a lot of opportunities in Indonesia.

Q: Which areas are ready for acquisitions?
A: Changes in the ownership of assets in the oil and gas industry
are common. Companies divest a certain area, not necessarily
because they don't like it. It's a matter of strategy. It may not
fit their geographical or operational strategies. They may shift
focus from offshore to onshore. In such a case, they would then
divest their offshore operations.

Q: What is Medco's focus?
A: Geographically, our focus is Indonesia. With regard to type of
operation, in the past we focused on onshore operations, because
we did not have the skills to carry out offshore operations. Yet
today, we have embarked on offshore operations as well because
our new partner, PTT, is strong in these. We have made orders,
including for an offshore area in Central Sulawesi. We hope to
start production (there) in 2004.

Q: Why have you focused only on Indonesia, while your partner is
from Thailand?
A: Because we see a lot of opportunities in Indonesia. This is
probably because the investment climate in Indonesia is still in
a poor state, compared with other countries. The interest of
foreign investors in Indonesia is still at a low level. But for
us, this has provided an opportunity. There isn't any strong
competition in the country for oil and gas investors. American
firms are not as aggressive as they once were. Amid the weakened
competition, we have a chance to become a host in our own
country.

Q: How about potential reserves?
A: They're still enormous.

Q: If the potential reserves are still large, why do companies
from America and elsewhere not want to come?
A: The problem is not related to potential reserves. People are
reluctant to invest here because the political and legal
conditions are not reliable -- very bad. There have been many
cases in which foreign creditors could not obtain the repayment
of their loans from local companies because the court said the
loan agreement was illegal. Furthermore, the autonomy law is
still unclear. The division of authority between the central,
provincial and regency administrations is still unclear. If we,
local people, are confused, foreigners will be even more
confused. All of these factors have scared away foreign
investors. For businesspeople like us, this is a chance, because
the competition has decreased, relatively. Of course, the risks
are high. But, if not us, who else is willing to take the risk?

Q: Apart from focusing on Indonesia and starting to embark on
offshore operations, is Medco also giving attention to products
other than oil and gas?
A: Our focus is still on oil and gas, but we haven't confined our
attention to these. We are an energy company, and energy is not
only oil and gas. We are also looking for other types of energy
which we can develop commercially. We are seriously thinking
about going into the geothermal sector.

Q: Why are you interested in the geothermal sector?
A: First, because it (geothermal steam) is clean. Second, it is
renewable. Third, because Java lacks gas. If (state electricity
firm) PLN cannot get enough gas in the next three to four years,
Java will face a power crisis; thus market demand for power in
Java will be very high. Geothermal plants could become a
substitute (for gas-fired power plants). Power produced by
geothermal plants might be not as great as that generated by gas-
fired power plants. But geothermal steam could become an
important substitute in the energy mix in Java.

Q: Do you think Java will still lack gas even if (state gas firm)
PGN realizes its plans for building pipelines to deliver gas from
South Sumatra to Cilegon (Banten)?
A: There will still not be enough. If the plan were realized, the
new gas supplies could only feed two or three power plants along
the northern coast of Java.

Q: But PGN is also planning to build gas pipelines from East
Kalimantan to Java.
A: I think the plan to build a gas pipeline from East Kalimantan
to Java is unrealistic. Why? Because the gas price in Java is not
competitive compared with the LNG (liquefied natural gas) price.
The LNG price in Japan is still above $3 (per million British
thermal unit), while PLN will not buy gas above $3. We have yet
to take into account the costs of transporting the gas from East
Kalimantan or Sumatra. So, if I were a gas producer in East
Kalimantan, I would rather sell my gas for LNG production in
Bontang than send it to Java via a pipeline.

Q: From a technology point of view, is Medco prepared to enter
the geothermal business?
A: One of the main activities in the geothermal industry is
drilling. For your information, apart from oil and gas
operations, Medco has a drilling unit, Apexindo. This company has
drilled many geothermal wells owned by (American energy firm)
Unocal. Thus, we have already mastered drilling skills. What we
need now are (geothermal) processing skills.

Q: The geothermal division will surely become an important source
of revenue for Medco?.
A: Certainly.

Q: Will it produce a larger revenue than oil or gas?
A: I don't think so. At present, 70 percent to 80 percent of our
revenue is from oil, but I expect a larger revenue from gas in
the future because our gas supplies to PLN have been steadily
increasing. We hope our gas output will increase in 2004, with
gas supplies from Senoro (Senoro-Toili JOB in Central Sulawesi,
which is jointly owned by Medco and Pertamina).

Q: What are your plans for gas from Senoro?
A: We are making parallel negotiations (with potential investors
and buyers) on several options. The first is to turn the gas into
LNG. The fact is that the gas reserves found in the area are
still not enough for LNG. We are continuing exploration for more
gas reserves. The second option is to use the gas for
petrochemical products. The third is to convert the gas into
liquid. The fourth is to use the gas to generate power for mining
companies in the area, such as Aneka Tambang and Inco.

Q:It seems that the area will thus become extensively
industrialized.
A: Yes. Central Sulawesi will become a huge industrial area.

Q: How great are the gas reserves in the area? Are they as large
as East Kalimantan's?
A: I think they are not that great. Maybe about 20 trillion cubic
feet, or half of East Kalimantan's gas reserves.