Golden opportunity for oil and gas contractors

Untung Suryanto Surabaya

It was very interesting to read the opinion piece by T.N. Mahmud, a former CEO of Arco Indonesia, in The Jakarta Post on May 5. His comments and proposals indeed represent the opinions of a highly regarded oilman who spent years in the oil and gas industry in Indonesia and who probably has seen the final draft of the long-awaited RPP Hulu (Upstream Implementation Guideline) for Law No. 22/2001 on oil and gas.

I realized though that Mahmud held a peculiar perspective toward the ability of our own people, primarily those in provincial governments.

He suggests government policymakers reconsider the 10 percent Indonesian equity participation (IP) clause in the RPP Hulu, which he calls an obstacle to oil investors.

This is even more surprising when we realize that many former Indonesian oil executives from Pertamina and other multinational oil companies are now running their own companies, such as Medco, Expan, Star Energy, Kondur and Lapindo. Many former multinational company executives and workers alike have joined Regional BUMD (Badan Usaha Milik Daerah, or companies owned by local administrations) oil and gas companies, and are ready to share their years of expertise for the benefit of Indonesia.

They know very well the decision-making process for determining between good and bad projects based on the proven, probable and potential reserves. They are well educated and know very well the associated risks, the high profit, high technology and high capital investment of upstream and downstream projects.

We all realize that the risk reduction option of inviting in new partners and fresh money will inevitably create management challenges that any world-class joint venture (JV) operator should be able to handle professionally, as stipulated in the respective Joint operating agreements (JOAs) and PSC contracts.

Regions such as Riau, South Sumatra and East Kalimantan are now able to cope with the oil and gas business in their respective areas. Riau province, via its 50-50 venture with Pertamina, namely Badan Operasi Bersama (BOB)-CPP, has been able to maintain the Coastal Plain block production level at between 30,000 and 35,000 barrels of oil per day over the last year.

South Sumatra province, through PT Petro Muba, has been able to manage a 10 percent working interest in one of the Medco blocks and construct a cost-effective mini-refinery in collaboration with the Bandung Institute of Technology.

What can we learn from the above cases? In a broad sense, they suggest that a provincial government may have certain advantages in managing the oil and gas business from a practical standpoint. Obviously, it would be hard to employ and maintain a full-time special oil management team if the producing fields were of small size and fragmented by the (regency) kabupaten administrative boundaries. Why? Simply because it would create a nightmare due to unitization, funding and production split procedures, leading to cost inefficiency.

One immediate solution that I can offer is to elevate the handling of oil and gas from the regency to the provincial level by creating a special oil and gas business unit that covers the entire provincial boundaries. This new business unit would be responsible for managing all facets of the oil and gas business on behalf of the provincial government, and would be by professional oil and gas experts.

Regencies could always have certain equity shares in this joint venture so that net income and dividends would be proportionally split between provincial BUMD and kabupaten BUMD. Management members, staff and workers could be sourced from the individual kabupaten. If local national expertise was not yet available, they could hire expatriates managers temporarily while grooming their successors.

Annual operating costs would be shared among the kabupatens and the provinces, but expensive capital expenditures could be sourced from bank loans or from direct foreign investment through mutually acceptable financial agreements. It is for this very reason the provincial government of East Java established oil and gas company Petrogas Wira Jatim in early 2003.

This Surabaya-based company is 100 percent owned by the East Java government, so the business unit is considered a provincial BUMD. They have created a joint venture with the Lamongan regency BUMD to develop a new supply base in Paciran. The main objective is to acquire a 10 percent to 100 percent working interest in each of the producing blocks in East Java under business-to- business deals.

Let us now address oil and gas Law No. 22/2002, particularly under Chapter 21, Clause 1, whereby every first-time plan of development (POD) for newly discovered fields must be "endorsed" (Law No. 22/2001 uses "consultation", a term which is rather ambiguous) by the provincial governor before receiving approval from the minister of energy and mineral resources.

Please note that by inserting this clause into the body of the law and the provision for the right to 10 percent Indonesian Participation (IP) in PSC contracts, the central government has a genuine intention of encouraging national participation in the direct sharing of oil revenue.

The 10 percent IP suggests the BUMD must pay the sunk cost up front and allows the provincial government to be freed from exploration risks and to actively participate in managing the operation through an Organizing Committee Meeting (OCM), as the highest controlling unit in the JV.

This is a golden opportunity for both foreign investors and provincial BUMD alike. Why? Because the Joint Venture (JV) operators will enjoy special relations with the provincial/regency governments, which will help them address public relations challenges with local residents, NGOs, students, central and local legislatures, etc.

Where are the probable sources of capital investment? We are all aware that there are significant amounts of funds, primarily from Japan, Malaysia, China, Singapore, Korea and other countries looking for profitable investments.

These investors will have an excellent opportunity to invest directly and indirectly in the upstream and downstream sectors through various types of business deals. The provincial BUMD then must act as agents of development in their respective provinces by transferring oil field technology and by assuring the utilization of local people and local resources as the main criteria for allowing investors to enter.

At the end of the day, the JV operators (not the BUMD) will receive special appreciation for their excellent behavior as corporate citizens and by acting as agents of the "trickle-down effect" to local residents.

The Indonesian archipelago is geologically rich for more discoveries and is still one of the best places for oil and gas investments. Billions of barrels of undiscovered oil and gas reserves are still untouched by those who are courageous enough to take the risk, clever enough to mitigate it, able to generate business profits and are willing to share a portion of it with all Indonesian people, including those in the regions.

We believe that the RPP Hulu of Law No. 22/2001 on oil and gas has all of those ingredients and can provide a healthy business- to-business environment.

The writer, a former vice president and general manager of PT Caltex Pacific Indonesia, is currently the technology and operations director of PT Petrogas Wira Jatim in Surabaya. The opinions expressed here are personal.