Indonesia Reiterates Exxon's Natuna Contract Terminated

JAKARTA Oct 11, 2006 (Dow Jones Newswires)

An Indonesian official reiterated late Wednesday that the government had terminated U.S. oil giant Exxon Mobil Corp.'s (XOM) contract to develop the Natuna D-Alpha gas block in Indonesia's East Natuna Sea.

Exxon Mobil's production-sharing contract to develop Natuna expired in 2005 and the government will decide whether or not to re-tender the contract for fresh bids, Kardaya Warnika, chairman of the official upstream oil and gas regulator BPMigas, told reporters.

Warnika's comments echo those made by Minister of Energy and Mineral Resources Purnomo Yusgiantoro, who said he had recently informed Exxon Mobil of the contract termination and that the government had tasked BPMigas to negotiate the contract's renewal.

Exxon Mobil has denied any termination of their Natuna development contract and said that, legally, the firm could continue development preparation until January 2009.

"We still have more years from 2007 (to develop Natuna) according to our production-sharing contract," Jakarta-based spokeswoman for Exxon Mobil's local unit, Deva Rachman, told Dow Jones Newswires earlier Wednesday.

In December, Exxon Mobil Indonesia Inc.'s President and General Manager, Peter J. Coleman, told reporters the company was proceeding with a "four-year plan" to deliver natural gas from the Natuna D-Alpha block to foreign buyers by 2014.

Exxon Mobil has estimated that the Natuna D-Alpha block holds 46 trillion cubic feet of recoverable natural gas reserves.

If the government decides to re-tender the Natuna production sharing agreement, it will "choose the best feasibility study in order for the field to be developed as-soon-as-possible," Warnika said, without elaborating.

The loss of the Natuna contract might cause Exxon Mobil to lose the money it has invested to date to bring the field toward development.

But Warnika and Purnomo's comments are more likely bargaining bluster than substance as Indonesia ratchets up the pressure on Exxon Mobil to revise its Natuna production sharing contract, with natural gas prices reaching record highs on the global market.

Exxon and state-owned Pertamina are the joint contractors for Natuna, with Exxon holding a 76% contractor's share compared with Pertamina's 24%. The production sharing contract awards 100% of all output revenues to the contractor, due to the perceived difficulty of tapping the Natuna block.

The majority of production sharing contracts for oil and gas development operations in Indonesia hinge on the government getting a 60% share of output revenue with the remaining 40% allocated to the contractor.

The Indonesian government began putting pressure on Exxon Mobil last month when Purnomo threatened to cancel the company's Natuna contract if the company didn't begin development of the block by Jan. 8, 2007.

Vice President Jusuf Kalla also raised the issue of a revised production sharing contract for Natuna during meetings with Exxon executives during a September 23-28 state visit to the U.S.

"The contract must be reviewed and benefit both parties -only then will we do business," the English-language Jakarta Post reported Saturday, quoting Kalla.

The Natuna spat has unsettling echoes of the lengthy disagreement between Exxon and Pertamina over a joint operating contract to tap the massive Cepu block in East Java. That dispute became a symbol among foreign investors and analysts of the perils of contract enforcement in Indonesia before it was finally resolved in March.

Exxon Mobil has reassured the Indonesian government that it will fulfill its contractual obligations to develop the Natuna block and is already in discussions with potential gas buyers including Thailand's PTT PCL (PTT.TH) and Malaysia's state-owned Petroliam Nasional Bhd, or Petronas, Rachman said.

"We've explained our commitment to the government of Indonesia...that we have made some commitments to sell to credible buyers," she said.

Copyright (c) 2006 Dow Jones & Company, Inc.

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