The Jakarta Post | Editorial | Sun, March 15 2015, 6:52 AM
The government has finally decided not to renew the production sharing contract of Total Indonesie of France and Japan’s Inpex for the Mahakam gas block in East Kalimantan, instead awarding the concession to state-owned oil and gas company Pertamina.
Although the decision will end years of uncertainty about the status of the giant gas concession, many complex issues still overshadow the 46-year-old contract, which will expire in 2017. Details, including the terms and conditions of the transfer of the concession to Pertamina, have yet to be determined.
The composition of the new shareholders of the concession is even more socially and political sensitive.
Excluding the administrations of East Kalimantan province and Kutai Kartanegara regency from the negotiation loop regarding the participating interests (shares) in the gas concession could set off social and political turbulence and even protest demonstrations to block access to the hydrocarbon complex.
The issue of the participating interests in the Mahakam block for East Kalimantan province and of Kutai Kartanegara regency is crucially sensitive. Regional administrations have often demanded shares in resource-based businesses, such as mining ventures located in their areas, even though they have neither the financial capacity nor the managerial capability for buying assets worth hundreds of millions of dollars.
In May 2011, East Java’s governor at the time, Saifullah Yusuf, threatened to close access to the West Madura offshore oil and natural gas block in a strong protest against the central government, which had turned down the demand of the provincial administration for 40 percent of the shares in the oil and gas field.
In April 2011, the West Sumbawa regency administration sponsored massive demonstrations against the US$3.8 billion copper and gold mine of PT Newmont Nusa Tenggara (NNT) because it was prohibited from acquiring an additional 7 percent equity stake in the mine.
Such misguided, unfriendly attitudes had by and large been experienced by PetroChina in Jambi when East Tanjung Jabung regency sealed off 26 of its 140 producing oil wells in May 2013, by ExxonMobile, which returned its Gunting oil block in Jombang, East Java, because of local opposition to its drilling operations, by Mubadala Petroleum of United Arab Emirates in Ruby field in the Makassar Straits and by Inpex in the Masela block in Maluku. Even though oil mining firms operate under production-sharing contracts (PSC) with the central government (through the Upstream Oil and Gas Regulatory Special Task Force, SKKMigas), mining contractors must still obtain dozens of permits from the local administration for mining activities.
Latest data at SKKMigas show an oil mining contractor requires 32 permits for exploratory drilling, 25 for production development and seven permits for production operations from the central government and regional administrations.
In today’s democracy local communities often use freedom of expression to make further demands of resource-based companies in their areas — often with the prodding and support of civil society organizations or NGOs.
Another important factor for ensuring sustainable production of the concession that accounts for almost one-third of Indonesia’s total gas output is which foreign oil companies Pertamina will select as its partners in operating the gas block.
Certainly Pertamina, despite its decades of experience in the petroleum industry, still needs technical and managerial assistance from major foreign oil firms as its partners to operate the giant gas field.
Total Indonesie earlier said 100 wells per year should be drilled in the block and around 10,000 well interventions be performed annually to maintain a daily production of 1.7 billion standard cubic feet of gas and condensate of about 62,000 barrels of oil equivalent. The concession also requires more than 500 logistical support vessels to operate.
Given the complexity of the operations and logistics, many have raised concerns about the big risk of output disruption if Pertamina immediately takes over the block without the assistance of foreign partners. Also, given the estimated $2.5 billion of annual working capital and investment needed for the operations and production development at the Mahakam gas field and the limited resources of national banks, Pertamina will have to borrow from foreign banks.
Pertamina alone will likely be unable to obtain such a huge sum of foreign credit even though the gas reserves in the Mahakam block are more than enough to serve as security for the loans. The state oil company needs foreign partners with high credit ratings to convince foreign creditors, and Total Indonesie and Inpex, the current concessionaires and the operator of the block, seem to be the best suited for that role to secure smooth transition.
Total Indonesie had since 2007 proposed a five-year transition in transferring the block’s operations after the termination of its contract to ensure a smooth transfer of the operations to Pertamina. But political pressures and rising resource nationalism had made the previous government of Susilo Bambang Yudhoyono afraid to make a firm decision on the status of the contract.
Ideally considering the complexity of operations and the big investment needed for production development, the status of the contract should have been decided at least five to 10 years before its expiry.
How well the government handles the termination of the Total-Inpex contract will impact the investment climate in the hydrocarbon industry as there are 20 similar contracts, accounting for 30 percent of national oil output, that will expire within the next five years.
— Vincent Lingga