Thursday, September 14, 2006

Chevron in Indonesia: A Wakeup Call

The largest oil and gas operator in Indonesia (boosted further with the global acquisition of Unocal assets last year), Chevron (CVX) operations have increasingly raised eyebrows of those familiar with the business & the company's ethics of conducting business with honesty and integrity. The company managed, in many ways, to put Indonesian government at 'fait-a-compli' situations. What's up?

Indonesia's oil production has been steadily declined in the last few years. Oil majors, including Chevron, blamed on poor investment in exploration activities, old & depleted fields, uncertainty of contracts etc. But rarely we check whether these guys are honest enough in their commitment to boost the country's oil output.
Chevron's operations deserved huge attention since the company is the largest oil producer in Indonesia, producing 478,000 barrels per day, roughly half of the country's total oil output, from its wells across Riau province. It operates three blocks (Duri-Minas, Siak, and MFK) in Riau and Kisaran block in North Sumatra.
Chevron Indonesia's oil operation contributes net earning of US$392 million in the first half 2006, according to the company's report to NYSE. Gas operations gave net earning of US$596 million in the same period to make total Indonesian contribution of US$988 million to Chevron's net income (US$8.35 billion). For the whole year, Chevron Indonesia's operations would contribute up to US$2 billion net earnings for Chevron.
It's HUGE! It's just too huge to say that Indonesia's investment climate is not competitive compared to other countries. Where else Chevron could make such a big chunk of profit? Mind you, the above earnings are net because all Chevron's investments would be repaid by government under what popularly known as cost recovery!
So, even if Chevron invests US$500 million a year only to be repaid later by government, the company's US$2 billion profit from Indonesian operation is still too big to raise the question: Has Chevron been honest enough to Indonesian people even to answer the question on why its production declined and let the country in oil deficit that cost so much for poor and ordinary Indonesian for sky-high oil price?
As reported by in April 2005, Chevron demanded more incentives to boost oil production, called the profit sharing of 10% (90% for government) is not profitable. Chevron argues that it needs better incentives to revive the old wells (300 in Chevron's operating area). It also blamed the declining of production from 750,000 barrel/day to 550,000 bpd on poor incentives. (I think, Chevron enjoys lot more profits at lower production now than in the past!) It's a kind of blessing in disguise. The company's contract at Siak block would be until 2013, while Duri-Minas on 2021. Indonesia has been generous (under pressure, cornered, or fooled around) enough to extend the contracts five years before their maturity.
Writing in progress...

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Anonymous Anonymous said...

Even worse now in the operation itself many of these so called 'Oil and Gas operator' ( incl. Chevron) are engaging other companies to operate under outsourcing agreement with very competitive price (means low) and with no profit sharing . When Indonesian Gov 'outsourced' to them as operator, at least they receive 10% profit sharing and 100% recovery for the investment they made.
So now when they are outsourcing it to other companies but keep the 10% profit sharing from the Goverment..can they still be called O&G Operator ??
Why do you think the Goverment engaged them in the first place?? And with the new setup now what is the added value of them to the country, I mean why not the Goverment engaged these companies directly (the companies that are being outsourced) and keep the 10% to itself/country.

September 14, 2006 1:40 PM  
Anonymous Anonymous said...

There are several issues deserved our attention...

1. Chevron is now pressing BPMIgas and Minister to extent Duri Field
contract beyond 2021 for another 20 years in order to increase its

2. Chevron reinjected its sludge at 15$/bbl additional cost, rejecting
several party over to recover the oil that could be sold for much better
return. Oil spill in Minas, Duri and Bekasap and other fields are just as
bad as small companies.

3. Its COgen power facility is entirely internal trading resulting in 100
millions $ additional net income to Chevron yearly. It should be subjected
to KPK and DPR RI audit. It should be just power at cost, not for extra
income and has escaped many audit. It is just like charging iots hodpital
operations to its employees.Chevron somehow managed to free.

4. Chevron appointed its many Indonesian Puppet to camouflage its bad
intention for Indonesianization Program. The employee moralle are at very
low points, that it continue to lost good people to Petronas, Indonesian
Oil Companies, Qatar etc. Brain drain ( some 2000 expertises in the last
three years) is so bad that its production continue to slip down from 800
thousands BOPD 6 years ago to just over 400 thousand BOPD nowadays.

5. Chevron charged its researches projects to Indonesian cost recovery.
For example..80 millions $ failure of light oil steam flood project in
Minas in 1999. 50 millions $ failures in its surfactant projects. 40
millions $ failure of its Duri North steam projects. Many wrong design in
its facilities and cost the country hundreds of million $.

6. Chevron keep its area and oilfield in Sumatra with no activity
resulting in low production. They declined other companies to come and
revitalize the production. GOI should take the area and never give it back
to Chevron.

7. Chevron is wellknown for its bad relations with Community and local
government. It has to face with many disturbances and unrest. Its
Indonesian Puppet certainly could not handle the problem and resulting in
very poor Chevron images.

8. Chevron Management is also very arrogant..keep saying we are the best
company and we are going to teach Indonesian Government on how to run the
oil business. In reality they are as bad in technology and business
processes as average Indonesian companies. In several meetings with
BPMigas and oil companies..Chevron management are clearly showing their
low skill and knowledges.

In hope for Chevron unless the US executives revitalize,
reform its American and Indonesian executives and managers and design a
new approaches to do business for a better Chevron images.

September 14, 2006 5:23 PM  
Anonymous Anonymous said...

Regarding Duri contract extention for another 20 years after 2021, I don't think Riau People is stupid enough let that case to happen. With CPP Block operatorship now under JOB of PT BSP and Pertamina, slowly Riau people will learn how to operate an E&P company. They now realize that this skill is so critical that they now try to develop it. It is true with the founding of Petroleum Faculty in UIR a decade ago, which now many of the alumni working in the CPP Block. It in the contrary with Politeknik Caltex Riau, where there is no single petroleum related faculty was founded. Does Chevron sistematically try to foul Riau people from being skillful in Petroleum business ???

September 15, 2006 8:57 AM  
Anonymous Anonymous said...

now now....

look.... the thing is that
when an oil and gas company invest, there is only a droplet of chance that they would get their money back.....
they will not get their cost back, until the first drop of oil is passed on for sale....
and remember, from exploration to first production, it could take decades (10-15 years).

Would you want to invest 10 million dollar per wells, with high risk of failure, and wait until 10 years to get just that 10 (times 10) million dollars back?

that high risk must be compensated with high return you know.. otherwise, we would not get more oil from the ground....

you only see chevron (notes that I do not work for chevron) as it is now when they are working in a brownfield... you don't see them taking risk on the greenfield...

June 19, 2007 2:38 PM  

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