New oil and gas law enhances income sharing<\/p>\n
Untung Suryanto, Surabaya<\/p>\n
It was very interesting to read the opinion piece by T.N.
\nMahmud, a former CEO of Arco Indonesia, in The Jakarta Post on
\nMay 5. His comments and proposals indeed represent the opinions
\nof a highly regarded oilman who spent years in the oil and gas
\nindustry in Indonesia and who probably has seen the final draft
\nof the long-awaited RPP Hulu (Upstream Implementation Guideline)
\nfor Law No. 22\/2001 on oil and gas.<\/p>\n
I realized though that Mahmud held a peculiar perspective
\ntoward the ability of our own people, primarily those in
\nprovincial governments.<\/p>\n
He suggests government policymakers reconsider the 10 percent
\nIndonesian equity participation (IP) clause in the RPP Hulu,
\nwhich he calls an obstacle to oil investors.<\/p>\n
This is even more surprising when we realize that many former
\nIndonesian oil executives from Pertamina and other multinational
\noil companies are now running their own companies, such as Medco,
\nExpan, Star Energy, Kondur and Lapindo. Many former multinational
\ncompany executives and workers alike have joined Regional BUMD
\n(Badan Usaha Milik Daerah, or companies owned by local
\nadministrations) oil and gas companies, and are ready to share
\ntheir years of expertise for the benefit of Indonesia.<\/p>\n
They know very well the decision-making process for
\ndetermining between good and bad projects based on the proven,
\nprobable and potential reserves. They are well educated and know
\nvery well the associated risks, the high profit, high technology
\nand high capital investment of upstream and downstream projects.<\/p>\n
We all realize that the risk reduction option of inviting in
\nnew partners and fresh money will inevitably create management
\nchallenges that any world-class joint venture (JV) operator
\nshould be able to handle professionally, as stipulated in the
\nrespective Joint operating agreements (JOAs) and PSC contracts.<\/p>\n
Regions such as Riau, South Sumatra and East Kalimantan are
\nnow able to cope with the oil and gas business in their
\nrespective areas. Riau province, via its 50-50 venture with
\nPertamina, namely Badan Operasi Bersama (BOB)-CPP, has been able
\nto maintain the Coastal Plain block production level at between
\n30,000 and 35,000 barrels of oil per day over the last year.<\/p>\n
South Sumatra province, through PT Petro Muba, has been able
\nto manage a 10 percent working interest in one of the Medco
\nblocks and construct a cost-effective mini-refinery in
\ncollaboration with the Bandung Institute of Technology.<\/p>\n
What can we learn from the above cases? In a broad sense, they
\nsuggest that a provincial government may have certain advantages
\nin managing the oil and gas business from a practical standpoint.
\nObviously, it would be hard to employ and maintain a full-time
\nspecial oil management team if the producing fields were of small
\nsize and fragmented by the (regency) kabupaten administrative
\nboundaries. Why? Simply because it would create a nightmare due
\nto unitization, funding and production split procedures, leading
\nto cost inefficiency.<\/p>\n
One immediate solution that I can offer is to elevate the
\nhandling of oil and gas from the regency to the provincial level
\nby creating a special oil and gas business unit that covers the
\nentire provincial boundaries. This new business unit would be
\nresponsible for managing all facets of the oil and gas business
\non behalf of the provincial government, and would be by
\nprofessional oil and gas experts.<\/p>\n
Regencies could always have certain equity shares in this
\njoint venture so that net income and dividends would be
\nproportionally split between provincial BUMD and kabupaten BUMD.
\nManagement members, staff and workers could be sourced from the
\nindividual kabupaten. If local national expertise was not yet
\navailable, they could hire expatriates managers temporarily while
\ngrooming their successors.<\/p>\n
Annual operating costs would be shared among the kabupatens
\nand the provinces, but expensive capital expenditures could be
\nsourced from bank loans or from direct foreign investment through
\nmutually acceptable financial agreements. It is for this very
\nreason the provincial government of East Java established oil and
\ngas company Petrogas Wira Jatim in early 2003.<\/p>\n
This Surabaya-based company is 100 percent owned by the East
\nJava government, so the business unit is considered a provincial
\nBUMD. They have created a joint venture with the Lamongan regency
\nBUMD to develop a new supply base in Paciran. The main objective
\nis to acquire a 10 percent to 100 percent working interest in
\neach of the producing blocks in East Java under business-to-
\nbusiness deals.<\/p>\n
Let us now address oil and gas Law No. 22\/2002, particularly
\nunder Chapter 21, Clause 1, whereby every first-time plan of
\ndevelopment (POD) for newly discovered fields must be "endorsed"
\n(Law No. 22\/2001 uses "consultation", a term which is rather
\nambiguous) by the provincial governor before receiving approval
\nfrom the minister of energy and mineral resources.<\/p>\n
Please note that by inserting this clause into the body of
\nthe law and the provision for the right to 10 percent Indonesian
\nParticipation (IP) in PSC contracts, the central government has a
\ngenuine intention of encouraging national participation in the
\ndirect sharing of oil revenue.<\/p>\n
The 10 percent IP suggests the BUMD must pay the sunk cost up
\nfront and allows the provincial government to be freed from
\nexploration risks and to actively participate in managing the
\noperation through an Organizing Committee Meeting (OCM), as the
\nhighest controlling unit in the JV.<\/p>\n
This is a golden opportunity for both foreign investors and
\nprovincial BUMD alike. Why? Because the Joint Venture (JV)
\noperators will enjoy special relations with the
\nprovincial\/regency governments, which will help them address
\npublic relations challenges with local residents, NGOs, students,
\ncentral and local legislatures, etc.<\/p>\n
Where are the probable sources of capital investment? We are
\nall aware that there are significant amounts of funds, primarily
\nfrom Japan, Malaysia, China, Singapore, Korea and other countries
\nlooking for profitable investments.<\/p>\n
These investors will have an excellent opportunity to invest
\ndirectly and indirectly in the upstream and downstream sectors
\nthrough various types of business deals. The provincial BUMD then
\nmust act as agents of development in their respective provinces
\nby transferring oil field technology and by assuring the
\nutilization of local people and local resources as the main
\ncriteria for allowing investors to enter.<\/p>\n
At the end of the day, the JV operators (not the BUMD) will
\nreceive special appreciation for their excellent behavior as
\ncorporate citizens and by acting as agents of the "trickle-down
\neffect" to local residents.<\/p>\n
The Indonesian archipelago is geologically rich for more
\ndiscoveries and is still one of the best places for oil and gas
\ninvestments. Billions of barrels of undiscovered oil and gas
\nreserves are still untouched by those who are courageous enough
\nto take the risk, clever enough to mitigate it, able to generate
\nbusiness profits and are willing to share a portion of it with
\nall Indonesian people, including those in the regions.<\/p>\n
We believe that the RPP Hulu of Law No. 22\/2001 on oil and gas
\nhas all of those ingredients and can provide a healthy business-
\nto-business environment.<\/p>\n
The writer, a former vice president and general manager of PT
\nCaltex Pacific Indonesia, is currently the technology and
\noperations director of PT Petrogas Wira Jatim in Surabaya. The
\nopinions expressed here are personal.<\/p>",
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