Financial powerhouses behind Natuna D-Alpha

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Cepu-like scenario in Natuna D-Alpha?

Regional administrations in Central & East Java secured 10% participating interest in Cepu oil and gas project. Today, some newspapers quoted Riau Islands governor Ismeth Abdullah saying his administration would ask the same in the Natuna D-Alpha project to be renegotiated between Indonesia government & ExxonMobil/Pertamina. That would make the process even more interesting to watch.

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Flip Flop on Natuna D-Alpha

In less than one month, government officers made flip-flop and conflicting statements on the status of ExxonMobil & Pertamina's contract to develop the massive gas reserves called Natuna D-Alpha project.

Today, both energy minister Purnomo Yusgiantoro and BPMigas chairman Kardaya Warnika stated that the Natuna PSC had been automatically terminated in January 2005. Few weeks ago, both officers stated that give time to Exxon & Pertamina until January 2007. In between, both guys also stated that Exxon may still operate the gas block but with brand new contract.
On the other hand, ExxonMobil which controls 76% shares in Natuna D-Alpha (Pertamina 24%) insisted that the contract is valid until 2009. (FYI, Pertamina initially owned 50% shares in Natuna D-Alpha. But somehow Pertamina divested 26% few years ago, and nobody raised the question, why? I could understand if the divestment is considered a big mistake, especially with the sky-high energy price in recent years)
Anyway, back to the Natuna legal battle, it's clear that both parties have different interpretation of the contract itself. Article II.2.2 of Natuna PSC amended in 1995 stated that if contractors (Exxon & Natuna) failed to come up with clear commitment before January 2005, the contract shall automatically terminated. Exxon claimed that it's letter dated December 2004 to BPMigas confirming the commitment to develop Natuna has been enough to secure the first two year extension, which means until January 2007. Article II.2.3 also stated that if one of the parties (BPMigas or contractor) asking for extension after the first two year of extension to further confirm the project, it's deemed obliged to approve additional second two-year extension (until 2009).
Government claimed that the contract has not been terminated unilaterally, but automatically. It means, government should provide proofs that contractor (Exxon & Pertamina) failed to meet the requirements in the contract. So far, no such proofs available that legally convincing. But Kardaya seems to believe that government is in strong position even if Exxon challenge that in international arbitrary. People that familiar to oil & gas business doubt though. "It's gonna be the next Karaha Bodas," he said.
What if government think that Indonesia managed to postpone hundreds of million dollar fine of Karaha Bodas case? Well, let's read brand new flip-flop statements in the newspaper in the coming weeks or so.
But the first statements, maturity of contract in 2007, has completely different legal consequences, i.e. government acknowledging Exxon's commitment made in December 2004 and the 2-year extension accordingly. Meanwhile if government claim the contract had been terminated automatically in Jan 2005, it has to come up with proofs to support that and probably a stupid question: Why government said before that the contract would mature in Jan 07? Or another stupid question: What's happened in the last two years? Where are all these guys?
I try to take positive leasons out of this. Suppose that gas price stays the same like 5 years ago, nobody would care about Natuna D-Alpha, because it's just too costly to develop. Now that government want to renegotiate for better terms, that's good. But we have to do it right. Some people try to blame Soeharto or BJ Habibie for the contract given to Exxon. Partly true because we always forget to protect ourselves from future ups-and-downs in contracts with smarter guys. Meaning, we have to learn to be smart in negotiations, articles by articles, paragraph by paragraph, and word by word.

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Natuna D-Alpha: Another headache for ExxonMobil

ExxonMobil Oil Indonesia Inc, a subsidiary of US giant ExxonMobil Corporation, is facing another headache over its Natuna D-Alpha working contract as BP Migas (the upstream oil and gas regulatory body) urge the company to immediately submit the feasibility study for the development of Natuna's 173 trillion standard cubic feet (TCF) of natural gas.

ExxonMobil is awaiting the settlement of its years of dispute with Indonesia's PT Pertamina over the giant Cepu oil and gas field in Java Island. Politians mounts pressures on government to appoint Pertamina as the operator of Cepu project.
On September 2005, BP Migas threatened to cancel Exxon's working rights for Natuna D-Alpha amid uncertainty over its future development.
Natuna gas field was estimated to hold total reserves of 140 trillion cubic feet (tcf), though some 72 percent of the reserves contain carbon dioxide. Without the CO2 the gas reserves should be around 45 TCF, which is still huge.
Under such circumstances, the development of Natuna D-Alpha needs investment up to US$40 billion. Such a huge development cost calls for a market capable of generating an adequate return.
That's why, Indonesian government had given the owners of the block the right to retain 40 percent of the block's future gas output, while under standard production sharing contracts, contractors keep 30 percent of gas output, with the remaining 70 percent going to the government.
The D-Alpha block is 74 percent owned by ExxonMobil Oil Indonesia. Pertamina holds the remaining 26 percent of the block. D-Alpha was part of the Natuna gas fields discovered in 1973, located in Natuna Sea, about 225 km off east Natuna Island (600 km northeast of Singapore, and 1,100 km north of Jakarta).
ExxonMobil signed an agreement with the government in 1995 for a 10 year of commercial operation. The fields have never been in production following the failure in the drilling in a number of locations since 1995, but both Exxon and Pertamina still conduct marketing activities and study. Exxon got contract extension for two years that would mature early 2007.
Pertamina has been frustrated by the marketing problem for Natuna D-Alpha and planned to divest 13 percent of its shares to Malaysia's Petronas in exchange of Petronas being the off-taker. In fact, Petronas, Pertamina, and ExxonMobil signed a memorandum of understanding on March 18, 2002 to jointly develop the block.
Three years ago, hopes also emerged as a couple of businessmen brought together by the Asia Pacific Economic Cooperation (APEC) planned to build a pipeline project touted to be the longest undersea gas pipeline in the world linking Natuna D-Alpha, Natuna Island and Shanghai, China. The 4,875-km long pipeline would be routed via Vietnam, Malaysia, and Thailand. However the US$8 billion pipeline project is yet to receive official endorsement from China and Indonesia.
In June 2005, Executive VP Corporate Strategy and Development PTT Public Company Limited (Thailand) Tevin Vongvanich met energy minister Purnomo Yusgiantoro to express the company's interest in developing Natuna D-Alpha.
Purnomo said that time that since there is already a gas pipeline from Natuna (West Natuna fields operated by Conoco), it would make sense if PTT also join the Natuna D-Alpha. But no information since then.
Exxon's partner, Pertamina, decided to postpone the D-Alpha project last year due to huge investment cost. It's a hell of a strain for Exxon.

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