Golden opportunity for oil and gas contractors

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.