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Exxon Mobil, Indonesian Company Near Agreement Over Oil Deposit

By Wayne Arnold

Ending five years of wrangling, Exxon Mobil appeared on Monday to have reached agreement with Indonesia’s state-owned oil company, Pertamina, clearing the last hurdle to developing one of Indonesia’s most promising oil deposits.

Exxon Mobil and Pertamina announced in Jakarta that they had concluded a joint-operating agreement that would allow the two companies to begin drilling for oil near the town of Cepu in eastern Java. The agreement, to be signed officially on Wednesday, calls for the establishment of a joint venture that will place executives from Exxon Mobil in charge of day-to-day operations, while Pertamina will head a joint oversight committee.

The agreement overcomes earlier demands by Pertamina that it take the first turn in alternating control of Cepu, a proposal rejected by Exxon Mobil as impractical. Unable to persuade Pertamina to budge and facing growing nationalist support for Pertamina, President Susilo Bambang Yudhoyono of Indonesia fired Pertamina’s president last week and replaced its board.

“We are pleased with this agreement,” said Deva Rachman, an Exxon Mobil spokesman in Jakarta. “This is a partnership which will allow us with the company to develop the Cepu block that will have significant benefits for Indonesia,” she added.

With an estimated 600 million barrels of oil and peak output of as much as 180,000 barrels of oil a day, Cepu could reverse a long and steady decline in oil production that has turned Indonesia, Asia’s only member of the Organization of the Petroleum Exporting Countries, into a net oil importer. The new production could increase Indonesia’s current production by almost 20 percent. Exxon said the development would cost more than $2 billion.

Analysts also hailed the deal as a breakthrough for Yudhoyono’s campaign to bolster government revenue and revive foreign investment in his impoverished country, the most populous Muslim nation. The dispute over Cepu had come to embody reservations among foreign investors about the difficulties they face in Indonesia.

“This will be a real shot in the arm for an industry that hasn’t been receiving a lot of investment,” said James W. Castle, president of the business consultancy Castle Asia in Jakarta. “It’s a real boon for business and that will probably spill over into the attitude for overall investment in Indonesia.”

Oil is one of Indonesia’s largest exports and one of the government’s biggest sources of revenue. But Indonesia’s oil wells are drying up faster than new fields are being developed. New exploration has been hindered by reservations among oil companies about legal security, corruption, and local unrest in Indonesia.

Cepu had come to illustrate the obstacles and risks to exploration in Indonesia. Though Cepu was discovered more than a decade ago, Pertamina concluded that its fields were largely depleted. It sold the right to scour the fields — it later said it was forced to sell — to a son of Suharto, Hutomo Mandala Putra, who is known as Tommy.

Tommy’s company, unable to recover oil, eventually sold the contract to Exxon Mobil.