Monday, February 27, 2006

Cepu Debacle and the legacy for 2009

As the negotiation clock ticked down to injury time, no immediate signal that ExxonMobil Corporation and Indonesia's Pertamina has reached an agreement over who should operate the giant Cepu oil and gas field. Vice President Jusuf Kalla set the dealine last week for both companies to resolve the dispute by this week at the last and if they failed to do so, government will takeover the appointment. Kalla assigned two ministers, energy and state-owned enterprises, to make decision immediately afterwards.
But it seems that without the president's decision no such deal would materialize. The president is in a South East Asia tour to three countries starting today with Brunei, and then Cambodia and Myanmar. Coordinating minister for the economy Dr Boediono is also on board.
In the absence of president Susilo Bambang Yudhoyono and Dr Boediono, it's almost certain that no decision would be made in the next few days on Cepu settlement. The president is scheduled to return home on March 2nd.
Rumors: The President is not comfortable with the fact that Golkar guys have been actively involved in Cepu project. Golkar executive Surya Paloh had secured a deal with Bojonegoro Regency to participate in the administration's share (4.5% in the 10% participating interest for local administrations). Other Golkar figures are believed to had already got the deal with Blora Regency (2.5% split) even though the regent is a PDI-P cadre. With up to 170,000 barrel per day at peak production, Cepu Block could generate trillions of rupiah to local administrations shortly after commercial operation started.
On top of that, VP Kalla is the chairman of Golkar. His statements 10 days ago indicates that Kalla hands on the settlement more than anybody in the cabinet. The president simply don't want to be perceived in public just like the Aceh Peace Deal.
The president is bussy calculating the impact to local politics in Bojonegoro in particular and East Java as a whole towards the 2009 election. He want to make sure that people in Bojonegoro, Blora, Central Java and East Java acknowledge his leadership in resolving the four-year dispute and a settlement could prosper people in these regions. He needs a legacy for 2009.
It is true that Blora and Bojonegoro are small regencies in terms of population. Blora with less than 1 million, while Bojonegoro slightly above 1.2 million people. But a Cepu settlement, with the hope that by 2008 it could start commercial production would also means the success for Central Java and East Java, two of the most populous provinces in Indonesia. SBY lost Central Java to Megawati Soekarnoputri in the 2004 election, and he is surely work hard to win the province in 2009.
Let's do the math. First on schedule. The sooner the decision to operate the block would be better. Let say the construction and preparation would take 36 months, if the project starts next month, the first drop of oil could be in early 2009, months ahead of the election. But local administrations would not get the windfall until the end of the year. Whoever operate the block, it takes few months or even years to reach peak production. But at least, the US$2.5 billion investment had been injected into the local economy by then and thousands of jobs created with the multiplier effects.
Imagine if the project was started last year, right after Exxon and Pertamina signed the Production Sharing Contract with BP Migas in October. The first drop of oil could be before the end of 2008, give room to local administrations to start enjoying the windfall (both through 10% participating interest or the budget arrangement at 15% of the total government's revenue stream) by early 2009, months before the election.
With daily production of 170,000 barrel of oil at US$60 per barrel, total revenue from Cepu would be US$10.2 million per day and it translates to US$3.72 billion per year. Mathematically, government will get US$3.16 billion, Pertamina at US$251 million, Exxon US$251 million, and local administrations US$56 million.
Under the autonomy and oil and gas laws, local administrations should get 15% of government's revenue. Let's say that the government's net revenue after cost recovery would be US$2.5 billion a year. That means, local administrations will get US$375 million to be divided to Bojonegoro and Blora as producing regencies (depending on where the location of the wells drilled in a particular year) at US$162 million, and the rest to other areas in East Java and Central Java.

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