Two days before the end of its five-year tenure on Sept. 30, the House of Representatives took a final shot at foreign oil companies, urging the government to submit a new bill to replace Law No. 22/2001 on oil and gas, arguing the present law is far too loaded in favor of foreign contractors.
The parliament asked the government to propose, within one year at the latest, an oil and gas bill which will focus on domestic energy needs, meaning that the bulk of oil and natural gas output from new fields should be allocated for domestic consumption.
The House move could further discourage new investment in the hydrocarbon sector at a time when most oil companies have postponed new exploration, except in areas with very good prospects, due to the global economic downturn and shortage of international credit.
Even without new risks of legal uncertainty following the House move, the country’s hydrocarbon sector has been suffering from bureaucratic lethargy on the issue of cost recovery by mining contractors.
In fact, judging from the number of bidders taking part in the tenders for new concessions conducted by the oil and natural gas directorate general this year, the interest of contractors in Indonesia’s petroleum sector seems to have fallen sharply.
The directorate general tendered through competitive bids, between December 2008 and April a total of 16 oil and gas concessions spread across the country but only five contract areas attracted bids from domestic and foreign oil companies.
Oil and Natural Gas Director General Evita Legowo blamed the miserably modest response from oil companies on the apparently poor prospects of the areas offered and the global economic conditions and weak oil market.
The government offered another 17 oil and gas concessions in June and set Oct. 13 as the deadline for the submission of bidding documents. However, lack of interest from contractors forced the oil and gas directorate general to extend the deadline for one month.
This trend is really worrisome because the Oil and Gas Regulatory Body (BP Migas), which oversees oil and gas mining contractors, says that without the discovery (and exploitation) of new reserves, our oil output, which at present averages 960,000 barrels a day, will decline by at least 8 percent a year, because most of the existing fields have matured.
Yet more discouraging is that despite diversification of primary energy resources into coal, geo-thermal, hydro-power and biofuel, oil and natural gas still account for almost 60 percent of our commercial energy consumption, which increases steadily along with economic growth.
BP Migas has done a lot to expedite the process of approving the budgets and working plans of oil contractors, fully aware that proven oil reserves can increase only through increased exploration.
But oil firms will not invest in such highly risky business activities without the right investment climate.
Most damaging to new oil investors currently is the regulatory uncertainty regarding cost recovery by oil contractors, because the government has yet to issue a regulation on the technical directives for expenditure accounting guidelines for production-sharing contractors, which is supposed to have been effective as from January.
Hence, instead of tinkering with the oil and gas law, it is more urgent for the government to resolve the problem of the cost-recovery mechanism to head off constant disputes.