Is KKN rife in the petroleum industry?

Is KKN rife in the petroleum industry?

By Parulian Sihotang and Alex Russell

JAKARTA (JP): Indonesia's remarkable economic growth rate over
the past 30 years has been predominately fueled by the proceeds
of the exploitation of its oil and gas wealth which, arguably, is
the birth right of every Indonesian citizen.

Indeed, on average over 42 percent of Indonesian domestic
revenues, and 48 percent of all export income, can be directly
attributable to oil and gas output. In 1999/2000, however, the
worrying statistic for Indonesians is that oil and gas revenue
fell by over 50 percent from the previous year's figure.

The fact that only 9.7 years worth of recoverable reserves
appear to be left for future generations must add to their
anxieties over the state of the industry (BP-Amoco Statistical
Review of World Energy, June 2000). This concern is shared by no
less an august body than the World Bank which attributed the
below par performance of the industry to poor management (World
Bank Report, June 2000).

Further, the Report claims that "If it is to operate in a
commercially, economically, socially and environmentally viable
manner, the sector needs to be substantially reformed -- urgently
-- given the issues at stake, the fallout from the regional
crisis and the adverse conditions in the global oil industry".

It is unthinkable that this decline can be allowed to
continue. In order to gain deeper insights into problems plaguing
the sector, and to recommend solutions to the problems, research
specialists in oil affairs from the University of Dundee,
Scotland, sought the views of key players and strategic decision-
makers in the Indonesian petroleum sector.

Petroleum experts were invited to respond to a series of
questions and 26 of them were interviewed in-depth on the issues.
The 101 respondents in the survey conducted from April to August
this year included top executives of foreign oil companies, top
government officers/auditors, public accounting firms and other
notable experts from the industry.

The results, which emerge from an analysis of their responses,
are startling, thought-provoking, challenging to the management
status quo and may pressurize the government and the industry
into establishing favorable policies to safeguard the future of
the industry.

A majority of the respondents stated that corruption,
collusion and nepotism, are primarily responsible for
unacceptable and unaccountable managerial practices in the
petroleum industry over the last 30 years.

If these views are correct then clearly they are prima facie
evidence of malpractice of national proportions, which demand the
immediate introduction of government management disclosure
practices, which are transparent and auditable, at both the
policy and operational levels.

This notion of transparency is the first and main prerequisite
for establishing accountable managerial control of the Indonesian
oil industry. But respondents had other views to express. First,
they argued that the management of petroleum operations should be
based on mutual trust between the government and foreign /
private operator companies.

Second, the government-led management of the petroleum
industry should be more responsive to the legitimate rights of
all stakeholders in the industry, including those of the
population.

Third, all petroleum companies, foreign and domestic, need to
be directly accountable for their activities and they should
systematically report the results of their operations to the
government.

Consequently, Pertamina's role as the manager of the
Indonesian petroleum activities, as stipulated in Law 8/1971,
would need to be abolished and that responsibility should be
delegated to independent government special units known as the
"implementing body and regulatory body" in the new oil and gas
law draft.

Respondents identified foreign oil companies, suppliers /
contractors, parent companies and the central government of
Indonesia as being the main beneficiaries from the petroleum
revenue, whilst locals and regional government fail to enjoy a
reasonable share of the oil largess.

This finding adds credibility to the current struggle by the
local population and regional government for their fair share of
oil revenues, as illustrated in the CPP Block and Arun LNG cases
between oil companies and the local people/regional government in
the provinces of Riau and Aceh.

Why are projects associated with exploitation of Indonesian
oil and gas properties seen as unattractive propositions by
venture capitalists? A majority of respondents or 54 percent
argued that corruption, collusion and nepotism are the main
cause.

Further, the bureaucracy associated with the requirement that
production sharing contractors must comply with the tendering and
procurement procedures established by the government -- despite
the fact that production sharing contractors do not use any
government money to fund their operating activities -- was seen
to be a barrier to investment.

Interference or control by Pertamina over foreign oil
companies was put forward by 27 percent of respondents as being
another major factor preventing inward investment. Other factors
identified included (1) heavy administration and cumbersome
process in projects and contracts approval, (2) rigid government
/ Pertamina supervisory role and style, (3) direct and indirect
interference from other governmental agencies and (4) personnel
rules and regulation imposed on oil companies' expatriates.

So what should the government do to reform the petroleum
sector in Indonesia? The following are the respondents' opinion
in order of urgency and importance: the government should (1)
introduce more incentives for exploration, appraisal and
development activities, (2) set more generous fiscal terms
especially on marginal and remote working areas, (3) eliminate
overlapping control by various levels of government authorities,
(4) give more control to the oil companies, (5) de-monopolize
Pertamina's role especially in the down-stream industry, (6)
eliminate government tendering/procurement rules on production
sharing contractors, and (7) abolish personnel rules and
regulations imposed on expatriates.

Although respondents identified regional government and local
people as being legitimate stakeholders of the petroleum
industry, central government was identified as the preferred co-
signatory to petroleum operation agreements.

The industry's concerns were cogently expressed by one top
executive of the oil company who argued that "It is a real danger
for the investors that every regional government might issue
their own regional regulations on tax and other duties to be
imposed on oil companies. It is going to be a real disincentive
for investment coming into the region ".

In conclusion, the evidence from the survey and interviews
indicate that the Indonesian petroleum industry needs to be
substantially reformed. The claims relating to corruption,
collusion and nepotism need to be taken seriously and steps taken
to eradicate such practices if the claims are substantiated.

It is important that there is speedy completion and
implementation of the new oil and gas law currently under
discussion between the government and the legislature, and this
law should impose accountability and transparency regulations for
the governance of petroleum operations.

Finally, any successful resolution of the issue of regional
autonomy over oil and gas affairs must be sensitive to the need
to promote investment in the petroleum sector.

The writers, who were involved in the above survey, study at the
Department of Accountancy and Business Finance, University of
Dundee in the United Kingdom.