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Jakarta Post

Sharing risk in the Mahakam Block

  • Salis S. Aprilian

    The Jakarta Post

Jakarta   /   Tue, September 22, 2015   /  04:29 pm

The termination of the contract for the Mahakam Block in East Kalimantan, one of the largest oil-and-gas fields in Indonesia, has been an interesting topic of discussion these last three years.

The energy and mineral resources (ESDM) minister has issued Regulation No. 15/2015 stipulating that the government has decided that the management of the block will be transferred from France'€™s Total E&P Indonesie (TEPI) and Japan'€™s Inpex to state oil-and-gas company Pertamina.

This isn'€™t something new for Pertamina. In the past, it took over management from Caltex in the CPP and Siak Blocks, from BP in the Onshore North West Java block and from Kodeco in the West of Madura Offshore block.

Even for different field sizes, Pertamina has been entrusted with managing the ex-JOB (Joint Operating Body) fields that focus on increasing production from Enhanced Oil Recovery stages.

Under Pertamina'€™s management, the fields have become more diverse, ranging from onshore and offshore fields, and from primary and secondary recovery stages.

The oil-and-gas industry is often referred to as a heavy industry technology, capital-intensive and high risk. However, technology now can be purchased and the capital can be borrowed from the markets.

So how do accurate calculations of the risk stay important at the time of decision making?

In regard to capital, managing the Mahakam Block looks like managing fields that are already mature with a well-known history and the potential of future production. Fresh money could soon be gained and used for capital investment and covering production costs.

The technology is also available in the market. The challenge is perhaps how to care for and optimize old assets with better planning.

A joint study with several service companies, which have centers of research and technological development and innovation in the areas of upstream oil-and-gas, could also be proposed.

Thus, capital and technology is no longer demanding. Hence, how to manage existing risk becomes more definite and measurable.

The ability to analyze and manage risk is intimately related to the real data available in the field. The more complete and accurate the data that can be retrieved, the better the resulting risk analysis.

Calculation of risk from the beginning that approximates real conditions will reduce the potential losses and, on the contrary, could increase profits.

The problem is we have limitations of knowledge and experience to analyze the data and see a future that is full of uncertainty.

The uncertainty of the future often deals with external factors such as socio-economic conditions (purchasing power, price of goods, supply-demand), politics (rules, legislation), the natural environment (weather, disasters, resources) and others. It is not easy to map the future with only reference to the present or to know exactly the relationship between cause and effect. We can only fumble around with social, economic, legal and political theories.

In the transfer of operatorship of the Mahakam Block, the government has decided that management will be entrusted to Pertamina. Then, Pertamina will sell 30 percent of its shares to the existing operator (TEPI and Inpex).

In addition, Pertamina will also sell 10 percent of its shares to the local government of East Kalimantan (based on ESDM Ministerial Regulation No. 15/2015). Pertamina will eventually hold majority shares of 60 percent.

The Pertamina'€™s Board of Directors said that its partnership with the foreign contractors was not because of the company'€™s limited financial or technical ability, but rather to share risks with partners who have been in the region for decades, within the framework of a '€œbusiness-to-business (B-to-B)'€ arrangement.

Sharing the risk is reasonable in any business, especially in the oil-and-gas upstream business sector. What should be taken into account is under what conditions we will share and how big the participating interest to be shared will be. Are there mutual benefits that can maximize the revenue of the company or the state?

The experience and knowledge of the existing operator can minimize the risk of failure of the operation and the maintenance of wells and production facilities that are old. In the absence of foreign workers involved in this block, all workers will become Pertamina'€™s employees.

Likewise, the investment and capital must be poured. So far, revenues from the Mahakam block result from gas that is processed into liquid gas or LNG.

The second factor is how this split of interest benefits Pertamina and the government. The share owned by local government is expected to be able to stimulate the role of the local government via the region-owned enterprise (BUMD) in business development in the future.

The participation of local government in granting various operational permits and environmental protection permits will become an indispensable factor for the company.

Then, an increase in revenues and profits for the company will enlarge the locally generated revenues that can be utilized for development. This will be all in addition to the effects of the use of local labor and the provision of goods and services in the region.

The writer is president director of PT Badak NGL, a subsidiary of state oil and gas company Pertamina. The views expressed are his own.

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