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With a population of 1.35 billion, China
recently elected its new President, Xi Jinping, who succeeded Hu Jintao.
The new Prime Minister, Li Keqiang, replaced Wen Jiabao.
One of the strategic moves of their predecessors expected to be carried
on by the new pair is to boost China’s energy resilience by directing
national oil companies like CNPC, CNOOC, Sinopec and PetroChina to go
overseas, covering various parts of the world from the Middle East,
Africa to Latin America, if necessary through bilateral oil and gas
diplomacy with destination countries. This strategy has proven effective
in expanding the portfolio of China’s oil and gas assets abroad,
including in Indonesia.
Unlike China, Indonesia has been negligent for being over confident with
its national resources, especially oil and gas. Indonesia is known for
possessing good oil and gas prospects but the level of successful
exploitation is not proportional to its soaring energy demand in line
with the growth of its population, economy and middle-class.
Indonesia is late in developing its oil and gas diplomacy, as already
practiced by China, Malaysia and even the US for a long time.
Although the end of the process is always concluded with normal business
contracts, in the initial phase these governments often help national oil
companies through bilateral diplomatic channels, notably in oil and gas
producing countries, with government-directed management policies.
The time has come for Indonesia to utilize diplomacy to support its
national energy resilience, although political as well as economic
bilateral costs admittedly sometimes have to be borne.
It seems the government has begun to realize the importance of this
diplomacy. The coordinating economic minister, key officials of the
Energy and Mineral Resources Ministry and Pertamina recently made a
working visit to Baghdad.
Indonesia should be grateful for the green light it was given from the
Iraqi government to acquire a 10-20 percent share in the West Qurna oil
field, which is supposed to contain nine billion barrels of reserves
(compared with Indonesia’s remaining 3.6 billion oil reserves). In West
Qurna, Pertamina will collaborate with ExxonMobil to produce oil from 1.8
to 2.8 million barrels daily.
Through active diplomacy, Indonesia is expected to secure the Iraqi
government’s approval of the right to participate in the management of
other major oil fields such as Tuba, Merjan or Kifl for Pertamina,
although its implementation remains under a business to business (B to B)
arrangement.
Under Iraq’s less favorable domestic
situation, the government of China kept ushering its national oil
companies to Iraq in order to compete for oil field management contracts.
As an illustration, not long ago CNOOC won a contract for the development
of the Missan oil field in southern Iraq with a daily production capacity
of 450,000 barrels. CNOOC defeated its two compatriot rivals, CNPC and
Sinopec.
In June 2009 CNPC, cooperating with BP, won a 20-year contract in the
Rumeila field with a daily production capacity of 2.8 million barrels,
and in the same year CNPC in alliance with Malaysia’s Petronas developed
the Halfava field.
The Indonesian government should be able to guide Pertamina to form
alliances with China’s oil companies, particularly under the new Chinese
leadership, but it is realized that without government support through
active diplomatic channels, Pertamina finds it hard to maneuver alone.
Frequent state visits between Indonesia and China since the Soeharto
period have indicated fairly good Sino-Indonesian diplomatic relations,
but in terms of quality, more specific attempts are required to turn out
value added for Indonesians.
One strategy required is cooperation in the energy sector, chiefly in the
oil and gas area, not only between Indonesia and China but also
cooperation in other regions like the Middle East and Latin
America.
The government should enhance the position of Pertamina so it is capable
of working in alliance with China’s oil companies.
The first step to benefit from oil and gas diplomacy during the term of
President Xi and Prime Minister Li is a revival of the effort to
renegotiate the price formula of the Tangguh gas sale to Fujian province,
China. Some time ago President Susilo Bambang Yudhoyono paid a state
visit to China, during which one issue raised was reopening the
possibility of a revision of the contract of the Tangguh gas sale to
Fujian province, the price of which was considered too low.
Former Chinese president Hu Jintao gave a “green light” gesture and as a
follow-up the Indonesian government formed a renegotiation team. Sadly,
no negotiations have taken place so far and no later than May 2013 is the
team expected to start talks with China, represented by CNOOC.
With the election of Xi in place of Hu, Indonesia needs to promptly renew
the Chinese government’s commitment to increase the price of the gas sale
to Fujian, so that Indonesia will not lose the chance to improve its
trade balance, especially the oil and gas balance, which in 2012 incurred
a deficit of up to US$5.6 billion.
One short-cut solution to Indonesia’s trade balance improvement is to
increase foreign exchange from the export sale price of gas. After the
successful first renegotiation of the price of the Tangguh gas sale to
Fujian in 2006, Indonesia announced its second-phase price review bid.
In 2008, a renegotiation team was set up under the coordinating economic
minister, but regrettably at the same time several vital projects faced
various bilateral problems with China, mainly connected to funding, such
as the 10,000-megawatt power generator development project, the aircraft
procurement project and some others, so that any “pressure” to improve
the price formula gas sale to Fujian was seen as counter-productive, even
burdening other national projects, which consequently made the government
team’s price review in 2008 unfeasible. It was realized that the
second-phase price review failure was due to the lack of effective oil
and gas diplomacy by Indonesia.
Contractually, for the next renegotiation with China, Indonesia should
submit its price review proposal no later than May 2013, with the
expectation that the disturbing political burden of 2008 during the term
of Hu has now been reduced under Xi.
The government should set up a more solid team to only focus on the gas
contract price review, without being considerably laden with other
national project interests.
Even if bilateral costs arise, they should be within the proper limits
and pose no heavy burden on Indonesia, which is important for Indonesia’s
oil and gas diplomacy with the new Chinese government.
Before resuming negotiations, it should be made certain that the greatest
benefit from the price review will be enjoyed by the state instead of
foreign contractors, because the Indonesian government has to bear the
bilateral costs politically and economically.
In this regard, foreign contractors scooping huge bonanza profits should
never happen. ●
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