speech

A New Challenge to Partnership in Indonesia's Upstream

By Peter J. Robertson, Vice Chairman
ChevronTexaco Corporation

Jakarta, Indonesia, Feb. 26, 2002

Speech in Bahasa Indonesia

It is great to be here in Jakarta to address the 28th annual conference of the Indonesia Petroleum Association and see again so many distinguished Indonesian energy leaders and longtime friends.

Let me say first how impressed I was with President Megawati's visit to the United States last year. Her meeting with President Bush and her compassionate speech in Washington touched both the American public and the energy community. I appreciated meeting with her during the Houston Energy Dialogue, which focused on restoring confidence for investing in Indonesia. And I look forward to working together in the years ahead.

It is especially important that we've all come together at this troubling time in world history. Clearly, in light of the tragic U.S. events of last September and their aftermath, the unifying role of organizations such as the Indonesia Petroleum Association (IPA) is more valuable than ever.

This is my fourth trip to Indonesia in the past year or so, and coming here always brings back memories, such as the elephants of Minas, the colorful dancers at Rumbai and the beauty of the islands.

The multicultural world we all share is ... made smaller each day - and I believe better – by economic relationships such as those represented between companies and countries here in this room today.

But I am reminded also of another event not here but in New England several years ago when my wife, Candy, and I went to see a concert where our son James was performing. He was playing not a piano or guitar but an Indonesian "gamelan" in a group devoted to Indonesian music.

It was a memorable moment for us, and to me, symbolic of the multi-cultural world we all share. It is a world made smaller each day – and I believe better – by economic relationships such as those represented between companies and countries here in this room today.

The theme for this IPA conference is transition and opportunity, and it's especially timely for some of us.

Pertamina, Indonesia's state oil company, is evolving toward a completely new structure under the recently enacted Oil and Gas Law. They are embracing a new role as an independent company, following the global evolutionary trend for national oil companies and helping to set a positive new direction for the nation. And I wish President Director Baihaki, Minister Purnomo and their leadership teams all the best as they go forward in this bold change.

Of course, with our merger last October, ChevronTexaco has made a major transition as well. We're now one of the world's largest integrated energy companies, third-largest in oil reserves among the supermajors, with over 2.5 million barrels of oil and equivalent-gas production per day. We have a unified worldwide downstream active on six continents, with more than 3 million barrels of product sales per day. And we have a deeper and broader technology portfolio.

ChevronTexaco is a truly global enterprise with outstanding prospects. And we hope to continue to grow with Indonesia not just in the upstream, but also along the entire value chain of the energy business.

Our IPA theme is timely for another reason as well. At this time of transition and opportunity, Indonesia urgently needs to reassure its energy partners, who are so important to its overall economic well being.

At this time of transition and opportunity, Indonesia urgently needs to reassure its energy partners, who are so important to its overall economic well being.

We face a mix of difficult challenges – political and regulatory, technical and scientific, financial and structural. And these will require us to work more closely in the future and listen to each other more carefully than at any other time in our shared history.

I see three priorities before the nation's oil and gas industry:

  • We need a stable and competitive investment climate.
  • We need a balanced portfolio to capture the greatest mutual benefit from both the new and the old sectors of the upstream.
  • And above all, we need partnership.

Let us look first at the need for a stable and competitive investment climate. The simple definition is this: Safe and secure working and operating conditions and flexible and reasonable terms that are fully honored. Capital will tend to go where it is most welcome and secure, and it must go where it can be most productive.

Indonesia is working on the tough issues of deregulation, privatization and regional autonomy. And this is very encouraging. But at the same time, other countries are competing very hard to attract more foreign investment. The field includes the full range of different business models for the upstream: ChevronTexaco, Pertamina, the new Russian majors, Petronas, the Chinese oil companies and many others.

Indonesia is working on the tough issues of deregulation, privatization and regional autonomy. ... But at the same time, other countries are competing very hard to attract more foreign investment.

But no matter what their differences may be, they all want to expand their exploration and production (E&P) portfolios into new countries, and the rules are the same for every player in the game. They must invest in those countries and projects with the greatest upside potential to grow both production and earnings.

It is encouraging to see that President Megawati and her cabinet are determined to create the competitive investment climate that Indonesia so urgently needs. And again, I appreciate her efforts to reach out to the industry and work with us.

Our second shared priority is to be sure that we work on a balanced portfolio. The nation must gain the maximum benefits from its oil and gas resources. So it must promote exploration, especially in the deepwater, continue building its liquefied natural gas (LNG) business and maximize its other gas-and-power development opportunities. All these things the nation has done, with an especially bright future ahead for gas as new infrastructure is put in place. But Indonesia must also ensure steady investment in its mature oil fields.

Looking first at the new side, the industry has had some good results in recent years. There was the Cepu discovery which looks like a 250-million-barrel oil field; the Belanak gas discovery; and West Seno, the nation's first deepwater project. Add it up, and Pertamina has forecasted up to 300,000 barrels a day of combined new production for Indonesia by 2004.

Unfortunately, we have also seen some highly publicized security problems, notably the interruptions to production and sales at a major LNG facility, and the civil unrest and damage to infrastructure in Riau, which has been both disruptive and costly during 2001. But again, the industry continues to explore and bring capital. Pertamina and others have reported discoveries – not giants but certainly commercial fields. And Caltex has begun seismic on our new Kisaran Block in North Sumatra.

So all of this is promising news. But let us remember: Larger oil fields are much harder to find today, as experience here in Indonesia and around the world shows. And with the deepwater comes higher risks and much higher costs. Further, while LNG has continued to grow and expand its customer base, it faces today a changed marketplace, which is more competitive and more crowded than before.

Let us celebrate the new fields and new projects of the future. But let us balance that by fully recognizing the importance of the mature oil fields to the nation.

So, let us celebrate the new fields and new projects of the future. But let us balance that by fully recognizing the importance of the mature oil fields to the nation. Let us remember the Indonesian proverb: It is sometimes possible to see ants on the other side of the ocean but still be blind to the elephant standing in front of you.

So again, our upstream business needs a competitive investment climate. And we need a balanced portfolio of new and old assets. But most of all, we need the third element: partnership. We must prove we can work together through change, under very difficult conditions. This is the new challenge to partnerships in Indonesia's upstream business.

Here we must turn of course to Caltex, the long-term partner which even today still produces fully half of Indonesia's oil, and which has stayed the course in good times and bad. More than 6,500 Indonesians work directly for Caltex, and more than 25,000 contractors as well.

These are very large operations. For example, just to develop Areas 10 and 11 in the North Duri oil field with new steamflood technology will require investing $500 million, drilling 1,600 wells and installing more than 1,200 kilometers (744 miles) of pipelines. Plus we are doing it almost entirely with Indonesian engineers, materials, drilling rigs and equipment involving an estimated 3,000 local workers. And nearly every paycheck stays in Riau.

This is a partnership with deep roots and long-term mutual benefit beyond the barrels themselves. Over the last 50 years, ChevronTexaco has hosted literally thousands of Indonesian scientists, managers and engineers for visits to our U.S. facilities. In this way, we've helped to create the core of seasoned employees and leaders who brought technology and know-how back to Indonesia.

In return, much of what ChevronTexaco has learned about partnering, we learned right here in Indonesia from many of the people in this room today. And we have put those lessons to work for mutual benefit in our operations all over the world.

... much of what ChevronTexaco has learned about partnering, we learned right here in Indonesia from ... and we have put those lessons to work for mutual benefit in our operations all over the world.

Further proving the value of stable partnerships, Caltex has been a magnet for other companies. In 1995, we started moving most of our procurement activity from Jakarta to Riau Province. Halliburton, Tripatra, Dowell, IJP, REDA Pump and many other Caltex suppliers set up offices in Riau, which attracted small and medium businesses as well.

Our contributions to building the regional economy go further still. Recently, Caltex contributed $1 million to support the "Riau 2020 Strategic Planning Study," led by Riau Governor Saleh Djasit. And we've made major contributions to the community. Last year alone, Caltex invested over $5 million in schools such as the Caltex Riau Polytechnic, and scholarships as well. In 2001 alone, we helped almost 30,000 students.

In fact, since 1955, the Caltex partnership has invested $750 million in the Riau community. The list is long: Medical clinics, youth programs, volunteer work by employees, water wells, bridges and other infrastructure.

The sum of all this brings yet another benefit to the nation. Like Indonesia's other established upstream investors, we help to create the foundation that can attract new investors of all kinds, not just energy. And in this way, the energy industry – so vital to the last century – is helping Indonesia create a more diversified economy for the new one.

Of course, there is another side to the Caltex story. I am speaking of declining production and rising costs. In 1995, Chevron's former CEO Ken Derr spoke where I am speaking today. He cited the achievements of Caltex, such as increasing the value of Pertamina's assets and managing costs, a mission continued more recently by President Director Humayunbosha. At the time, the Duri Field was producing about 300,000 barrels per day. The daily average last year was about 260,000. So we've held the decline to 14 percent since the mid-1990s.

I am very proud of our Duri team for this achievement. But we should recognize that this success was totally dependent on continuous capital investment – and notably also, we have focused on the best areas of the field. You can't do that forever. Without the $800 million invested during this period, Duri would probably be down to 100,000 barrels today. More importantly, even with a strong focus on cost control, the lifting costs since 1995 – not counting energy expense – have more than doubled.

Earlier in my career, I was in charge of our upstream business for Chevron in North America. And the big challenge was managing our giant, mature fields on the Gulf of Mexico shelf, in Texas and California. I learned a tough but simple lesson: As oil fields mature, we have to change our operating model. So we took a hard look. And we decided that we would have to produce smarter barrels, cheaper barrels and more profitable barrels, not just to save money but ultimately to produce a lot more oil.

The change required new attitudes, tactics, technology, a more flexible work force and creative cost management. But as a result, we came to see our mature fields as strong prospects for tomorrow instead of problems left over from yesterday.

In its history, Caltex alone has produced almost 10 billion barrels for Indonesia. And we believe we can recover another 4-to-5 billion. At ChevronTexaco, we want to put our best technology and ideas to work. We're ready to keep testing the frontiers of reservoir management and capital efficiency. We know there are areas of Duri that probably hold up to 150 million producible barrels, but they're not recoverable under the current terms. The estimated reserves might as well be "zero" without the right fiscal terms.

At ChevronTexaco, we want to put our best technology and ideas to work. We're ready to keep testing the frontiers of reservoir management and capital efficiency.

Imagine if we made a 150 million-barrel new discovery. We would all be celebrating the nation's good fortune. But whatever Duri's untapped potential may lack in excitement, it makes up in value. Here is a vast, shallow, onshore deposit, with no finding costs, an established infrastructure and virtually no risk to capital.

Clearly, here is a case where an old barrel can be more valuable than a new one! This is why we must work together to confront both the geologic realities of these mature fields and the economic requirements as well, because the terms of the past and present may not fit the needs of the future.

Thinking about our industry here in Indonesia, I am reminded of the story of the North Sea. Everyone saw the decline, but at first, they didn't see the solution. Then government and industry pulled together, and the entire regional industry bounced back.

Like the mature areas of the United States – the Permian, the San Joaquin Valley and so on – the U.K. offshore became one of the industry's great turnaround stories. They blended different tax treatments with new kinds of incentives, streamlined permit processes and special terms for mature areas. They created new procurement strategies, developed shared services and standardized contracts.

Our industry has all sorts of ways to improve already at work around the world, like pooling capital, optimizing rig time and especially ensuring safer operations, which yields a powerful, combined return in human, financial and environmental terms.

We can learn and benefit from all of this here in Indonesia. The record is clear: reducing costs creates new opportunities and often, new reserves.

Indeed, the challenge of taking a fresh look at large area of older fields, where the industry is well established but in decline, can re-energize entire organizations. And sometimes, it can give new life to an entire region.

My own primary focus of course is the future of Caltex, because of its enormous importance for Indonesia and for ChevronTexaco. But while each company in Indonesia's upstream faces its own unique mix of challenges, we all share a common interest in the three priorities before us.

Again, we need a stable and attractive business climate. We need to work on a balanced portfolio to ensure that Indonesia gets maximum value from both the new and the mature sectors of the business. And we have to work in partnership through this period of great change to create our future. We must meet the new challenge to partnership and grow the industry in every way we can.

Speech in Bahasa Indonesia

Updated: February 2002