In the early 1990's, Indonesia's increasing energy demand required the Government of Indonesia to work closely with the oil companies operating under Indonesia's Production Sharing Contracts (PSC) to resolve the energy shortfall. The numerous fields located in the Offshore Northwest Java (ONWJ) contract area contained almost 2 TCF of certified gas reserves to supply West Java's gas demand. These ONWJ reserves, operated by ARCO Indonesia, Inc., provided a natural fit for the market since they were located in close proximity to Jakarta's high gas demand area. However, expected development costs initially made development of these reserves uneconomic. To overcome this obstacle, ARCO and the Government of Indonesia needed work together to meet both parties’ requirements.
The project was divided into several phases of developments, called Gas Tranches. The first Gas Tranche (Tranche I) was initiated in September 1993 with gas from the KLX/KLY fields to supply 260 BBTUPD of gas sales to PLN (State Electricity Company), with swing up to 325 BBTUPD. At the end of the 11 years contract life, approximately 1 TCF of gas will have been delivered. Following this Tranche I sales agreement, two shorter term contracts were signed: 1) Cilamaya market sales (eastern part of West Java) at 60 BBTUPD for 3 years starting in October 1995; 2) PGN (State Gas Company) sales, called Mini Tranche, at 50 BBTUPD for 10 years starting in September 1997. The Tranche II gas development was then proposed to anticipate additional West Java gas demand.
Since the ONWJ contract area covers an area 160 miles long by 70 miles wide, significant investment was required to build the gas network infrastructure. Wells, well platforms, main pipelines, compressor modules, automation system, and modifications to existing facilities all needed to be installed. With this large capital investment, the gas development was uneconomic under the existing PSC terms. Therefore, special incentives were required from the government.
The Indonesian government and ARCO entered into negotiations to develop these incentives. At the same time, other issues such as the gas development plan, gas markets, supply/sale contractual terms and delivery procedures were discussed and negotiated. To resolve the economic hurdle, ARCO proposed an interest cost recovery incentive, which was one of the possible alternatives available under the ONWJ PSC contract terms. After extended negotiations, Interest Cost Recovery of LIBOR + 1.5% was finally granted by the government to lift the Gas Tranche project's ROR to an acceptable level based on the agreed gas price. The project was then successfully implemented.