The Indonesian government’s decision to extend ConocoPhillips’ production-sharing contract (PSC) for the country’s second largest natural gas block signals a move away from the economic nationalism that has left the nation’s oil and gas sector in a shambles.

Secured just three months after President Joko Widodo won re-election, the agreement with the Houston-based petroleum giant shows just how much politics influenced previous decision-making and the impact it has had on foreign investment in the once-booming energy sector in recent years.

Widodo would have been hard-pressed to implement a policy shift any earlier, particularly during a heated election season when grandstanding politicians and tough-talking presidential rival Prabowo Subianto were loudly banging nationalist drums.

Responding to mounting criticism from the business community, Widodo has also signaled a reduced role for over-leveraged and inefficient state enterprises in major infrastructure projects by turning over West Java’s Patimban 42.3 trillion rupiah (US$3 billion) port development to three private sector contractors.

Under the new 20-year Corridor natural gas bloc contract, ConocoPhillips will retain a 46% stake in the Sumatran field, down from a previous 54%, while state-owned oil company Pertamina’s interest will rise from 10% to 30%. The remaining 24% will stay in the hands of Spanish energy firm Repsol SA.

An attendant mans a fuel pump at a Pertamina fuel station, a state-owned petroleum company in Jakarta. Photo: AFP/Romeo Gacad
An attendant mans a fuel pump at a Pertamina fuel station, a state-owned petroleum company in Jakarta. Photo: AFP/Romeo Gacad

ConocoPhillips will continue to act as operator for at least the first three years of the contract extension, between 2023 and 2026, after which the role will gradually shift to Pertamina – though Mines and Energy Minister Ignasius Jonan has said there is no set timeline for the transfer.

“The government has learned that changes of ownership and operatorship has cost them dearly,” says one industry analyst. “Without any incentive, the outgoing parties simply milk the asset as much as they can and leave Pertamina to pick up the pieces.”

Blamed for a recent oil spill in the Java Sea, east of Jakarta, Pertamina is already under fire over a 30% drop in production at East Kalimantan’s third-ranked Mahakam block, which it took over from French energy giant Total in December 2017.

Given the equally complex technical difficulties involved, industry experts are already questioning the state company’s ability to maintain the 200,000-barrel-a-day Rokan block, Indonesia’s biggest oilfield, when Chevron Pacific’s contract runs out in 2021.

Corridor has its own complexities. Although it may be an onshore field, the wells are much deeper than offshore Mahakam and about 40% of the gas is comprised of Co2, which requires specialized well casing and more expensive processing.

That explains why the government is proceeding slowly on the issue of operational control, with ConocoPhillips executives calling the new arrangement a “win-win” for both sides and pointedly emphasizing the importance of continuity.

Source: ConocoPhillips

Corridor produced 827 million cubic feet of gas a day in the first half of 2019, significantly more than the Mahakam block where the daily output has dropped alarmingly to 700 million cubic feet, more than 300 million below target.

Dwi Sucipto, head of upstream regulator SKK Migas and a possible candidate for energy minister in Widodo’s next Cabinet, noted that five of the six underperforming oil and gas contractors so far this year are Pertamina subsidiaries.

ConocoPhillips was among four of the top 10 PSC holders to exceed their targets, he said.

Analysts are surprised Repsol has been able to keep its original stake in the Corridor, but that may be related to its discovery earlier this year of the two trillion cubic feet Sakakemang field in neighboring South Sumatra, the biggest find in 18 years.

Repsol and partners Petronas and Moeco are hoping to use ConocoPhillips’ processing facilities when the new field comes on stream in 2024-2025, producing an estimated 300 million cubic feet a day for the next two decades.

“Indonesia has recently ramped up efforts to rejuvenate its oil and gas sector by reducing bureaucracy, revising fiscal terms and opening up the level of data available,” said energy intelligence group Wood McKenzie.

A natural gas facility at the Masela gas field in the Arafura Sea, Maluku, Indonesia. Photo: Facebook

“It will be up to Indonesia to capitalize on the buzz generated by this discovery to attract further investment and stimulate more activity.”

That means more private and less state management.

“It is about being proactive and reactive to changing circumstances that leads to good outcomes,” says one foreign petroleum consultant. “But that’s not in a state company’s DNA. Here, you can make a good decision and have a bad outcome and go to jail.”

He was referring to the recent eight-year prison term handed down to former Pertamina president-director Karen Agustiawan, 60, accused of causing $40 million in losses to the state over the firm’s investment in an Australian oil concession.

It is not the first time a senior executive has gone to jail for an innocent business decision that went south — or for trying to cut corners to speed up a project caught in an onerous budgetary process that in many cases involves checks on almost every invoice.

Another case was that of Eddie Widiono, the former boss of state power utility Perusahaan Listrik Negara (PLN ), who was jailed for four years after allegedly adding $13.8 million to the cost of two generators for power-starved South Sumatra.

Although he was never been accused of enriching himself, police were acting on an interim State Audit Agency (BPK) report, which noted a difference between the price of the units and that of the same type of generator available on the Internet without taking into account installation and commissioning costs, insurance and loan repayments.