Total SA: Petroleum a la Francais

Total to Start Talks to Extend Drilling Contract in Indonesia

By Leony Aurora

Dec. 22 (Bloomberg) -- -- Total SA plans to start talks with Indonesia next year to extend a drilling license that contributes 8 percent of the company's output, before investing $8 billion to tap remaining reserves in the Mahakam Delta.

Europe's third-largest oil company needs a guarantee within four years that exports of liquefied natural gas from Borneo will continue after 2017, when the current drilling contract expires, Philippe Armand, president of Total's Indonesian unit, said in an interview in East Kalimantan province Dec. 20.

``We will not start without confidence that we will recover those investments,'' Armand said. ``It's a very heavy program, a significant project.''

Extension of the contract would help Total bolster reserves as discoveries of new fields dwindle. The government has proposed diverting gas from Mahakam to the domestic market in Java to meet rising energy demand and curb consumption of oil.

Total E&P Indonesie's drilling area contributes 75 percent of supplies to the world's largest LNG plant by capacity in Borneo, enough to meet 40 percent of Japan's needs.

The company is concerned about a possible change in the shareholding split between overseas investors and Indonesian authorities upon contract renewal. Regional governments are lobbying to get a share of output from fields under any new agreement with overseas developers.

In June last year, local authorities in the Cepu area of Central and East Java were handed a share of a field operated by Exxon Mobil Corp. and the state oil company, PT Pertamina, underscoring a trend toward decentralization in the country.

Revenue Split

Total and partner Inpex Holdings Inc. each hold a 50 percent stake in the so-called production sharing contract in East Kalimantan, entitling them to 30 percent of revenue left after recovering costs, while the government gets 70 percent.

The fields including Tunu and Peciko in the drilling area have about 13 trillion cubic feet of reserves left after pumping 10 trillion cubic feet since starting up in the 1980s. The remaining gas will allow production to continue for another quarter century provided there's an adequate return on the investment, Armand told reporters on Dec. 19.

The cost of tapping gas is increasing as the remaining reservoirs pose greater technical challenges, requiring more wells and compressors to pump the gas to the liquefaction plant in Bontang, known as PT Badak NGL, Armand said.

The $8 billion of spending to access the deposits will have ``a significant impact'' beyond the expiry of the current contract, Armand said.

Output Plateau

Total and Inpex have pushed output to a plateau of as much as 2.7 billion cubic feet a day amid dwindling supplies to the LNG plant from Chevron Corp. and Vico Indonesia, a joint venture of BP Plc and Eni SpA. Falling shipments prevented Indonesia from meeting its contractual commitments.

Indonesia may not extend contracts to ship 12 million tons of LNG a year to Japan after they expire in 2010 because Indonesia wants to divert the gas to the domestic market, Energy Minister Purnomo Yusgiantoro said on Feb. 8.

Total plans to spend $1 billion, an increase of 22 percent from this year's budget, to drill 122 wells next year, throughout Indonesia, Darto Sayogyo, vice president of drilling and well services at Total E&P Indonesie, said yesterday. The company drilled 116 wells this year, more than the 100 wells planned at the beginning of the year.

Sixty-nine out of 115 production wells to be drilled next year will be in the Tunu field, the company's biggest gas producing area in its Borneo concession, Sayogyo said.

Total will drill three exploration wells in the Mahakam Delta, Makassar Straits and an area north of Lombok island in West Nusa Tenggara province next year. Total will drill four wells next year to further study the extent of previous discoveries, including one in an area near Tunu that is expected to start production in 2009.

To contact the reporter on this story: Leony Aurora in Jakarta at laurora@bloomberg.net

Last Updated: December 21, 2006 21:18 EST