Govt terminates Exxon contract in Natuna field

Ary Hermawan, The Jakarta Post, Jakarta

The government has finally decided to terminate its oil and gas contract with Exxon Mobil Corp. in the Natuna D-Alpha area of the Natuna Sea, although the American oil giant insists the contract remains valid.

The director general for upstream commercial oil and gas development at the Energy and Mineral Resources Ministry, Priyono, said here Thursday that the letter terminating the contract would be issued in May.

"The Upstream Oil and Gas Regulator will finish processing the legal documents and other administrative matters within three to six months starting from last December," he said during a seminar on the gas potential of Natuna island in Riau Islands province.

The upstream oil and gas regulator sent a letter to the ministry in September recommending that the contract with Exxon in the Natuna Sea be terminated. Energy and Mineral Resources Minister Purnomo Yusgiantoro agreed with the recommendation in a letter issued on Dec. 8 last year, Priyono said.

The production sharing contract for the Natuna D-Alpha block was signed by Pertamina and Exxon in 1980. The contract was later amended in 1995 due to technical difficulties faced by Exxon in developing the gas field.

The gas found in the block has a 71 percent carbon dioxide content, making it expensive to extract. The government decided to give Exxon another 10 years to develop the field and allow it to keep 100 percent of the revenue from gas production under the amended contract.

The amended contract was due to expire in 2005. According to the government, in order to be extended, Exxon was required to furnish a business plan based on comprehensive studies. Exxon, however, argues that it has complied with all of the requirements under the 1995 agreement, which gave it the right to extend the contract twice for a period of two years each time.

Despite the government's decision to terminate the contract, Exxon is upbeat that it will reach a mutually beneficial agreement with the government. "We're always looking forward to a dialog," Exxon spokeswoman Deva Rachman told The Jakarta Post.

The U.S. based firm has spent US$400 million on exploring the block, the biggest in Southeast Asia with 46 trillion cubic feet of recoverable gas reserves, while state oil company Pertamina has spent US$60 million. The two-decade exploration effort has not so far led to actual production, however.

According to a government regulation, responsibility for the development of the Natuna D-Alpha block will now be given to Pertamina. "If Pertamina refuses to develop the block, it will be tendered using one of two different mechanism, a regular tender or a direct offer," said the ministry's director general of oil and gas, Luluk Sumiarso.

It is estimated that the investment needed to develop the block amounts to more than $25 billion.

Gas industry analyst Kurtubi and Oil and Gas Companies Association chairman Effendi Siradjudin said responsibility for the development of the gas field should be handed over to Pertamina.

Another analyst, Andang Bachtiar, suggested that the government develop new blocks in the Natuna Sea. The gas potential in the area amounted to 80 trillion cubic feet outside of the Natuna D-Alpha block.

Legal expert Ryad Chairil said the government would have to be prepared for a long legal battle if Exxon decided to bring the dispute over the Natuna block to the Court of International Arbitration.