Rig Tenders join forces with Marco Polo

Marco Polo Marine Ltd has entered into a JV agreement with PT Rig Tenders to penetrate the offshore oil and gas marine segment.

Marco Polo told Singapore Stock Exchange (SGX) this morning that the collaboration mechanism will be formalized between MP Ventures, a subsidiary of Marco Polo Marines Ltd, and Rig Tenders respectively through a 30:70 controlled entity, which will participate in selected offshore oil and gas opportunities, including vessel ownership and chartering services.

Rig Tenders is a 80.54%-owned subsidiary of Scomi Marine Berhad, listed in Malaysia Stock Exchange, engaging in business of owning and operating marine vessels serving the logistic needs of coal and oil/gas segments. Rig Tenders' major customers are Adaro, Arutmin, Chevron, CNOOC, and Total Indonesia.

Marco Polo Marine Ltd is a growing integrated shipping group principally engaged in the ship chartering and shipyard businesses. The group's shipyard which provides ship building, ship repair, and conversion services, is located in Batam Island, Indonesia, occupying a total land area of approximately 348,705 square meters, with a seafront of approximately 650 meters. The group is expanding the shipyard, and when completed, this would be one of the largest shipyards in Batam.

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Anadarko, Chevron, Husky executives injured

Three executives from three different oil and gas companies---Anadarko Petroleum, Chevron Indonesia, and Husky Energy---have been injured from explosion at JW Marriott hotel this morning. 

Upstream oil and gas regulatory body (BP Migas) spokesperson Sulistya Hastuti Wahyu said the executives are Gary Ford (general manager for Anadarko Indonesia Co), Kevin S Moore (general manager of Husky Oil North Sumatra Ltd), and one executive from Chevron Indonesia who has yet to be identified.

"Gary Ford might be evacuated for medical treatment in Singapore, and is currently treated at MMC Hospital, Jakarta," Wahyu told Detik.com few minutes ago.

Meanwhile, Kevin S. Moore is currently treated at MMC Hospital for fractures and might have surgery. 

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Cost recovery claims & US$2.5bn state loss

The Supreme Audit Agency (BPK) found potential loss to the state of US$2.5 billion of cost recovery claimed by five oil and gas contractors, Tempointeraktif.com reported.

BPK has just audited five of the contractors. They are Chevron Pacific Indonesia, ConocoPhilips Grissik, PetroChina Jabung, Medco Rimau and Pertamina-BSP. BPK blamed on Upstream Oil and Gas Regulatory Body (BPMigas) for the potential losses as the agency is seen non decisive enough. BPK also asked government to review the production sharing contracts (PSCs) to have them clearly state what costs could be recovered.

Details are as follows:
Charges on interest recovery:
- Chevron: USD4.95 million
- Conoco: USD170.4 million
- PetroChina: USD23.98 million
Third party contracts:
- GSEA contract between Conoco & Chevron: USD5.46 million
- Electricity supply contract between BOB Pertamina & Chevron: USD20.04 million
- Electricity supply contract between Chevron & MCTN: USD210 million & USD1.23 billion
- Duri oil-gas exchange between Chevron & Conoco: USD4.2 million

OTHERS:
- Collection station modification at Chevron: USD33.979 million
- Investment credit charges for gas operation at Conoco: USD379.5 million (no legal grounds)
- First Tranche Petroleum at Conoco: USD442.19 million during 1997-99 & 2000-2004 (no legal grounds)

Unfortunately none of the companies audited clarified the findings so far. Considering the amount that big, if they're true, so much at stake for these oil giants, especially Chevron & Conoco, both listed in the world's stock exchanges. The scope of audit, I think, has been limited to certain operation of these giants and that would potentially lead to another major findings. It's interesting to see what will be their responds.
BPMigas, as reported by Tempointeraktif.com, simply said it would follow-up the findings and cross-check them with the contracts.
To my surprise, even BPMigas admitted, donations from these oil/gas contractors made to tsunami victims could be charged as cost recovery item as long as it's stated in the contract. Such donation could be considered the company's corporate responsibility & community development program and it's reimbursed.
To me, it isn't fair at all. These companies got so much publication when they gave the donation, perceived as good citizens, and have led people to think how generous they are while actually it's the state/people who pay for it through cost recovery scheme.

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Off to China again, balancing act

President Susilo Bambang Yudhoyono (SBY) starts a five-day visit to China today, mainly to strengthen economic ties between the two countries, just weeks ahead of US president George Bush's visit to Jakarta and days after VP Jusuf Kalla visit US.

Last year, both the president and VP visited China. SBY also visited US last year. SBY will meet Chinese PM Hu Jintao, the fourth meeting between the two leaders. SBY will score the same amount of meetings with Bush next month. Balancing act, to take benefit from the competition between the superpowers, hopefully.
As reported today, the president is scheduled to witness the signing of cooperation agreements worth US$4.5 billion between Indonesia and Chinese companies in energy sector. No details available so far.
One thing, China energy giants such as CNOOC and Petrochina, have been agressively invested in Indonesia's oil and gas sector even though the scale of their operations are still insignificant compared to US giants such as Chevron or ExxonMobil.
I'm pretty sure, Bush will take with him these giants to Jakarta next month. Whatever, such competition, especially between US and China energy giants, should be good for the country.

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Chevron in Indonesia: A Wakeup Call (2)

I'm so glad to read an article written by Orin Basuki, reporter of Kompas, the largest newspaper in Indonesia, under the title...chasing the truth to San Ramon. The article is basically based on an audit report completed by Supreme Audit Agency (BPK) on PT Chevron Pacific Indonesia, a subsidiary of Chevron Corp, USA.

The article is centered on cost recovery, a term in oil and gas business in which contractors such as Chevron claim the costs to government/state.
BPK found the following irregularities at Chevron:
1) Caltex polytechnic Riau: Cost recovery claimed US$6.56 million. (So the education & training facility is not a donation of Chevron, it's a state-funded institution)
2) School cost: Cost recovery claimed US$6.29 million for 2004 & 2005. (Again, this is no corporate social responsibility/CSR, it's a state-sponsored)
3) Donation to international school: Cost recovery claimed US$5.94 million. (This isn't a CSR for God sake)
4) Community development & community relationship: Cost recovery claimed US$1.5 million and US$1.47 million respectively. (Not CSR, state-funded activity)
5) Interest recovery: US$4.97 million (this should not be charged as cost recovery item)
6) Modification of collecting stations US$33.98 million: No benefits for the operation.
7) Materials worth US$18.92 million, no gain, charged as cost recovery.
8) Electricity and steam supplied by PT Mandau Cipta Tenaga Nusantara have been doubted the fairness and would cost the government US$210 million and loss to the state at US$1.23 billion.
BPK auditors admit there should be a long list of items that deserved cost recovery, but government's position in most contracts is so weak that contractors tend to mark up cost recovery and charge everything in the mechanism. "Even they charged the cost to pay foreign teachers for expatriate's children or scholarship for children of local staffs. In the end, cost recovery is about the same with all the company's operational costs," Arief Handoko, BPK auditor told Kompas.
Worse, as explained by J Widodo Mumpuni, chief auditor on Chevron, government's position in the contracts is so weak that it coudn't blame contractors for the markups even though they put the country at huge financial losses.
This is what I mentioned in my previous article Chevron in Indonesia: A Wakeup Call.
I hope Kompas would continue the publication of other audit results over oil contractors such as ExxonMobil, ConocoPhillips, Petrochina, CNOOC, Medco Energi, Energi Mega Persada, Pacific Oil & Gas, Santos, Star Energy, Pertamina, Petronas, etc.
Not just that we're aware of how these contractors made lots of money from the country's resources, but we know how careless our government officers (including BP Migas) in performing their role as regulator and supervisor. With that, we know what we should fix right now.

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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 Tempointeraktif.com 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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BP Migas: Anadarko failed to find oil

Upstream Oil and Gas Regulatory Body (BP Migas) said UK-based Anadarko Indonesia Company failed to find oil reserves at two exploration drillings of North East Madura III block it acquired from Chevron (40%) in June, Bisnis Indonesia reported.

Doddy Hidayat, deputy operational at BP Migas, confirmed the failure but gave no details. "That's the fact," he said.
In June, Chevron and Anadarko entered into a swap agreement in which Chevron divest all its interests in five blocks (Bukat, Ambalat, Muara Bakau, Popodi, and Papalang)---all in East Kalimantan---to Anadarko in exchange of 40% working interest in North East Madura III block.
Chevron had 33.75% shares in Bukat and Ambalat, 50% at Muara Bakau, and 24% at Popodi and Papalang respectively.

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Indonesia Gas War Part II

The decision of Downstream Oil and Gas Regulatory Body (BPH Migas) to appoint Bakrie Brothers as the operator of 1,200 km long gas pipeline linking East Kalimantan and Java has sparked Gas War II in the country.


Upstream Oil and Gas Regulatory Body (BP Migas) Chairman Kardaya Warnika responded immediately the decision with his same-old statement that the gas reserves in East Kalimantan will not enough to support the pipeline.
We have two alliances at odds. First, BP Migas with gas producers in East Kalimantan such as Chevron (previously Unocal), Total Fina, and Arco/BP, PT LNG Badak (a joint venture of some companies) plus POG which plans to build new LNG plant in Bontang, and LNG customers in Japan, South Korea, & Taiwan (plus may be later on China). On top of this, several major gas customers in East Kalimantan such as PT Pupuk Kaltim (ammonia and urea producer), PT Kaltim Methanol Industry (methanol), PT Kaltim Pasifik Amoniak (ammonia), and PT Kaltim Parna Industry (ammonia).
Second, BPH Migas with domestic customers in Java and local pipe manufacturers which will take benefit out of the pipeline project.
The first group might say, sorry we have no more gas for you (Bakrie pipeline) because we have long-term contracts in hands at US$9/MMBTU. We could consider not to renew the contracts when they matured, but you have to pay the same export price. No way we will sell at US$3/MMBTU. Transporting gas to Java may help gas supply for power plants and manufacturing industries in Java, but at US$3/MMBTU, the country lost the foreign exhange earning of US$6/MMBTU. Without gas supply, no way that Bakrie could build the pipeline. Japanese LNG buyers are reportedly furious about the pipeline plan.
The second group, on the other end, 'may' push government to implement what we understand as Domestic Gas Obligation (DMO) wherein gas producers have the obligation to sell their output to domestic market first. But at what price, that's the question. This group argues gas pipeline would create more multiplier effects than exporting LNG.
What are the multiplier effects? Boost the pipe manufacturing industry, for sure, including Bakrie's pipe business. Power generation may be next in line because out of 10,000 MW new power plants to be built in the next five years, most will be coal-fired, not gas-fired. So this argument might be considered weak. Besides, if the country really want to develop multiplier effect of natural gas, why not build more gas-based chemical plants in East Kalimantan along with the power plants?
East Kalimantan already the largest ammonia producer in the world with more than 4 million tones per year capacity (through Pupuk Kaltim, KPA & KPI); the largest methanol (through KMI & Methanol Bunyu) with 1 million tones/year; and the largest urea producer in one site (3 million tones/year). We could build more of such plants, not to mention the mid-stream chemicals like acrylonitrile, caprolactam, nitric acid or ammonium nitrate (raw material for explossives, increasingly important with the growing mining industry in Indonesia/the world), all of which uses natural gas as feedstock.
The strategy to build more manufacturing facilities outside Java would deconcentrate both people and energy consumption in Java, right? And it's politically correct in the decentralization strategy.
The war is on and the winner might be decided by politics & power play instead of economic reasons.

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Riau vying for Chevron block

Riau Provincial admnistration is establishing a consortium to acquire small oil block currently under Chevron Indonesia's management amid competition between two regencies in the province, Kampar and Rokan Hulu (Rohul), newspapers reported today.

The oil field known as Mountain Front Kuantan (MFK) block is currently operated by Chevron with production capacity of 500 barrels of oil per day. Chevron got the block in January 1975 for 20 years contract mature January 2005 but extended twice until January 2007.
While the oil field may be small, the block has been in dispute between Central Government and Regional administrations, and among the local administrations in Riau. Riau claimed that it could takeover the block, while Central Govt want an open bidding.
The original working area was 6,865 square km but Chevron had relinquished more than half the area to 3,000 sq km at the moment. State-owned Pertamina has 10% participating interest in the block. With 500 boepd, total revenue from the block could be US$12.77 million per year at US$70/barrel. It's so small for Chevron, but not that small for local companies.

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Petronas-Exxon-Pertamina: Lessons learned

While some Indonesians, especially political pundits, bussy to reject ExxonMobil as the operator of the giant Cepu oil field, Malaysia's Petronas quitely opens its first gas station in Cibubur, near Jakarta. Petronas is the second multinational to open gas station in Indonesia after Shell, the super major along with ExxonMobil and Beyond Petroleum (BP).

We, Indonesians, are always jealous with Petronas. Those who loves Formula One easily noticed Petronas in one of the only 11 teams competing in the racing. Their existence would significantly be boosted with their recently announced plan to be the largest player in retail market of fuels in Indonesia.

Petronas used to learn from Pertamina, Indonesia's state-owned company. The Malaysian even adopted the production sharing contract (PSC) system in oil and gas business. They modified that, off course. In less than two decades, Petronas emerged as one of the largest companies in the oil and gas business. It has ventured into various countries, become a global oil and gas player.

What's wrong with Pertamina? Why Petronas managed to surpass Pertamina in almost every aspects of the business? A simple comparison: Pertamina booked net profit of around US$1.3 billion last year, while Petronas 10 times Pertamina's. Pertamina's oil production was 140,000 barrel per day, while Petronas at 567,000 barrel per day.

Can we learn something from Petronas?

Partnership. No way that Petronas could become a world player without partnership with other global players such as Chevron, Mitsubishi, ExxonMobil or BP.

Under production-sharing contracts, ExxonMobil's 600 wells account for about half of Malaysia's oil production and two-thirds of Peninsular Malaysia's natural gas production. Petronas Carigali Sdn. Bhd., a subsidiary of Petronas, is a co-venturer in all but two of the 11 fields operated by ExxonMobil.

ExxonMobil Exploration and Production Malaysia Inc., (formerly known as Esso Production Malaysia Inc), is the largest oil producer in Malaysia and largest supplier of gas to Peninsular Malaysia, producing approximately 280 thousand barrels of oil and 1.4 billion cubic feet of gas per day.

Building on experience, Petronas has extended its reach by forming ventures with ExxonMobil and other multinationals to explore for oil and gas in Africa, the Middle East and Central Asia. The highlight is the Petronas and ExxonMobil membership in the $3.5 billion Chad Project (ExxonMobil interest, 40 percent; Petronas 35 percent; and Chevron, 25 percent).

Petronas is also a 15 percent interest holder in ExxonMobil's Block 24 offshore Angola and Block 214 offshore Nigeria.

Suprisingly, those who oppose ExxonMobil and insist to have Pertamina as the leader in Cepu project, tend to use Petronas as the role model of nationalism in developing the country's natural resources. I'm afraid these guys use the wrong model or they just don't want to read or just to make the case against government.

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Five Reasons Why Pertamina BOD Matters, Minister Says

Minister for state-owned enterprises Sugiharto explains five things that should have been done and should be done in the future at Pertamina. These same might also be used to make the case on replacing Pertamina's board of directors amid critics that government planned to kick out the current board for their stubborn rejection on ExxonMobil as the operator of giant Cepu oil field.
Antara quoted Sugiharto on these reasons as follows:
First, Pertamina need to boost oil production. The state-owned company's oil production significantly dropped to around 30,000 barrel to 40,000 barrel per day, far below the foreign companies like Chevron or even local companies like Medco Energi. Total national output was around 1 million barrel per day at the end of 2005.
Second, Pertamina should improve its communication with government in a more transparent way to reduce or to prevent problems like scarcity of fuel supply in some areas last year. Sugiharto blamed on poor internal communication at Pertamina that caused late reports. Sugiharto also stated that Pertamina's 2006 budget failed to meet the January 31st deadline.
Third, Pertamina should boost its competitiveness in domestic and overseas market. Major oil companies like Shell and Malaysia's Petronas have increasingly heads on Pertamina in local retail fuel market.
Fourth, Pertamina's restructuring has been in the slow pace in the last two years.
Fifth, Pertamina needs to work closely with foreign oil contractors like in the development of Cepu block.
Do a simple rhetoric analysis, we might easily find Sugiharto's statement was very much strengthening the earlier statement made by President Susilo Bambang Yudhoyono. I concluded earlier that the President had given strong signal to replace the current board of Pertamina. But he needs good reasons to do that. Off course these reasons might not easily convince those who believe that the replacement has something to do with other reasons that too-bad-to-be-true or to-good-to-be-true.

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US Business Heavyweights are in town, the long wish list

Representatives from 20 heavyweight companies under the US-ASEAN Business Council are in town for a week. The delegation met this week a wide range of government officials including President Susilo Bambang Yudhoyono, VP Jusuf Kalla, Coordinating Minister for Economy Boediono, Finance Minister Sri Mulyani Indrawati, Energy Minister Purnomo Yusgiantoro, Trade Minister Mari Pangestu (most of them studied in US, except VP Kalla), and Transportation Minister Hatta Radjasa.
The group's formal statement on the objetive of the mission is its continued commitment to Indonesia and preparing a message for the international investment community that Indonesia is growing in its importance as an international investment destination for major American companies.

Why are they here? What are their expectations? Below is my version of their wish list when they meet government officials.

1) Boeing: Sell more airplanes to beat Airbus. The almost bankrupt carrier Garuda Indonesia had signed a US$ 2 billion agreement which focuses upon the development and modernization its fleet through operations of 10 Boeing 787-8 Dreamliners and 18 Boeing 737 New Generation series. These new airplanes will be part of Garuda's fleet by 2011. By that time, Garuda might not exist anymore, as government is preparing to sell up to 49% shares.

2) BP: We're confused of the partition of Papua into two provinces at the time we're preparing to build the US$3 billion Tangguh LNG plant in Western part of Papua. We also don't want to repeat our neighbor Freeport McMoRan's mistake to pay the military for protection of the project. Please give us advise!

3) ConocoPhillips: We're going to keep our working interest in Malacca Strait gas field (we don't want to sell it to other parties like our partner Exxon which started the divestment last year) as long as the government is willing to give better deal (50%:50% split on gas output, change the current 60% for government and 40% for contractor scheme).

4) McDermott International: We have been appointed as the main contractor of Tangguh LNG Plant. Well, in the past we had a very good relationship with Mohammad 'Bob' Hasan, Soeharto's golf buddy. We had to cut the relationship for few years as he lived behind the bars. But he is a free man now, so...Or we're thinking of a possible cooperation with engineering companies like Bukaka (VP is the founding shareholder).

5) ExxonMobil: We're fed up with endless dispute over 1 billion barrel of oil reserves in Cepu Block. First of all, you signed the MoU in June appointing us as the operator, but now Pertamina insists to operate that for first five years, then our turn, rotating system for 30 years. Besides, you just splitted up the 10% PI into four local administrations (Central Java, East Java, Bojonegoro, and Blora). It means we have to deal with four administrations should we'll be the operator. Please give us good advise.

6) Freeport McMoRan: The recent report on our payments to military officers in the past few years to protect the gold and copper mine had cost our future while we're afraid of fresh attacks to our facilities in Papua. We paid US$1 billion since 2004 in royalties, taxes, and military expenses. Could you please make a new arrangement for the military? We are in big trouble here as now the Corruption Eradication Commission (KPK) constituted our payments to military as graft.

7) Microsoft: Let's cut a deal. We'll give your offices heavy discounts on legal computer software in exchange of a promise to purchase authorised Microsoft merchandise in the future and launch a major crackdown on a pirated software racket that is believed to be one of the world's worst. Your word is your bond. We had discussed the proposal that emerged from a meeting between Indonesian President Susilo Bambang Yudhoyono and our founder Bill Gates in Seattle on May 2005.

8) GlaxoSmithKline: As the largest vaccine producer in the world, we're planning to complete tests for a bird flu vaccine within the next two years. We heard that our competitor Baxter had cut the deal with Indonesia's ministry of health affairs to produce the vaccine locally in a cooperation with Biofarma, the state-owned company. Is there any possibility that we could get the deal?

9) General Electric: We had invested US$300 million in the country and hold 12.5% shares in Paiton Energy. We heard that the government is planning to raise the electricity tariff by 30% this year. It would be great if PLN could afford to buy our power supply at higher tariff as well.

Oops! We have limited time here as we're entering the next meeting with China business delegates. Members of China delegates are CNOOC (competed with Chevron to acquire Unocal, BP's main partner in Tangguh LNG Project), Petrochina (competing with ExxonMobil to control Cepu Block, one of Pertamina's main partner and is working on a refinery project in Tuban, East Java), Lenovo (acquired IBM's PC business), Huadian Group (planning a giant coal-fired power plant in South Sumatra), and Qian Yuan Hao Biological (exporting vaccine flu to Indonesia) among others.

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Tax holiday for new refinery projects

Investors are asking for tax incentives to build oil refineries in Indonesia. Minister of Energy Purnomo Yusgiantoro supported the idea saying the country needs new refineries to meet at least 70% of national fuel demand.

While no details of kind of tax incentives demanded, I suspect that would be in the form of tax holiday for five to 10 years as deliberated by Tax Law for certain projects. But I am not sure whether such incentive would help the country attract investors given countless of problems in the oil and gas sector, including the declining crude oil production from 1.4 million bpd in 1997 to about 1 million bpd as of today.

In fact, no new refineries were built in the last decade while domestic fuel consumption increased by 6% to 7% per year in average despite efforts to lure in investors. State-owned company Pertamina is the only company with oil refinery business in Indonesia with seven plants at combined capacity of around 1 million barrel per day.

Some of these plants are too old to keep up the demand as most of them built in early 1970s and 80s. It is predicted Pertamina's refineries could only produce 800,000 bpd at the maximum, leaving the gap of around 500,000 bpd as demand already reached 1.3 million bpd.

The refinery in South Sumatra, for example, has maximum output of 145,000 bpd, far below its installed capacity of 180,000 bpd. Major refineries in Cilacap (Central Java) and Balikpapan (East Kalimantan) were also built in 1970s. Unexpected shutdown at one of these refineries easily disrupt Indonesia's fuel supply.

That's why in the early 90s, Soeharto regime awarded dozen of licenses to investors in the oil refining business but none of them materialized. So far only one refinery project could be considered 'most likely' to be built. The project is planned by Pertamina with China's Sinopec with capacity to process 150,000 barrel to 200,000 barrel per day of crude oil. The project is located in Tuban, East Java. Iran will supply the crude as Indonesia's crude oil production is in decline.

There are hopes that the giant Cepu oilfield, adjacent to Tuban area, with capability to pump out 170,000 bpd would be the future crude supplier for Tuban refinery. But doubts linger on the immediate start-up of the project as negotiation between Pertamina and ExxonMobil is not settled yet. Most likely the first drop of oil from Cepu would be the end of 2008 the earliest.

Elnusa, Pertamina's subsidiary, is also planning to build a 300,000 bpd refinery in Java. The company is reportedly talk to three local tycoon, Salim, Djoko Tjandra, and Prayogo as possible partner in the giant project.

Early last month, local company PT Intanjaya Agromedia Abadi (who own this company? Director of Intanjaya is HS Mappasule) signed a memorandum of understanding with Texas-based International Global Technologies (using Google, no information about this company) to build a 400,000 bpd refinery in Parepare, Sulawesi Island. Both companies claimed to start the construction of the project by early 2006.

The Parepare oil refinery in South Sulawesi was initially licensed nine years ago, but development stalled during the 1997-98 economic crisis. The companies established a joint venture called PT Kilang Minyak Intan Nusantara (KMIN) which also planned to build a huge refinery in Batam Island.

No refinery projects heard from major oil companies like Shell, Exxon or Chevron mainly because of limited access to retail fuel market. Pertamina maintained its retail and distribution monopoly for petroleum products, until July 2004 when the first licenses for a foreign firm to retail petroleum products are due to be awarded to BP and Petronas of Malaysia. Shell opened its first gas station in Karawaci, near Jakarta recently to be followed by Petronas next month. But both companies would only sell un-subsidized fuels.

The government is still promising to open the sector to full competition by 2005, although progress has been very slow to date as reflected by uncertainty over when government would scrap the fuel subsidy policy. Should Tuban refinery would go on stream by 2008, the gap between local supply and demand that should be imported, would go up to 700,000 bpd. That would surely put a lot of pressure on the national economy and its weak rupiah currency.

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Shell opens first retail outlet, Petronas to follow

Shell Indonesia, a local arm of Royal Dutch Shell Plc, opened its first retail outlet at the upmarket Lippo Karawaci housing estate in Tangerang, some 20 kilometers west of Jakarta.
Shell offers Super and Super Extra gasoline with octane levels of 92 and 95, respectively. The Super is sold at Rp 5,700 (57 U.S. cents) per liter while Super Extra is offered at Rp 5,900.
The two types of gasoline are direct competitors for state oil and gas firm PT Pertamina's Pertamax and Pertamax Plus, which are sold at the same prices.
The retail outlet is Shell's first investment plan in the downstream sector, following the implementation of Law No. 22/2001 on oil and gas. The implementation ended Pertamina's monopoly in the downstream sector as well. "We are proud to be back in the fuel business in Indonesia," Shell Indonesia country chairman Bob Moran said in a statement.....

Chairman of The Downstream Oil and Gas Regulating Agency (BPH Migas) Tubagus Haryono said previously that Shell is going to build 400 gas stations in eight years time. Malaysian Petronas is planning to build 200 gas stations in the same period. The first of Petronas gas station is scheduled to be opened next month in Cibubur, West Java province. The agency had awarded retail license to eight oil companies including Chevron, the largest crude oil producer in Indonesia.

But most of the gasolines should be imported as none of world players operating refinery in Indonesia. All refineries are owned by Pertamina. Sinopec from China is conducting a feasibility study to build a new refinery in East Java in a joint venture with Pertamina.

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Oil deficit troublesome

I was expecting Jakarta’a traffic would be more relax once the government raise fuel price significantly. But it turn out to be an empty dream. The first week of price hike (almost doubled the gasoline price) no sign that people might drive down. That’s not make sense to me.
“This is the first week of the month when people still have money in their pocket. Just wait for another week,” said a friend.
But when the traffic jam is there while we had entered the second week of October, I look for another answer. A taxi driver gave better answer. He said on average people are driving 40 km two-way home-office which could consume 6 liter of gasoline at the most or Rp27,000 per day. Put an escalation of 50% for commuting and traffic, the cost would only goes to Rp40,000 per day.
Given the poor public infrastructure, no incentive for commuters to stop driving. Even though government would increase gasoline price again next year by another 30 percent, consumption will persist.
So, I am thinking of a step increase in parking tariff in cities might reduce people’s driving appetite. Let say for the first hour should be Rp10,000 instead of Rp2,000 and Rp3,000 per hour onwards. The money collected should be enough for the city administration to start seriously build the mass rapid transport system.
I am deeply worried about the country’s future in energy supply and its macroeconomy impact. Indonesian love big cars simply because they could pick up all family members in a car and traveling together over the weekend. But they use the same cars for commuting on working days as well with one or two passengers. That’s why traffic jams are so bad in cities like Jakarta. And the traffic jam cost the country oil deficit which is getting bigger, cause bigger cars need more energy.
Look at the latest statistics from Central Bureau of Statistics. In the January-August 2005, Indonesia’s crude oil surplus reduced significantly to US$137 million from US$244 million in the same period last year.
Take a look at trade balance in refined oil (gasoline, diesel oil etc). Indonesia’s deficit more than doubled from US$2.14 billion (Jan-Aug 2004) to US$5,22 billion in Jan-Aug 2005. Thanks to Indonesia's net export of gas at US$5.8 billion, the country's oil and gas trade balance still in surplus of US$731 million in that period. But the surplus heavily dropped from US$2.9 billion in the same period last year. No doubt that by the end of the year, Indonesia would book deficit in overall oil and gas trading.

The reason is clear, Indonesia imported US$6,43 billion of refined oil (fuels) in 8 months this year while it’s export only at US$1.2 billion.
And if we review the automotive market this year, there is no way that fuel consumption would drop. New cars sold in Indonesian market this year have reached 400,000 and could reach 600,000 by the end of the year. Last year, Indonesia ranked first in the world as the fastest growing market with 37% growth. At least 4 million new motorcycles hit the road last year and another 4.6 million to 5 million this year.
It is clear that automotive market is not affected by increasing fuel price in the last few years. Government should capitalize on that with higher tax, right?
Imagine if tax for new cars increased by Rp10 million per car, government could raise Rp5 trillion and Rp1 million per motorcycle could raise another Rp5 trillion. On top of that, government could implement fuel tax as well.
In the supply side, Indonesia desperately needs fresh investment to boost oil output. In May, output hit its lowest level of 927,800 barrel per day, far below OPEC’s quota of 1.425 million bpd.
Investors, mainly foreign investors, blamed Indonesian for not generous enough to give incentives for oil and gas activities, lack of legal certainty, heavy bureaucracy, confusing interpretation of autonomy rules, and social problems.
But a respected blogger gave me the following reasons why Indonesian should not rely too much on foreign oil and gas investment:
- Training and career planning for Indonesian working for foreign oil and gas company are limited to enabler positions. For the core expertise, Indonesian is limited to be an assistant, not key player.
- Indonesian has no access to proprietary technology.
- Indonesian executive promotions are camuflage and ceremonial. Indonesian executives at foreign oil and gas companies are mere puppets.
- Indonesia is regarded as cash cow (US$2 billion per year) to finance their expansion. Reinvestment in Indonesia is limited.
- Asking too many fiscal and tax incentives
- Don’t think they would support government’s intention to boost output. This is a nightmere. They are playing the cornering strategy to ask more incentives from government. Wanna proof? Santos in Jeruk, Exxon in Cepu, Chevron in Central Sumatra, and Unocal in Kalimantan.

So I think of Indonesian oil and gas companies. I only know some names. Pertamina, Medco, Energi Mega Persada, and Bumi Siak Pusako. I don't know whether we could count on these companies to reduce the oil deficit. Pertamina, with all its resources, should have play a leading role. But here we are. Pertamina is a sick man. What do you think?

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Cepu Deal: Mediocre mentality

People hate a loss more than they value an equal gain. This is a quotation from Richard Layard’s best selling book Happiness, Lessons from A New Science (2004).

Cepu, Central Java and Bojonegoro, East Java are peaceful neighbors. But it could be ruined by the current clash on oil and gas resources overlapping both areas.

It’s all about money and politics. With potential output of 200,000 barrels per day, we are talking about US$10 million per day business or US$3.5 billion per year and US$100 billion for 30 years of contract.

The fields have proven reserves of 600 million barrels of oil (some say 1 billion barrels) and 8 trillion cubic feet of natural gas. With such enormous reserves, Cepu and its surroundings could be Indonesia’s Texas.

Central government confirmed yesterday through energy minister Purnomo Yusgiantoro that local administration will get 10% participating interest in the block. Yet it’s not clear which one, Cepu or Bojonegoro. The working interest is located in Bojonegoro, but the oil and gad deposits actually underneath Cepu.

Even though both regencies are offered to get equal share of, say, 5%, no guarantee either sides could agree. Both autonomy and oil and gas laws failed to address such grueling issues. Imagine that drilling wells are located in Bojonegoro while oil beds are in Cepu. Which regency is fall into category as producing area that deserved to get participating interest as dictated by 2001 Oil and Gas Law?

Should they share the fortune?

How Partai Kebangkitan Bangsa (PKB) with strong influence in East Java and Partai Demokrasi Indonesia Perjuangan (PDI-P) with overwhelming power in Central Java will tackle this issue?

Political switch

Indonesia’s position regarding Cepu has been switched along political changes. Baihaki Hakim, a former president of PT Caltex Pacific Indonesia (wholly-owned subsidiary of Chevron Texaco), rejected the idea of contract extension to Exxon Mobil when he was the president of Pertamina. Baihaki was appointed by then President Abdurrahman Wahid, founder and key figure of PKB.

His successor, Arifi Nawawi (appointed by president Megawati Soekarnoputri, chairwoman of PDI-P), meanwhile resume talks with Exxon. The results were that Pertamina and Exxon as contractor will get 40% of output, while 60% for government. With participating interest 50% respectively, both companies will get 20% output. Such deal sparked criticism as other contractors only get 15% output while government 85%. This is the standard contract.

What a shame for Megawati. His closest ally and key economic minister, Kwik Kian Gie, was a staunch critic for Cepu settlement and rejected such arrangement. Kwik maintain his stance until now and demanding Exxon completely out of the project.

It was Widya Purnama (appointed during Megawati presidency’s last days), the current president of Pertamina, who also publicly opposed the idea of resume talks with Exxon. His first statement after appointment as Pertamina CEO was, “I will leave this post if government give Cepu block to Exxon,” Widya said in August 2004. He said Pertamina more than able to operate the block without Exxon Mobil. Pertamina even planned bond issuance up to US$2 billion to finance the project. But that’s already history.

Widya is counting his days. He is a lame duck CEO. President Susilo Bambang Yudhoyono had stepped in Cepu affair right after his inauguration in October 2004, especially after his first meeting with US President George Bush in Santiago, Chile November 2004. Both reiterated Cepu resolution in their second meeting in Washington DC last month.

SBY then asked Chief Economic Minister Aburizal Bakrie to establish a negotiation team. The team is led by Martiono Hadianto (Pertamina chairman and former CEO during BJ Habibie presidency), with members Lin Che Wei (expert staff of SOE ministry), Rizal Malarangeng (former political analyst), Muhammad Abduh (Pertamina commissioner), Umar Said (former secretary general of energy department under Ginandjar Kartasasmita), Mustiko Saleh (vice president of Pertamina), and Muhammad Ikhsan (economist, expert staff for Aburizal Bakrie’s office).

Some political parties, namely PDI-P, PKB, and recently Partai Amanat Nasional (PAN, once led by reformist Amien Rais, strongly rejected the negotiation team. But government moves on.

The result, this is preliminary and subject to President SBY’s approval, is 70% output for government and 30% for contractors. The contractors are Exxon Mobil with 45% participating interest, Pertamina also 45%, and the remaining 10% for local administration.

It is a better deal if we compare to 60%:40% arrangement under Nawawi, but it is worse than standard contract of 85%:15% between government and other oil contractors.

Well, government argues such deal is a win-win solution. Indonesia could resume its position as OPEC member and reduce fuel subsidy, while Exxon will surely make money out of it. But it shows, once again, how weak we are in dealing with high-level intervention as Bush and SBY did and mediocre mentality.

Who could gain the most?

Exxon: Will get 45% of participating interest of the block. Let say the block will produce 200,000 barrel oil per day, Exxon will get 45% by 30% (as 70% of output is government’s share) which is equal to 13.5% or 27,000 bpd. At US$50 per barrel, Exxon could generate US$1.35 million per day or around US$492 million per year. The contract expires in 30 years meaning Exxon could make US$15 billion for the contract period. Sure, Exxon is promising investment up to US$2 billion to develop the block. But anybody would dare to invest such amount to get big chunks of US$15 billion, right?

Pertamina: Without any significant efforts, Pertamina will make the same amount with Exxon over 30 years period. The company is lucky to inherit the state’s rights over oil and gas resources, even though new oil and gas law deliberated in 2001 had lifted that.

Suppliers: Companies like Seamless Pipe (subsidiary of Bakrie & Brothers) has opportunity to supply huge amount of pipes to support Cepu operation.

Partners for local government: Like in many cases, most likely that local administration (both in Cepu and Bojonegoro) is preparing to establish a joint venture company as a vehicle in the block’s participating interest.

Losers

Indonesian, the rest of us, lost the opportunity to get better deal which is 85%:15%. This is a huge difference, which is 15% of 200,000 bpd (equals to 30,000 bpd) and at US$50 per barrel Indonesian government lost US$1.5 million per day or US$500 million per year and US$15 billion in 30 years.

Extra happiness provided by extra income is greatest when we are poor and declines steadily as we get richer. In reverse, any lost of income (opportunity) for the poor (Indonesian) brings a lot more misery than the rich (Exxon and USA).

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Exxon vs Pertamina

International pressure, including from US President George Bush, is working well on ExxonMobil’s years of dispute with Indonesian government and Pertamina (state-owned oil and gas company).

Both parties resumed negotiation yesterday and an agreement is expected to be reached by May 20, right before President Susilo Bambang Yudhoyono's visit to Washington in late May. Despite pressures from local politicians to have ExxonMobil completely out of Cepu Block, the rich oil and gas fields onshore Central Java, a win-win solution is searched.

It was Bush, at the sidelines of APEC Summit in Santiago, Chile last year, who reminded Indonesia President Susilo Bambang Yudhoyono (SBY) on the dispute. As admitted by Sudi Silalahi, cabinet secretary, SBY then responded with instruction to his ministers to settle the issue.

And now, we have political analyst Rizal Malarangeng, brother of Andy Malarangeng (President SBY’s spoke person), as spoke person for Pertamina (state-owned oil and gas company) regarding negotiation with ExxonMobil on Cepu Oilfield in Central Java.

While it’s not a surprise, we don’t know exactly how Rizal (Ohio State University graduate) been appointed and who were the candidates for the job. Was it direct appointment from Chief Economic Minister Aburizal Bakrie? Was it by Pertamina’s board of director?

Two months ago, Freedom Institute, where Rizal is the director, was criticized for its support for government’s policy to raise fuel price. Freedom Institute is fully funded by Aburizal Bakrie, long before his appointment as minister by SBY.

After the fuel price, Rizal is dealing with Cepu Block, one of the largest oil and gas project in Indonesia. The block has 2 billion barrel of oil and 11 trillion cubic feet (TCF). It could be the second largest oil field after Duri, Riau province run by PT Caltex Pacific Indonesia (subsidiary of Chevron Texaco).

Rizal said a win-win solution on the dispute will lure in new investment up to US$3 billion. But he declined to disclose details of Pertamina’s offer.

Exploration license is the core of dispute between ExxonMobil and Indonesian government. Tommy Soeharto, son of former president Soeharto, once owned shares in the block but then sold its stakes to Exxon after failure to discover oil.

In early 2001, Exxon surprised Indonesian government with its announcement of huge oil and gas discovery in the block, which then triggered the dispute. In contrast with other oil exploration contract, the Cepu Block is under technical assistance contract supervised by Pertamina. The problem is the contract will expire 2010.

Pertamina insisted that it could operate the block without ExxonMobil after the license expired. Meanwhile Exxon, though agreed to share the fields with Pertamina, demands extension of the contract until 2030.

Exxon's request for a 20-year extension of its right to 20 percent of any oil produced from Cepu, was refused by the government in 2003. Recently, Indonesian parliament (DPR) also supported Pertamina to develop the fields without Exxon.

But during the process, there were conflicting interests in Indonesian side, since they open the door for new investor to work with Pertamina.

One of the most interesting names is PetroChina, a China company that aggressive in acquiring oil and gas field in Indonesia. US and China is competing fiercely in Indonesian oil and gas industry. Just last month, Unocal (the third largest gas producer in Indonesia) took Chevron’s (the largest oil producer in Indonesia) US$18 billion bid to control the company.

Under pressure to lure in more oil and gas investment, Indonesian government pushed Pertamina to resume negotiation with Exxon. According to Rizal, the negotiation resumed yesterday with targeted completion by May 20, 2005.

Exxon Mobil offered Pertamina 10 percent, but Pertamina asked for 35 percent, and then 50 percent, arguing that Tommy had forced it to sell in the first place. Exxon Mobil agreed to sell 50 percent of its current contract to Pertamina for half of its development costs, which it estimated at $450 million. Pertamina accused Exxon Mobil of inflating the figure.

Faced with the prospect of losing Cepu entirely, Exxon Mobil has agreed to negotiate a new contract, a 50-50 joint venture with Pertamina, to take over when the current contract expires.

During the process, there were conflicting interests in Indonesian side, since they open the door for new investor to work with Pertamina.

One of the most interesting names is PetroChina, a China company that aggressive in acquiring oil and gas field in Indonesia. US and China is competing fiercely in Indonesian oil and gas industry. Just last month, Unocal (the third largest gas producer in Indonesia) accepted Chevron’s (the largest oil producer in Indonesia) US$18 billion bid to control the company.

Should ExxonMobil and Pertamina settle the dispute, US companies will maintain their control on Indonesian oil and gas resources, especially with depleting gas reserves in Exxon's Aceh operation and a possible closure of the fields next decade.

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Chevron made US$495 million profit in Indonesia last year

Chevron’s operation in Indonesia contributed US$495 million to the company’s consolidated profit last year.

According to its 2004 annual report, Chevron sales in Indonesia reached US$1.869 billion last year, slightly increased from US$1.759 billion in 2002. But the company’s after tax results increased from US$379 million in 2002 to US$495 million last year.

Chevron managed to increase its sales and after tax profit thanks to oil price hike in the last two years as the company’s output significantly cut down in 2002 after PT Caltex Pacific Indonesia, Chevron’s main subsidiary, transferred oil blocks with daily production of around 50,000 barrels to a company co-owned by local government in Riau province and Indonesian government.

The company’s merger plan with Unocal will strengthen its position in Indonesia, which is one of Unocal’s core areas for its international operations and represents a significant contributor to the company’s reserve and production base.

Unocal so far had invested US$5 billion to support its activities in Indonesia.

Indonesian government welcomed the Chevron-Unocal merger and saying it will not have negative impact for the nation’s oil and gas production.

Chevron won the race to acquire Unocal as other serious contender, the China National and Overseas Oil Company (CNOOC), is shopping around Indonesia to acquire more oil and gas assets. CNOOC is currently the second largest oil producer in Indonesia after Chevron.

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