Declining legal certainty in the oil and gas sector could threaten future investment, industry officials have warned in the wake of controversial government decisions against two major operators.
A senior government official, speaking on condition of anonymity, told the Jakarta Globe that a recent decision by Jero Wacik, the energy and mineral resources minister, not to renew the contract of Richard Owen, the ExxonMobil Indonesia chief executive, had thrown the fate of two key oil and gas blocks into uncertainty.
“Now we don’t know what’s going to happen with the Natuna and Cepu blocks,” the official said, referring to one project in Riau Islands and another in East Java.
Erwin Maryoto, ExxonMobil Indonesia’s vice president of public and government affairs, previously said that the decision not to renew Owen’s contract would not affect operations at the two blocks.
But the government official argued that Jero’s move, in his capacity as the head of SKMigas, the interim oil and gas regulator, was unprecedented and may put at risk ExxonMobil’s continued investment in the country.
“We don’t know yet exactly what the reaction from ExxonMobil headquarters [in Texas] has been like, but to my mind this is the first time in Indonesian history that the head of a company with a production-sharing oil and gas contract has ever been [denied a work contract extension],” the official said.
Hadi Prasetyo, head of public relations at SKMigas, said earlier that Owen was denied an extension because of his “inconsistent” policies, citing ExxonMobil’s decision to call off a sale of assets first mooted in 2011.
At that time, the company said it wanted to sell its assets grouped under Mobil Exploration Indonesia, ExxonMobil Oil Indonesia and Mobil Indonesia LNG.
The assets included the Arun field and the North Sumatra offshore field. According to company data, as of 2010, those assets produced about 215 million standard cubic feet of gas per day (mmscfd).
Several investors expressed interest in the assets, including state gas distributor Perusahaan Gas Negara, but Exxon reportedly nixed the sale plan.
Hadi said another reason for not renewing Owen’s contract was ExxonMobil’s inability to meet production targets from its Cepu block, which includes the Banyu Urip field that is believed to hold the largest untapped oil reserves in Indonesia and is thought to be able to produce 240,000 barrels of oil per day (bpd).
Hadi said the government had set a target of 31,000 bpd from the Cepu block. However, Erwin said ExxonMobil was only producing around 24,000 bpd, around only three-quarters of the target.
Behind closed doors
The government’s reasons for not allowing Owen to stay on at ExxonMobil Indonesia have raised questions among industry observers.
They point out that if failing to meet the government’s production target was grounds for not getting an extension, then the heads of other oil and gas firms should also have been frozen out.
Last May, Raden Priyono, the head of BPMigas, the upstream oil and gas regulator that was dissolved and replaced by SKMigas, revealed in a report to the House of Representatives that only five of the 56 companies operating on production-sharing contracts in the country had met their designated targets.
Speculation is now mounting about the reason that ExxonMobil refused to complete the Arun sale.
A government official with knowledge of the negotiations told the Globe that the company had already held a tender to determine the winning bidder.
“The outcome of the tender was final and the winner was the consortium of Ratu Prabu Energi and Intera Arun Energi,” the official said, adding that the joint bid came to around $1.1 billion.
The decision did not please Jero, the official said. In a December meeting, weeks before Owen’s contract expired, the minister urged the company to “pick another winner,” the senior official said.
Jero reportedly wanted Arun to be sold to Mandiri Oil, which finished third in the bidding after it offered only $600 million for the assets.
Tommy Kesowo, a spokesman for Mandiri Oil, formerly known as Mandiri Panca Usaha, confirmed that the company had taken part in the bid to buy ExxonMobil’s shares in the Arun assets.
He also revealed that the company had been set up two years earlier as a subsidiary of the Indoland Group, a property development holding company responsible for projects including the upscale Pacific Place mall in South Jakarta.
The continued controversy surrounding the ExxonMobil case comes amid efforts by the Attorney General’s Office to push for a criminal prosecution of officials from Chevron Pacific Indonesia over an environmental rehabilitation project.
The South Jakarta District Court last month ruled that the AGO did not have sufficient evidence against the four officials accused of fraudulently claiming $23.4 million in recovery costs for a soil bioremediation program that was not carried out, and ordered prosecutors to release the officials and drop all charges.
However, the AGO has persisted in trying the case, despite the insistence of both Chevron and BPMigas that the government did not pay any recovery cost and that there was therefore no case to pursue.
In light of the case, Chevron warned authorities that the deteriorating investment climate in Indonesia could lead to lower future investment by the company.
This fear was echoed by both of the senior government officials the Globe spoke to, who warned that if ExxonMobil was subjected to similar arbitrary treatment, long-term plans to fully develop the Natuna and Cepu blocks could be set back.
The Natuna block has an estimated 46 trillion cubic feet of gas — the largest reserve in Asia. Fully developed, it would be capable of producing 57 million cubic meters of gas a day. Cepu contains reserves of about 1.5 billion barrels of oil and eight billion cubic feet of gas. If ExxonMobil maximized its oil production there, it could pump out 170,000 bpd of oil.