Economic Aspects Of A Successful Indonesian Venture

Abstract

Abstract In 1968, Indonesia offered a prime example of oil industry economics at work. Artificially low U. S. prices for oil and gas coupled with high finding costs caused Roy M. Huffington, Inc. (Huffco) and a number of other companies to seek better exploration opportunities overseas. Huffco was successful in negotiating a thirty-year production sharing contract with Pertamina, the Indonesian State Oil and Gas Enterprise. An aggressive program of exploration was undertaken. Financing of the operation was arranged by bringing together a group of six companies with Huffco as operator and participant. In the jungles of East Kalimantan (Borneo) and Sumatra, Huffco capitalized on the use of helicopters to expedite the building of a self-supporting oil and gas enterprise - which today includes exploration, production, transportation, and a $700 million LNG complex. Discovery of the prolific Badak oil and gas field in 1972, followed by prolific Badak oil and gas field in 1972, followed by other significant discoveries, made this enterprise a commercial success. Accelerated development of the LNG project produced a record completion schedule and further improved the project's profitability. profitability. Today, the Indonesian operation yields an excellent return to the six companies which ten years ago looked for and found an exploration opportunity with potential rewards to match the sizeable risks. Realistic economic incentives in Indonesia attracted the capital and technology necessary to find and develop successfully the Badak project. Similar opportunities exist today and more will develop as governments, including our own, realize that proper incentives produce results in our industry, regardless of how tough the technical problems appear to be. Introduction The oil and gas business has always offered many challenging new opportunities. Today is no exception. But new risks are involved and new technology usually is required. For example, in 1968, many U. S. independents such as Roy M. Huffington, Inc. (Huffco), as well as the majors, were caught in an economic squeeze between rising costs of finding oil and gas and rigidly controlled area sales prices for petroleum. Deeper drilling and compliance with a host petroleum. Deeper drilling and compliance with a host of new regulations further compounded the problem. The result was that risks were no longer compensated for by the rewards of probable new discoveries. Consequently, Huffco, and others, began to look for and find better opportunities overseas. But these new opportunities called for new solutions, as demonstrated by Huffco's experience in Indonesia, which is summarized below. In the late sixties, Huffco began serious evaluation of opportunities for oil and gas exploration in Indonesia. This culminated in the decision to join with Virginia International Company (Vico) in 1968 in acquiring a 30-year production sharing contract with Pertamina, the Indonesian stateowned oil and gas enterprise. Terms of this contract were somewhat new to the international petroleum industry and differed markedly from more prevalent arrangements in two major respects: the host country retained both management of the project and 100 percent ownership of all facilities within the country. The venturer paid all costs but was allowed full cost recovery from production, limited to 40 percent in any one year, with no limit on carry-forward of accumulated costs. Also, a proportionate share of the oil produced, up to a maximum of 25 percent from each contract area, was sold to Pertamina at a fixed price of $0.20 per barrel to provide for Indonesia's domestic petroleum requirements.