T

he government has rightly decided that state oil company Pertamina will own 70 percent of the Mahakam oil and gas block in East Kalimantan after the current contract expires in 2017 and Total E&P Indonesie of France and Japan'€™s Inpex, current holders of the concession, may own the remaining 30 percent.

But this decision, which follows a government policy adopted early this year of not extending the present contract, does not immediately resolve once and for all the legal status of the gas-rich block.

Many complex issues still overshadow the current contract, the initial version of which was signed 48 years ago. Details such as the terms and conditions on the transfer of the concession to Pertamina and the composition of the new shareholders have yet to be determined. And as the saying goes, the devil is in the (technical) details.

First of all, Total and Inpex will not automatically take up the 30 percent stake offered by the government because they will have to pay for that equity based on the value of the concession in 2017.

The assessment of the concession'€™s value alone will be rather tricky and complex because the latest volume of the remaining proven reserves and the prospect of new discoveries have to be carefully analyzed.

Certainly Pertamina still needs technical and managerial assistance from major foreign oil firms as its partners to operate the giant gas field to make the transition seamless without any risk of operation disruption.

Given the complexity of the operations and logistics, many have raised concerns about the big risk of output disruption if Pertamina takes over the block without the assistance of foreign partners. The block also needs US$2.5 billion in annual working capital and investment, and in view of the limited resources of local banks, Pertamina will have to borrow from foreign banks or float dollar bonds.

Pertamina alone will not likely be able to obtain such a huge sum of foreign credit financing even though the gas reserves held by 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.

Given these challenges, Total and Inpex, the current concessionaires and the operator of the block, are naturally best suited for that role to secure a smooth transition.

The government also still needs to resolve as soon as possible the sensitive issue of participating interests in the Mahakam block for the East Kalimantan provincial administration and the Kutai Kartanegara regency administration.

Taking into account all the technical negotiations and sensitive issues that have yet to be dealt with, the remaining 15 months for concluding a new contract on the Mahakam block will not be enough.

Therefore, the government, Pertamina and regional administrations should work hard to get the best deal
for the block, which accounts for one-third of our national gas output.