Global Insight Perspective | |
Significance | According to a statement made by the Minister of Energy and Mineral Resources Purnomo Yusgiantoro, Indonesia will not renew ExxonMobil's production-sharing contract (PSC) for the Natuna D-Alpha block. Delays in commercialising the 46 Tcf thought to be in play at the 222-Tcf deposit and less-than-favourable terms have been cited for the termination of the contract. |
Implications | ExxonMobil will reportedly have until January to wrap up its operations at the D-Alpha block. The move deals a blow to the investor confidence that Indonesian authorities have worked hard to rebuild in the wake of the Cepu oilfield affair. |
Outlook | The state oil company Pertamina should assume sole operational control of the block as of January. There have been suggestions it would look to involve other foreign partners, but any that may enter the picture are unlikely to enjoy the sort of PSC terms ExxonMobil had in hand. |
Impatience is Not a Virtue
Having let it be known over the last month that it was less than happy with prevailing arrangements (see "Related Articles"), officials in Indonesia appear to have summarily terminated ExxonMobil's production-sharing contract (PSC) for the massive Natuna offshore gas deposit in the South China Sea. Reuters was amongst the first to cover the comments made by Indonesia's Minister for Energy and Mineral Resources, Purnomo Yusgiantoro, yesterday, which reveal the IOC's PSC is no longer valid. Purnomo is quoted as saying that the IOC has failed to fulfil the relevant terms of the PSC. While the legal procedures are currently being worked out, he said "it is clear that the contract has expired".
Earlier comments indicated that the PSC ran through January and that the IOC was being given time to put forward a new strategy for the D-Alpha block, located roughly 1,100 km north of the capital, Jakarta. Indeed, rather than the PSC itself, it may be the patience of Indonesian authorities that has expired. ExxonMobil has yet to comment officially on the matter, but the annulment might be attributed to the urgency with which Indonesian authorities are attempting to maximise what remains of the country's hydrocarbon resource base. In contrast to the approach adopted by, say, nearby Brunei Darussalam, which is seeking to extend the life of its oil and gas reserves and sustain the contribution the commercialisation of these resources will make to state coffers, Indonesia has sought to expedite its potential for upstream exploitation. On top of the need for increased pace of development, the government has become bent on extracting a larger share of the associated upstream production.
These two drives, pace and splits, combined in the grounds for a protracted dispute with the very same IOC, ExxonMobil, over the development of the Cepu oilfield in Java, perhaps the country's last untapped crude gem. The long-running contest over Cepu damaged investor confidence at a time when officials should have been attempting to improve it. Today's news undoes much of the rebuilding work that a change in leadership at NOC Pertamina and conciliatory gestures by authorities had fostered. It again shows the sort of desperation that defines the upstream situation in Indonesia and the caution with which investors need to operate in this uncertain climate. Given that foreign capital and technical expertise will be instrumental in sustaining rates of output and optimising what upstream opportunities remain, from Indonesia's point of view the manner in which these upstream affairs are conducted is self-defeating.
This is an unfortunate outcome because one can appreciate the underlying anxiety here. The Natuna D-Alpha block looks on the surface to be the answer to the prayers of those officials seeking to boost domestic gas consumption while supporting an extensive array of long-term LNG contracts. Indonesia is facing an upstream gas supply shortage of the sort that makes 222 Tcf of gas sound too good to be true—and it is. Exploration work has shown the deposit's commercial potential is far lower than the gas reserve estimates would imply. D-Alpha has extremely high carbon dioxide levels, some 70% of the field's composition. This has made the commercial development neither straightforward, nor inexpensive. Some 46 Tcf is thought to be commercially viable, but even ExxonMobil struggled to sign off on the US$40-billion price tag attached to the play. That is factoring in the majority share of output it was able to secure for this PSC. Running counter to the established 35:65 minority split, even with 76% of the output, the economics at Natuna did not add up for the world's largest IOC. If not for Exxonmobil, then one must ask: for whom Natuna might pay off?
Outlook and Implications
According to Purnomo, the country's oil and gas regulator BP Migas has been charged with determining the next course of action in the wake of the PSC termination. ExxonMobil has been given until January to "check out", in the minister's words. He stated that the government may give further privileges to Pertamina but also that discussions were ongoing. There have been suggestions that another foreign partner may be sought to help cover costs and handle the technological challenges presented by the D-Alpha block. One can be sure that any future PSC will fall heavily on the side of Pertamina and the needs of the domestic market. In the absence of a more convincing netback afforded by a massive LNG project, it is difficult to see which firm might be inclined to fill ExxonMobil's shoes. Certainly the manner in which the former PSC has been terminated will not send the right signal to those IOCs that may well have coveted what remains a huge upstream play.
Related Articles
Indonesia: 4 October 2006: ExxonMobil's Work Plan at Surumana Block in Indonesia Takes Shape
Indonesia: 29 September 2006: Revised PSC Terms the Key to ExxonMobil's Extension at Natuna Gas Play in Indonesia
Indonesia: 8 September 2006: Pertamina on the Lookout for International Partner in Future Development of Natuna Gas Prospect in Indonesia
Indonesia: 5 September 2006: ExxonMobil May Lose Out on Indonesia's Natuna Gas Play in January
Indonesia: 14 March 2006: ExxonMobil and Pertamina Conclude Cepu Joint Operation Agreement