Delays clog new Indonesian oil output

John McBeth, Straits Times 29 Mar 10;

FOR a resource-rich country seemingly in a panic over becoming a net oil importer, a status that ended its membership in the Organisation of Petroleum Exporting Countries two years ago, Indonesia sure has a strange way of showing it.

Indeed, the delays afflicting the 600-million-barrel Cepu block, the biggest oil discovery in Indonesia for three decades, illustrate all that is wrong with the oil and gas bureaucracy and even the investment climate in general. Regulatory and contract uncertainty and resource nationalism have already cut Indonesia's share of global exploration spending to its lowest-ever level.

Ideally, Cepu should have been in full production by 2005. The best bet now is that it won't be until 2014 that the oil is finally flowing along a planned 76km pipeline to an offshore storage container off the north-eastern Java coast.

When subsidiary Cepu Mobil discovered the main Banyu Urip field in 2001, there were grumbles over why previous concessionaires had failed to find it. The answer: state-of-the-art 3-D technology. Then followed four long years of wrangling with ExxonMobil's partner, the Pertamina state oil company, and a powerful lobby of nationalist officials and politicians over who would operate the concession.

There were also the uncertainties created by the October 2001 Oil and Gas Law and the fact that the legislation's all-important implementing regulations were not issued until 2004.

In late 2005, newly elected President Susilo Bambang Yudhoyono fired the Pertamina board and cleared the way for ExxonMobil to take the lead in the US$2.7 billion (S$3.8 billion) venture covering Banyu Urip and seven smaller fields in the Cepu block.

Under a 30-year production-sharing contract, the government was awarded 85 per cent of the revenue, with the majority of the remaining 15 per cent shared by the two partners and a minority stake going to four district governments.

It was hoped the new oil bonanza, with its bonus of two trillion cubic feet of natural gas, would re-energise Indonesia's dwindling crude production. It turned out to be a faint hope.

ExxonMobil wanted to develop Banyu Urip to its 165,000 barrel-a-day potential in one step. But regulator BPMigas opted for a phased approach in the strange belief that the company had inflated the size of the field. Instead of one large separation facility, it proposed two smaller plants to be built at different stages.

When ExxonMobil objected, BPMigas prevailed on the company to put down two new wells, just to prove what it already knew from the 3-D seismic mapping. Mines and Energy Minister Purnomo Yusgiantoro signed off on the plan.

By then it was mid-2006 and ExxonMobil told the government that it did not think it could get production going by 2009. Not only was BPMigas dragging its feet over contract approvals, but the company still did not have any land, only an inventory of the 700ha (held by 3,000 individual landowners) it needed for the processing plant and the pipeline right-of-way.

The company finally relented after receiving assurances it would get help with the land acquisition and that the early oil would be piped to a small refinery already operated by a Pertamina-PetroChina venture in an adjacent field.

But Pertamina failed to finish the 23km pipeline in time. So while Exxon met the start-up deadline in December 2008, it spent the next three months trucking the oil to Mudi in a fleet of 40 tankers - until the operation was deemed unsafe.

Nothing moved between March and August last year, when the pipeline was finally completed. Since then, the supply of oil delivered to Pertamina-PetroChina and a second small off-taker has risen to the promised 20,000 barrels a day.

By then, however, there was a dramatic new twist to the whole saga. Results from the two new wells showed ExxonMobil had, in fact, under-estimated the size of the field - by 75 million barrels! No guesses about what happened next: BPMigas proposed the one-stage idea the company had proposed in the first place.

The revised development plan went back to the minister's desk. But Mr Purnomo, now busy managing Dr Yudhoyono's 2009 campaign finances, left the issue to his eventual successor, Mr Darwin Saleh, one of the stranger choices in President Yudhoyono's new Cabinet.

Perhaps wisely, given his zero experience in oil and gas, Mr Saleh passed the buck to BPMigas. But again, it was another four months before the plan was approved and tenders called for three of the five contracts.

Even that process revealed the unhealthy side of doing business in Indonesia, with a company belonging to a legislator on the parliamentary petroleum commission vying - unsuccessfully - for one of the contracts. Other politicians merely sought pay-offs from a company whose adherence to corporate cleanliness and playing by the rules almost certainly contributed to its troubles.

Thanks to unbridled speculation, the Rp15,000 (S$2.30) per sq m tax value of Cepu's land eventually ballooned to Rp85,000, leaving the developers with an acquisition bill of nearly US$60 million.

By now, however, with all the time and expense that has gone before, it must seem to be cheap at the price.