Friday, September 02, 2005

Conflict over Cepu Oilfield Splinters Indonesian Cabinet

The enduring conflict over giant oil and gas resources in Cepu, Java has splintered Indonesian cabinet. This is a big test for President Susilo Bambang Yudhoyono’s leadership. Previous cabinets also split over the issue.

While Yudhoyono clearly stated in his August 31 speech that Cepu contract should be settled in one or two weeks, doubts remain especially on Pertamina board of director’s resistance on the memorandum of understanding signed in June between government and ExxonMobil.

Internally, Pertamina’s board of commissioners has been at odds with board of directors over the MoU. Both claimed support from ministers. From public statements and communication between parties involved, it is clear that board of commissioners claimed support from Chief Economic Minister Aburizal Bakrie and Vice President Jusuf Kalla that Pertamina should honor the MoU.

Meanwhile board of directors claimed support from Energy Minister Purnomo Yusgiantoro that Pertamina should settle the internal dispute first before government move to a production sharing contract (PSC).

Cepu is under technical assistance contract (TAC) expired 2010 while under the MoU it should be replaced with PSC expired in 30 years.

Key to the settlement is Minister of State-Owned Enterprise Sugiharto who has the power over Pertamina’s management. He is the one who should settle the conflict.

Previously both Sugiharto and Aburizal stated that Pertamina’s board of directors should be replaced before the end of August. Sugiharto had asked his ministry’s secretary Said Didu to conduct a fit and proper test and select new management. Said said it is about time to install the new management at Pertamina. Rumors said Lendo Novo, Sugiharto’s chief of staff on investigationg corruption in SOEs, is investigating the candidates to make sure they never involved in corruption scandals.

But until now it is not clear when Sugiharto will replace Pertamina’s management. He already missed the target.

In the meantime Pertamina’s board of director intensifies its maneuver taking the opportunity of no clear regulation on local government’s participation in oil and gas sector. They offered to three regencies the 10% participating interest in Cepu. They are Blora, Bojonegoro, and Cepu in two provinces (Central and East Java). Horizontal conflict between regencies and provinces along with vertical conflict between regencies, provinces, and central government could put the Cepu block in a war zone.

Rumors of lobby conducted by Pertamina’s board to get support from Vice President Kalla through his son in law Sutanto Supardjo could also worsen the split between Kalla and Yudhoyono on economic affairs. So far, Kalla seems to support the MoU. But no statement made by Kalla on Cepu since his visit to China last week accompanied by Pertamina’s board of director and Sugiharto among others.

No information on whether Kalla and Pertamina met Petrochina executives during the visit. PetroChina was rumored last year to replace ExxonMobil in Cepu and secured support from ruling elites.

Aburizal’s position on Cepu also critical as he is under pressure to be replaced sometimes in October. Minister Purnomo is also on top list of ministers who should be kicked out of cabinet due to his poor performance in dealing with decreasing oil production, fuel and electricity scarcity in the last few months.

Even minister Sugiharto who secured enormous support from Prosperous Justice Party (one of Yudhoyono’s main supporter) is back into the list as part of a deal to replace Aburizal. Golkar Party, led by VP Kalla, is fighting hard to get state-owned enterprises ministry under its portfolio, may be in exchange of Aburizal’s replacement.

Under such circumstances, it is interesting to see whether Yudhoyono could control the situation and get the Cepu deal done this month. Else, Indonesia might have to wait few more years to have significant oil production boost from Cepu and a lot more suffer to the economy as oil price is on its way to reach US$100 per barrel as predicted by some analysts.

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