Indonesia Calls for Exxon to Replace Local Chief

28.01.2013 -

A senior Indonesian official has called for U.S. energy group Exxon Mobil to replace its country manager after delays at one of its major oilfields, fuelling concerns about state meddling in the sector.

Indonesia, the world's fourth-most populous country, is pushing firms to develop huge oil and gas resources more quickly to fuel rapidly expanding domestic demand.

But the former OPEC member has struggled to attract energy investment since becoming a net oil importer in 2004 as the government tightens its control over natural resources.

Indonesia is banking on the Exxon-led Cepu block in Central Java, the country's biggest oil find in the last decade, to stop a decline in the country's crude output, which fell to 860,000 barrels per day (bpd) last year from over 1.2 million bpd a decade ago.

Gde Pradnyana, operations controller for new oil and gas regulator SKKMigas, told Reuters on Monday there were more delays at Cepu and, partly as a result, it had decided not to extend the work permit for the head of Exxon Mobil's Indonesian unit.

The permit for the chief executive, Richard Owen, was due for renewal in February, he added.

"We think it's probably better for Exxon to nominate somebody else, to replace him," Pradnyana said. "We're not intervening in the way Exxon is doing their business, but we are expecting a result."

Exxon representatives earlier said the company was "seeking clarification from the Indonesian government" over Owen's permit, but were not immediately available for comment on Pradnyana's remarks on Monday.

Cepu's Banyu Urip field is expected to reach peak output of 165,000 barrels per day (bpd) by 2014, but as of Monday it was only producing 24,000 bpd. Pradnyana said full production was unlikely before August or September next year, behind the initial target of May 2014.

The decision on Owen also comes after several Indonesian firms failed in their efforts to buy natural gas assets that Exxon had put up for sale in Indonesia's Aceh province, sources familiar with the industry said. Exxon declined to comment.

"He wasn't cooperative enough," said an SKKMigas official, who declined to be identified because of the sensitivity of the issue. "(Exxon) wanted to sell the assets, but then suddenly it didn't happen ... a lot of domestic companies were interested."

Domestic energy self-sufficiency is a policy priority in Asia's second-biggest crude oil producer and the world's third-largest exporter of liquefied natural gas.

Resources are also a key issue in the run up to presidential elections in 2014, and a rise in resource nationalism is a growing risk for foreign operators in Indonesia.

Energy Minister Jero Wacik this month warned oil executives to be "cooperative".

"If you change directions too much you'll be replaced," he told executives during an contract signing. "Lots of foreigners have been sent home because they didn't want to cooperate ... If you have work areas that are not being used we'll remind you. If it happens several times we'll take your permit."

The changing investment environment appears to be impacting other producers. U.S. group Chevron has sent letters to SKKMigas reserving the right to reduce its investment if conditions in the country failed to improve, Pradnyana said.

Chevron is Indonesia's largest producer, accounting for 45% of the country's total crude output in 2012. The company was not immediately available for comment.

Exxon in 2011 put declining natural gas assets in Sumatra up for sale, with total output of about 215 million standard cubic feet of gas per day, drawing interest from state gas distributor PGN, state energy firm Pertamina and Indonesia's Medco Energi. Pertamina and Medco said the price Exxon was looking for was too high.

Sources close to the matter say Pertamina is eyeing control of assets, though it likely lacks the expertise to develop a technically difficult and costly project such as the huge Natuna gas field off Borneo.

Some lawmakers are now pushing for Pertamina to get its hands on the huge Mahakam gas block in Indonesian Borneo after a contract giving Total and Japan's Inpex the right to operate it expires in 2017.

Stakes in such projects would not just secure energy supplies, but could also boost budget revenues.

In 2011, the oil and gas sector contributed 266.6 trillion Indonesian rupiah ($27.6 billion) to domestic revenue, or 22 % of the total, one of the top sources of state income.

"The government is becoming more intrusive in the management of companies," said James Castle, chairman of CastleAsia, a corporate consultancy in Indonesia with clients including Exxon's Owen. "There's virtually no investment ... It's going very slow because of resource nationalism, legal uncertainty - I don't see it changing anytime soon."

The move on Exxon came weeks after the energy industry was shocked by the constitutional court's ruling that scrapped energy regulator BPMigas, following a challenge by Muslim groups and others that said foreign firms were getting too good a deal.

Indonesia's parliament plans this year to issue a new law on oil and gas that will set new ground rules for the energy sector. The government has said it will retain a supervisory role over the regulator.