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Bulletin of Indonesian Economic Studies

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Notes
Alex Hunter
Published online: 23 Aug 2006.

To cite this article: Alex Hunter (1967) Notes, Bulletin of Indonesian Economic Studies, 3:7, 70-72, DOI:
10.1080/00074916712331331088

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 No 7, June 1967

NOTES

Oil Developments

Interest in offshore exploration o f Indonesia's

continental shelf continues (see Bulletin, No.6, February
1967). At least twenty foreign companies, including
fifteen from the U.S.A., have in recent months made
enquiries in Djakarta. The latest known agreement was
signed on 16 May 1967 between PERMINA and the Continental
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Overseas Oil Company (a subsidiary of the Continental Oil

Co. of the U.S.A., an American independent which has
successfully established production fields in Canada, the
Middle East and Africa). It is a production-sharing
agreement for exploration near Bandjarmasin in Kalimantan.
Its provisions differ in some respects from past
arrangements. The usual initial amount o f $1 million will
be paid by the overseas company for exploration rights in
Indonesian territory; it is now termed "compensation for
geological data". I n addition, however, a production bonus
of $3 million will be payable when production from the
licensed area reaches 75,000 barrels per day (about 4 million
metric tons per annum). This bonus is presumably over and
above normal tax payments on production up to this point. A
second difference is that any production above 75,000
barrels per day will be shared in a ratio 67.5 per cent for
PERMINA and 32.5 per cent for Continental Oil. Thus, if
exploration proves fruitful and production from the lease
reaches the proportions of a medium-sized field, the
production-sharing agreement gives the Indonesian partner
PERMINA a sizeable proportion of the area's production for
disposal in Indonesia or for export.

Production of crude in Indonesia in 1966 was around

170 million barrels (or 24.5 million metric tons), slightly
lower than in 1965. This slight falling off was only to be
expected. During 1965-66, and especially in the uncertain
months following the October coup, the international oil
companies in Indonesia held over important investment
decisions. One company, Stanvac, planned for a time to
transfer to state ownership its refinery at Sungei Gerong -
a plan which appears now to have been quietly dropped.
Thus, investment in exploration, or further development o f
field installations, was hesitant, especially as the oil
company exchange rate, fixed in July 1966 at Rp.10 = $1,
was becoming more and more unrealistic. Rapid inflation
made local services, materials and labour prohibitively
expensive to the companies.
 In t h e first quarter o f 1967 production prospects f o r
crude w e r e m u c h brighter. Following an eightfold increase
in the domestic prices of benzine and o t h e r petroleum
products, the exchange rate for o i l companies w a s raised
to Rp.85 per dollar. Also Caltex Pacific, the principal
exporter o f I n d o n e s i a n oil, reduced t h e price o f M i n a s
crude sold abroad from $1.75 to $1.62 in order to secure
more markets. U n d e r this twofold stimulus production is
confidently expected to b e significantly higher in 1967,
probably b y 8-12 per cent.

The M i d d l e East crisis has naturally provoked

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speculation as to its likely effects o n export markets for

crude oil. I t is f a r ' f r o m clear that the difficulties o f
P e r s i a n G u l f producers will operate i n the short term to
t h e advantage o f Indonesian exports. T h e b a n - o n exports
imposed by Arab countries extends only to the U.S.A. and
t h e U.K. These countries will not b e discommoded too
seriously: the U.S.A. can easily secure compensating supplies
from Venezuela -
its membership of O.P.E.C.
a country only too happy to supply despite
T h e W.K., although formally
deprived o f S a u d i Arabia, Kuwait and I r a q i oil, c a n fall
back o n transhipments of cargoes consigned to other European
countries; and c a n also count on I r a n to expand its output
to meet some o f the temporary shortages. Moreover, t h e b a n
o n exports does not extend to countries s u c h a s Taiwan, *he
Philippines, Australia, N e w Zealand, Hong K o n g , Singapore or
Malaya - even though the refinery capacity o f all these
countries is dominated b y international o i l companies of
British and U.S.A. parentage. Finally, all o f Indonesia's
markets are east of t h e P e r s i a n Gulf and Suez. T h e blockage
of the canal and the resulting partial s w i t c h to western
hemisphere o i l supplies are likely to leave t h e Arab
countries w i t h a surplus o f crude requiring disposal east o f
Suez. T h e r e is a risk of physical shortage i n tanker
capacity; b u t this too, considering the volume o f laid-up
tonnage and the number o f tankers w h i c h could b e diverted
b a c k from t h e carriage o f wheat, is only a short-term
problem.

In t h e long term, however, Indonesia m a y benefit from

the M i d d l e East war. T h e political instability o f that
area, w i t h the ever present r i s k o f physical disruption of
o i l installations, has been sharply underlined. Large
industrial markets such as J a p a n may w e l l react b y seeking
to orientate their supply connections towards Indonesia
and Borneo, if exploration reveals a sufficiently sound
reserve position. A visit to Australia by Major-General
I b n u Sutowo, Director o f O i l and Gas A f f a i r s in Indonesia,
 early in J u n e w a s interpreted a s an attempt to take advantage
o f t h i s situation and obtain more markets for I n d o n e s i a n oil.
A c t u a l l y , his m a i n purpose appears to have b e e n to reassure
C a l t e x and AMFQL ( w h i c h u s e Minas crude) about rumours that
I n d o n e s i a n oil was being sold through third party companies.

T h e reduction b y Caltex in its export price for M i n a s

crude from $1.77 to $1.62 raised i n Djakarta rumours of
dubious dealings. I t was alleged that t h e fifteen cents
difference would b e absorbed b y t h e F a r East O i l Company
( a company registered in Tokyo and set u p by Major-General
Sutowo and Kosho Ogaza, a member of the J a p a n e s e Diet, to
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handle sales in Japan o f Indonesian oil o t h e r than that sold

b y the international companies). It is difficult to believe
that C a l t e x would permit a third party to secure such ap
enormous discount on M i n a s crude merely f o r acting as agent.
Caltex itself made the application f o r the price reduction
which was refused at the first attempt ( s e e Petroleum P r e s s
Service, February 1967) but subsequently approved.

Adequate reasons for the Caltex move can b e found in

the international o i l market situation. M i n a s crude
generally commands a h i g h e r price than M i d d l e East crudes
partly f o r its sulphur-free and by-product characteristics
-
and partly for its locational advantage relative to J a p a n ,
Australia, N e w Zealand, the Philippines and the Pacific.
But its price level is not completely independent o f M i d d l e
East price levels. The discounts o n M i d d l e East o i l prices
h a v e , since 1960, steadily increased u n d e r pressure o f
competition from African production and independent U.S.
and Japanese companies, as w e l l as of excess capacity in
the M i d d l e East itself. T h e international majors n o w
commonly g i v e discounts to independent refiners, or to s t a t e
refineries, in Italy, Japan, India, etc., w h i c h place the
effective f.0.b. price of most Middle East crudes in t h e
range $1.10 to $1.40. Further, the taxation and Treasury
authorities in various countries, including Australia, w i l l
not permit imports of crude at a price so h i g h as to b e
inconsistent w i t h international trading levels, since h i g h
pricing o f imports of c r u d e can drastically reduce taxable
refinery profits, as well a s demanding greater expenditures
o f foreign exchange. Caltex, i t would seem, i s merely
facing the f a c t s o f life. T o o b t a i n n e w markets f o r M i n a s
crude and expand Indonesian production, a l o w e r price level
is imperative.

A l e x Hunter

72