Misguided Takeover

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  • Oil Wharf Terminal of PT. CPI Port in Dumai, Riau, Tuesday, January 15, 2019.  ANTARA FOTO/Aswaddy Hamid

    Oil Wharf Terminal of PT. CPI Port in Dumai, Riau, Tuesday, January 15, 2019. ANTARA FOTO/Aswaddy Hamid

    TEMPO.CO, JakartaThe takeover of the Rokan Block by Pertamina has the potential to cause losses. The government policy of nationalizing foreign assets needs to be corrected.

    THE government should not be angry when the production, or lifting, of oil from the Rokan Block falls sharply this year. The decision by Chevron Pacific Indonesia, the operator of the oil block in Riau province, to not carry out exploration or make any new investments in the largest block in Indonesia was easy to guess from the outset. What is more, Pertamina, which will become the new operator there, will only be able to start drilling in August 2021.

    This is not the first time there has been a decrease in lifting when the government has decided to take control of an oil and gas block. Previously, when it took over control of the West Madura and Mahakam blocks, Pertamina faced exactly the same problem. However, because the production at Rokan is very significant - one-third of Indonesia's oil production - the impact on state revenues will be very large. This is why the Upstream Oil and Gas Special Regulatory Task Force (SKK Migas), which is responsible for upstream oil and gas activities, hastily asked Pertamina to immediately invest to prevent a larger decline in production next year.

    Before the transition period, production at Rokan in 2018 averaged 200,000 barrels per day. However, after the government decided that Chevron would no longer be at the operator of the block after 2021, daily production this year is estimated to have fallen to only around 160,000 barrels. This decline in production could even continue until 2022 because the construction of new rigs will need at least eight to 10 months. As well as this, Pertamina will have to dig deep into its pockets to buy chemicals patented by Chevron. These additives are important in order to increase oil production from the old wells at Rokan.

    The government should have considered the reduction in state revenues from the Rokan Block when it decided to replace the operator there. Chevron has not made any investments since 2018 because of only having less than two more years working the block, while they would need at least five years to recover any investment. The guarantee of recompense for recovery costs alone is not attractive enough because the operator also wants a return on its investment. As a result, the government has lost earnings potentially amounting to millions of dollars.

    Transferring the management of oil and gas fields away from foreign investors is an issue that is both political and an effective way to attract the attention of the public. Politicians often promote the importance of state resources being managed by national companies without considering the impact of a decline in state revenues. It is not only oil and gas but also gold, silver and copper, as in the case of the Freeport gold mine in Papua. This issue is usually brought to the fore at a time of presidential elections, including in 2019. Nationalist jargon was proclaimed everywhere.

    The issue with nationalizing assets clearly ignores technical and business calculations. After foreign operators lose these oil and gas blocks, their profits are not automatically transferred to Pertamina. In the Rokan Block, aside from having to provide large amounts of funding for exploration activities, Pertamina will also have to pay a new contract signing bonus of Rp11.3 trillion. All these costs mean that it will take a long time to recover the investment. And in the case of the Rokan Block, Pertamina will need to work extra hard to find new oil fields so that production remains high.

    In the future, economic management must be based on the business calculations that bring about the maximum possible benefit to the state. Nationalistic jargon proclaimed from campaign stages that leads to losses for the state should be abandoned. If there is no significant change from this kind of practice of taking control, Indonesia will continue to lose large amounts of potential income.

    Read the Complete Story in Tempo English Magazine