Is KKN rife in the petroleum industry?<\/p>\n
By Parulian Sihotang and Alex Russell<\/p>\n
JAKARTA (JP): Indonesia's remarkable economic growth rate over
\nthe past 30 years has been predominately fueled by the proceeds
\nof the exploitation of its oil and gas wealth which, arguably, is
\nthe birth right of every Indonesian citizen.<\/p>\n
Indeed, on average over 42 percent of Indonesian domestic
\nrevenues, and 48 percent of all export income, can be directly
\nattributable to oil and gas output. In 1999\/2000, however, the
\nworrying statistic for Indonesians is that oil and gas revenue
\nfell by over 50 percent from the previous year's figure.<\/p>\n
The fact that only 9.7 years worth of recoverable reserves
\nappear to be left for future generations must add to their
\nanxieties over the state of the industry (BP-Amoco Statistical
\nReview of World Energy, June 2000). This concern is shared by no
\nless an august body than the World Bank which attributed the
\nbelow par performance of the industry to poor management (World
\nBank Report, June 2000).<\/p>\n
Further, the Report claims that \"If it is to operate in a
\ncommercially, economically, socially and environmentally viable
\nmanner, the sector needs to be substantially reformed -- urgently
\n-- given the issues at stake, the fallout from the regional
\ncrisis and the adverse conditions in the global oil industry\".<\/p>\n
It is unthinkable that this decline can be allowed to
\ncontinue. In order to gain deeper insights into problems plaguing
\nthe sector, and to recommend solutions to the problems, research
\nspecialists in oil affairs from the University of Dundee,
\nScotland, sought the views of key players and strategic decision-
\nmakers in the Indonesian petroleum sector.<\/p>\n
Petroleum experts were invited to respond to a series of
\nquestions and 26 of them were interviewed in-depth on the issues.
\nThe 101 respondents in the survey conducted from April to August
\nthis year included top executives of foreign oil companies, top
\ngovernment officers\/auditors, public accounting firms and other
\nnotable experts from the industry.<\/p>\n
The results, which emerge from an analysis of their responses,
\nare startling, thought-provoking, challenging to the management
\nstatus quo and may pressurize the government and the industry
\ninto establishing favorable policies to safeguard the future of
\nthe industry.<\/p>\n
A majority of the respondents stated that corruption,
\ncollusion and nepotism, are primarily responsible for
\nunacceptable and unaccountable managerial practices in the
\npetroleum industry over the last 30 years.<\/p>\n
If these views are correct then clearly they are prima facie
\nevidence of malpractice of national proportions, which demand the
\nimmediate introduction of government management disclosure
\npractices, which are transparent and auditable, at both the
\npolicy and operational levels.<\/p>\n
This notion of transparency is the first and main prerequisite
\nfor establishing accountable managerial control of the Indonesian
\noil industry. But respondents had other views to express. First,
\nthey argued that the management of petroleum operations should be
\nbased on mutual trust between the government and foreign \/
\nprivate operator companies.<\/p>\n
Second, the government-led management of the petroleum
\nindustry should be more responsive to the legitimate rights of
\nall stakeholders in the industry, including those of the
\npopulation.<\/p>\n
Third, all petroleum companies, foreign and domestic, need to
\nbe directly accountable for their activities and they should
\nsystematically report the results of their operations to the
\ngovernment.<\/p>\n
Consequently, Pertamina's role as the manager of the
\nIndonesian petroleum activities, as stipulated in Law 8\/1971,
\nwould need to be abolished and that responsibility should be
\ndelegated to independent government special units known as the
\n\"implementing body and regulatory body\" in the new oil and gas
\nlaw draft.<\/p>\n
Respondents identified foreign oil companies, suppliers \/
\ncontractors, parent companies and the central government of
\nIndonesia as being the main beneficiaries from the petroleum
\nrevenue, whilst locals and regional government fail to enjoy a
\nreasonable share of the oil largess.<\/p>\n
This finding adds credibility to the current struggle by the
\nlocal population and regional government for their fair share of
\noil revenues, as illustrated in the CPP Block and Arun LNG cases
\nbetween oil companies and the local people\/regional government in
\nthe provinces of Riau and Aceh.<\/p>\n
Why are projects associated with exploitation of Indonesian
\noil and gas properties seen as unattractive propositions by
\nventure capitalists? A majority of respondents or 54 percent
\nargued that corruption, collusion and nepotism are the main
\ncause.<\/p>\n
Further, the bureaucracy associated with the requirement that
\nproduction sharing contractors must comply with the tendering and
\nprocurement procedures established by the government -- despite
\nthe fact that production sharing contractors do not use any
\ngovernment money to fund their operating activities -- was seen
\nto be a barrier to investment.<\/p>\n
Interference or control by Pertamina over foreign oil
\ncompanies was put forward by 27 percent of respondents as being
\nanother major factor preventing inward investment. Other factors
\nidentified included (1) heavy administration and cumbersome
\nprocess in projects and contracts approval, (2) rigid government
\n\/ Pertamina supervisory role and style, (3) direct and indirect
\ninterference from other governmental agencies and (4) personnel
\nrules and regulation imposed on oil companies' expatriates.<\/p>\n
So what should the government do to reform the petroleum
\nsector in Indonesia? The following are the respondents' opinion
\nin order of urgency and importance: the government should (1)
\nintroduce more incentives for exploration, appraisal and
\ndevelopment activities, (2) set more generous fiscal terms
\nespecially on marginal and remote working areas, (3) eliminate
\noverlapping control by various levels of government authorities,
\n(4) give more control to the oil companies, (5) de-monopolize
\nPertamina's role especially in the down-stream industry, (6)
\neliminate government tendering\/procurement rules on production
\nsharing contractors, and (7) abolish personnel rules and
\nregulations imposed on expatriates.<\/p>\n
Although respondents identified regional government and local
\npeople as being legitimate stakeholders of the petroleum
\nindustry, central government was identified as the preferred co-
\nsignatory to petroleum operation agreements.<\/p>\n
The industry's concerns were cogently expressed by one top
\nexecutive of the oil company who argued that \"It is a real danger
\nfor the investors that every regional government might issue
\ntheir own regional regulations on tax and other duties to be
\nimposed on oil companies. It is going to be a real disincentive
\nfor investment coming into the region \".<\/p>\n
In conclusion, the evidence from the survey and interviews
\nindicate that the Indonesian petroleum industry needs to be
\nsubstantially reformed. The claims relating to corruption,
\ncollusion and nepotism need to be taken seriously and steps taken
\nto eradicate such practices if the claims are substantiated.<\/p>\n
It is important that there is speedy completion and
\nimplementation of the new oil and gas law currently under
\ndiscussion between the government and the legislature, and this
\nlaw should impose accountability and transparency regulations for
\nthe governance of petroleum operations.<\/p>\n
Finally, any successful resolution of the issue of regional
\nautonomy over oil and gas affairs must be sensitive to the need
\nto promote investment in the petroleum sector.<\/p>\n
The writers, who were involved in the above survey, study at the
\nDepartment of Accountancy and Business Finance, University of
\nDundee in the United Kingdom.<\/p>",
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