Govt wants to reform oil and gas industry

By Berni K. Moestafa

JAKARTA (JP): The government recently submitted to the House of Representatives (DPR) a draft law on oil and gas in another legal move to lift the exclusive rights given to state owned oil and gas company, Pertamina, over the country's upstream and downstream oil and gas industries.

A similar bill, which also sought the removal of Pertamina's monopoly, was submitted in 1999 but was rejected by the House.

If enacted, the new bill would replace the two current laws, Law No. 44/1960 on the oil and gas industry and Law No. 8/1971 on state owned oil and gas company Pertamina.

Unlike the general mining industry where most of the authority will be transferred to provincial administrations in line with the implementation of the regional autonomy law next year, the new oil and gas bill will maintain the central government's control over the issuance of permits needed to enter either the upstream and downstream sectors.

However, the exclusive rights, which have been enjoyed by state owned oil and gas company Pertamina for years, will be removed.

The bill will also remove the government's control over fuel prices by pegging them to international market prices.

"We envision a modern oil and gas industry, that is capable of competing, that is transparent, accountable and where there is no monopoly," director for production and exploration at the Ministry of Energy and Mineral Resources, Kardaya Warnika said.

In this industry the upstream sector comprises exploration and exploitation of oil and gas, while the downstream sector is related to refining, distribution, marketing and sales.

Kardaya said that the new bill would dismantle Pertamina's present double role as regulator and operator in both sectors.

"Pertamina will become an ordinary company as any other state company. And as such it cannot be a regulator since that is the authority of the government," he said.

Consequently, the bill provides for the establishment of a "managing agency" that will take over Pertamina's regulatory role in the upstream sector, Kardaya explained.

This managing agency would assume similar functions to Pertamina's Foreign Contractors Coordinating Agency (BPPKA).

Based on the bill, production sharing contracts will be signed by this management agency under the scrutiny of the House of Representatives.

Pertamina will then become the agency's production sharing partner, after having surrendered its regulatory role to the agency.

Determining the oil blocks and gas fields for the production sharing partners, is left to the minister of energy and mineral resources.

Tenders

Kardaya said that the government would open tenders for the selection process, upon which the agency would sign the production contracts.

"We have no name for it (the agency) yet, but we might call it something similar to Thailand's Oil and Gas Authority Agency," he explained.

Although its status was not yet defined, he said, the management agency would not be part of the Ministry of Energy and Mineral Resources.

"The ministry handles policies and resource management only," Kardaya said.

Liberalization would take effect in the downstream sector.

"Unlike now, downstream activities will be open to private firms, cooperatives, and other state companies," Kardaya explained.

As for foreign investors, he said, they must first set up a legal entity in Indonesia.

Asked whether local players could compete with giant multinational oil companies, Kardaya said the law would not be applied until regions were prepared.

"Advance provinces like Java, may be the first to come under the law, while others would follow depending on their readiness," he explained.

"This bill anticipates the complete removal of the government subsidies in domestic fuel sales," he added.

Article 28 of the bill stipulates that fuel and gas prices will be open to the mechanism of fair and healthy market competition.

The government has said that it planned to gradually lift its fuel subsidy spending until fuel prices reached market levels by the year 2005.

But, as in the upstream sector, a special agency, established to supervise the downstream sector, would have the power to intervene in the market if fuel prices surge beyond a certain limit.

According to him, when fuel prices soar above a set limit, the agency would act and scale back the increase to keep prices "affordable."

Whether the government would then inject fuel subsidies across the board, would be up to the agency to decide, he said.

"Subsidy is a temporary political decision that depends on the willingness and the capability of the government," he said.

At present, he said, the government had the willingness but not the capability to subsidize fuel prices.

This fiscal year alone, fuel subsidies are estimated to hit Rp 44 trillion (US$4.8 billion at the current exchange rate), an amount that irks international financial institutions, as they poured in billions of U.S dollar to keep Indonesia's economy afloat.

Subsidies

Fuel subsidies are eating up the country's oil export revenue, estimated to provide a hefty surplus of around Rp 11 trillion.

The gradual lifting of fuel subsidies is part of an agreement with the International Monetary Fund (IMF) to obtain the Fund's $5 billion financial aid.

Kardaya said the regulating agency would also control gas prices distributed through pipelines, as well as issue the licenses for contractors that operate them.

Because of its important role, he said, the agency would hold a higher position than the operating agency.

Under the bill, the regulating agency would consist of a commission, whose members the President would appoint with the approval of the House of Representatives, Kardaya explained.

He said that the bill, once enacted, would have no immediate impact on current production sharing contractors, but they would benefit in the long term from the separation of Pertamina's regulatory role.

"It's not uncommon to them (investors), in developed countries the roles are clearly divided," he said.

Pertamina as an equal competitor in the oil industry is not in an objective position to maintain its regulatory role, according to him.

Kardaya said that a transition period was included in the bill that assured the transfer of Pertamina's regulatory role to the two agencies.

Under article 59 of the bill, the managing agency is given a one year transition period, while the regulating agency will have two years. Until then, Pertamina will retain its regulatory role in both the upstream and the downstream sectors.

He said the government hopes Pertamina becomes a world class oil and gas company once the company is relieved of its regulatory functions.

As an operator, he said, there was no need to supervise other firms and Pertamina could focus on developing its own business.

The government's desire for Pertamina to grow and become an effective multinational company, has been motivated to an extent by Petronas, the state oil and gas company of Malaysia.

"Pertamina once taught Petronas employees in the oil and gas industry, they sent hundreds to Pertamina for study. But now we're the ones left behind, and it's us who must learn from them," he said.