More adjusted splits may soon be in place

Leony Aurora, The Jakarta Post, Jakarta

With government and U.S. energy giant ExxonMobil agreeing last week in principle to a new contract splitting production from the Cepu oil block in line with global oil prices, petroleum firms operating here are considering similar deals, the head of the Indonesian Petroleum Association (IPA) says.

IPA executive director Suyitno Patmo Sukismo said the IPA planned to ask the government whether the newly introduced scheme, which would split production on a scale adjusted to international oil prices, was applicable only to Cepu.

"If the government wants to offer (such a scheme), we will study the possibilities," said Suyitno on the sidelines of an energy seminar on Monday.

Commenting on the issue, chairman of the Oil and Gas Upstream Regulatory Agency (BP Migas) Kardaya Warnika said that only new contracts would be able to use adjusted, rather that fixed, fluctuating production splits.

"It's up to both parties (the government and contractors)," Kardaya said.

"If (the system was used) in a contract extension, we could discuss (the possibility)."

However, the existing contracts would remain as they were, Kardaya said. "We have to honor the contract sanctity."

Indonesia and Exxon have ended their four-year dispute on the development of Cepu, an oil-rich but largely untapped oil block located on the borders of Central Java and East Java, signing a principal agreement on Saturday.

The agreement gives 85 percent of production totals to the government and 15 percent to contractors if oil prices average more than US$45 a barrel in a year.

However, should oil prices fall to below $35 a barrel in any given year, the government will get a lower share of 70 percent from the oil output, leaving contractors a bigger portion of 30 percent.

Such a fluctuating split scheme is the first to be introduced in Indonesia. The block will be jointly managed by Exxon, Pertamina and the regional administrations.

British energy giant BP Plc's head of energy analysis Michael Smith said that it was a good idea to tie a production split to oil prices.

"With lower prices, the (contractor) company gets a somewhat higher take," he said. "In general that is a good idea."

Indonesia, with its increasing domestic demand and a steadily declining oil output, is pinning its hopes on the development of the Cepu block, which is predicted to produce some 170,000 barrels of oil per day (bpd) at its peak.

Domestic crude and condensate output hovers at slightly above 1 million bpd at present, lower than the 1.52 million bpd enjoyed in the late 1990s.

Smith said that it would be difficult for Indonesia to increase its output, as productive oil fields had been thoroughly explored and had passed their peaks.

"Government efforts may alter the path of the decline but they will not stop it," he said.

The only answer to the country's oil problems was to attract more investors to the sector by eliminating trade barriers and imposing appropriate legal and contractual terms, he said.