Investors want review of laws on oil industry

JAKARTA (JP): PT Caltex Pacific Indonesia Chairman Haroen Al Rasjid asked the government yesterday to review its laws regarding both the upstream and the downstream oil industry, saying they are no longer conducive to new investment.

Haroen told a seminar that fundamental changes to the law, including the abolition of the industry's monopolistic nature, would make Indonesia's petroleum industry more attractive to new investors.

He cited the results of international research, including that conducted by consultants Wood McKenzie, which show that oil exploration in Indonesia has been declining since 1990.

"Only about 50 percent of the 80 exploratory wells planned to be drilled in 1994 were completed," added the chief of Caltex, the country's oldest and largest oil producer.

The trend is worrisome, he said, because oil production can be sustained only by increasing the proven reserves and the proven reserves can be increased only by exploration.

Haroen expressed concern that, without the discovery of a significant amount of new reserves, the dreaded "doomsday" in the oil industry might occur sooner than expected and Indonesia would become a net oil importer.

He blamed the sharp, steady decline in oil exploration and seismic surveys on the unfavorable regulatory climate for new investments in the development of hydrocarbon resources.

"It is therefore high time for the government to review all the existing laws on the petroleum industry and to make them more conducive for new investments," he said.

The Oil and Natural Gas Directorate General has estimated Indonesian proven reserves of hydrocarbon at 10.41 billion barrels of oil and 114.2 trillion standard cubic feet of gas.

"But at an annual production rate of 600 barrels of oil and 2.5 trillion cubic feet of gas, those reserves will not last long without additional reserves, especially because the fast-growing economy is increasing the domestic demand for oil by five or six percent a year," he said.

He considered a larger volume of exploration to be the only effective answer to those challenges. But that will requires greater investment which, in turn, will demand a much better business climate, he added.

Haroen said the current production-sharing contract -- the standard agreement under which foreign oil companies operate in the country -- is no longer favorable, especially in view of the competition for investments posed by other oil-producing countries.

"The production-sharing contract stipulates only a production/profit sharing scheme, but does not mention anything about a risk-reward sharing concept," he said.

Haroen argued that the product/profit-sharing arrangement is effective only after the start of commercial production, while the greatest risks are faced during the exploration work.

He said additional incentives are even more crucial for exploration and development in the frontier areas in Indonesia's eastern provinces, where infrastructure and trained labor are extremely scarce.

"In 1994, for example, only five exploratory wells were drilled in eastern Indonesia, where most of the 60 sedimentary basins already identified with potential oil resources lie," he added.

Haroen added that better investment incentives have now become much more important as Indonesia faces keen competition from other oil producing countries which offer better packages to foreign oil companies.

He estimated that, given the special characteristics of the oil industry -- capital and technology intensive and highly risky -- foreign investors will continue to play a dominant role in Indonesia's hydrocarbon development for the foreseeable future.

The one-day seminar on energy, organized by the Foundation of the Indonesian Institute for Energy Economics, also presented economist Hadi Soesastro and energy experts A. Arismunandar, Soetarjo Sigit, Suryono and Mohammad Ridwan as panelists.

Subroto, former secretary-general of the Organization of Petroleum Exporting Countries and former Indonesian minister of oil and energy, opened the seminar in his capacity as the chairman of the foundation. (04/vin)