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Pertamina's biggest gamble: The Mahakam block
As the government is almost certain to transfer control to Pertamina of the gas-rich Mahakam block in East Kalimantan, from French energy giant Total SA and Japanâs Inpex Corp
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As the government is almost certain to transfer control to Pertamina of the gas-rich Mahakam block in East Kalimantan, from French energy giant Total SA and Japan's Inpex Corp., the state energy company is confronted by its many shortcomings that may leave it having bitten off more than it can chew, unless it can find heavyweight partners.
As the nation's biggest gas block, Mahakam's integrated operation dwarfs all concessions currently operated by Pertamina, the epitome of a state-managed entity persistently plagued by political and governance issues, stifling bureaucracy, limited capital and a lack of technology.
While an excess of nationalistic sentiment runs high among policymakers when it comes to the discussion of Mahakam's fate, little attention has been paid to the enormous scale of the operation should Pertamina be left to operate it alone.
With the production accounting for 25 percent of the country's total gas production of around 6,963 million metric standard cubic feet per day (mmscfd) in 2013, the block will need about US$2.5 billion annually in expenditure to keep it running.
This amounts to half of Pertamina's total allocation of $5 billion this year for its upstream exploration, development and revitalization of aging oil wells across its entire upstream operations.
As a mature block with a high degree of complexity, Total has needed to drill more than 100 wells per year and around 10,000 well interventions annually to maintain production, not to mention the daily management in its nine drilling rigs in operation. In comparison, Pertamina drills fewer than 50 wells annually.
The block will also need more than 500 logistical support vessels, whose contracts are based on international best practices that limit loopholes for corruption and kickbacks.
Pertamina's newly appointed president Dwi Soetjipto has acknowledged the shortcomings, and has also confirmed the reality that Pertamina will need to bring on board the expertise of other parties to jointly operate the block.
'We have asked that the government appoint us as the main operator. From there we will forge cooperation with other companies to maximize the value of the block,' said Dwi, who was the president director of state-run cement producer PT Semen Indonesia prior to helming Pertamina.
While Dwi has opened up the block for other companies to participate, he provided no guarantee that Total or Inpex would be able to stay on, even temporarily.
'The potential partners could be any private companies. We need to see whether it is feasible for them [Total and Inpex] to remain in the block,' Dwi told The Jakarta Post recently.
Having managed the block since 1967, Total and Inpex are due to see their permits expire in 2017.
It was not until December last year that the Energy and Mineral Resources Ministry made the decision, in principle, to allow Pertamina to operate the block based on the argument that the Oil and Gas Law requires all expired concessions to be handed over to Pertamina.
The ministry has given Pertamina until March to convince the government that its operation of the block would provide significant benefits for the country.
Pertamina upstream director Syamsu Alam is optimistic that the company has all the resources to manage the block, citing its success story in taking over the management of the West Madura Offshore (WMO) and Offshore North West Java (ONWJ) blocks, both in the Java Sea, from foreign companies.
The petroleum output for each block is around half of that of Mahakam, which produces about 69,500 barrels of oil equivalent per day.
'In WMO, we've managed to increase production by 31 percent while in ONWJ by 47 percent since we took over the blocks,' said Syamsu.
'There is no reason to doubt our ability to take over a bigger block,' he said.
The fate of the Mahakam block has been a sensitive issue amid growing demands that national companies play a bigger role in handling the valuable resources of Indonesia.
Amid such sentiment and concerns over Pertamina's lack of resources, Total has offered the government a five-year transition plan for Mahakam.
Under the proposed transition period, a consortium involving Total, Pertamina and Inpex would be established so that Total could transfer the know-how and experience of operating the block.
'The transition is needed to maintain smooth and efficient operations,' Total E&P Indonesie president Hardy Pramono told the Post, recently.
'It will provide time to define the future. In the meantime, we have proposed business-to-business opportunities to Pertamina to develop its presence overseas,' he said, adding that Total was eager to talk and cooperate with Pertamina as 'a partner and not as a competitor' on the future of the Mahakam asset.
Hardy explained that as a complex, mature block, Mahakam needed technology innovation and high investment, and competent human resources that abided by international health and safety standards in order for the production decline to remain controllable.
'Mahakam is a world-class project with multiple risks. Hence it is a necessity to have partners in order to minimize those risks,' he said.
