It is unpopular to stand up in favor of big business, let alone a foreign oil giant such as ExxonMobil, and politicians do not like to take unpopular actions. But it was managerial leadership, not politics, the new president of state oil company Pertamina, Ari Soemarno, demonstrated when he agreed to allow ExxonMobil to lead the daily management of the oil-rich Cepu block in East Java.
Soemarno's decision Monday to accept a Pertamina-ExxonMobil joint operation of Cepu, resolving a dispute that had blocked the development of the oil field for more than four years, was the best option for the country's interests.
The Pertamina chief was right in observing the Cepu oil field must be developed as soon as possible for the sake of national interests and, given Pertamina's current condition and capacity, ExxonMobil is at this point the best choice for accomplishing this.
The country, already a net oil importer, desperately needs to develop the Cepu block, which is estimated to be capable of generating 170,000 barrels of oil a day (bpd). This is quite significant given national capacity is currently less than one million bpd.
It would have been better if Pertamina could have been appointed to lead the day-to-day operations of the block, because the state company and ExxonMobil each hold a 45 percent stake in Cepu under a 30-year production sharing contract, with the remaining 10 percent owned jointly by the Central and East Java administrations.
But as a 28-year career executive of Pertamina, Soemarno is the best judge of the company's true capacity. Pertamina should magnanimously concede that it still lags behind the American oil giant in terms of technology, financial resources, managerial expertise and experience in production development. And the fact of the matter is that the country urgently needs to bring the Cepu field onstream.
Moreover, unlike the usual production sharing contracts (PSCs), the PSC for the Cepu block has been hailed as a model for looking after the country's interests. The production split will be based on a new, innovative arrangement whereby the government will take 85 percent of the output and the contractor 15 percent if global oil prices average over US$45/barrel, and 70:30 if oil prices average below $35/barrel. Based on this sharing agreement, ExxonMobil's take will range from 6.75 to 13.50 percent, depending on global oil prices.
Surrendering the daily management of Cepu to ExxonMobil does not mean giving the American company a blank check to exploit our natural resources. Pertamina, with an equal equity holding to ExxonMobil, is represented on the daily management board and on the supervisory board (Joint Operating Committee). So are the Central and East Java administrations.
Cost control at Cepu is vital because the government's take (share) of the oil field is based on output after the costs are recovered. The field's cost recovery can be managed properly without Pertamina being in charge of the day-to-day management of the field's operations because the management board is only authorized to implement the work and budget plans that have been approved by the Joint Operating Committee.
The most important thing is for Pertamina to appoint highly capable executives as its representatives on the management and supervisory boards so it can effectively see to it that the development and operations of the Cepu field are as efficient as possible and the transfer of managerial expertise and technology from ExxonMobil to Pertamina is smooth.
Apart from direct supervision through Pertamina's direct participation in the management and supervisory boards, the government has another tool to oversee oil contractors -- BP Migas, the government agency in charge of supervising the implementation of all oil and natural gas PSCs.
All production sharing contractors, including Pertamina-ExxonMobil, in oil and natural gas must have their annual work and spending plans approved by BP Migas. This upstream oil supervisory body is responsible for determining what expenditures can be counted as expenses for oil and gas production operations.
In the end it was managerial leadership, not politics, that was needed to resolve the Pertamina-ExxonMobil dispute, which had blocked the Cepu oil field development for more than four years. And that was precisely what Soemarno, presumably with the prior approval of the government, as the owner of Pertamina, offered.
