Nation expects more benefits from oil and gas resources

Nation expects more benefits from oil and gas resources

Johannes Simbolon
The Jakarta Post
Jakarta

Indonesia's oil and gas industry has opened another chapter in
its history with the introduction of the new oil and gas law.

The oil and gas bill proposed by the government early this
year was first greeted by many analysts and industry players with
skepticism as it shared the same "mission impossible" as a
similar bill that was rejected by the House of Representatives
after it was proposed by the government in 1998. That is, to lift
the decades-long monopoly held by state oil and gas company
Pertamina over the country's oil and gas industry.

Surprisingly, the current House approved the bill after only
several months of debate, compared to a year of arguments on the
failed 1998 bill. As a matter of fact, not all legislators were
happy with the law as underlined by the inclusion of an appendix
in the law expressing the legislators's fear that the nation will
"lose" control of its oil and gas resources.

Pertamina campaigned against the 1998 bill. But this year,
with its top management led by reform-minded Baihaki Hakim, who
was actively supporting the 1998 bill when he was still president
of American oil and gas company PT Caltex Pacific Indonesia,
Pertamina was not seen lobbying against the bill.

Under the new law, Pertamina has to transform itself into a
limited liability company in two years, while the government will
establish the so-called Implementing Body and Regulating Body
within the first year of the implementation of the law. The first
agency will take over Pertamina's rights to regulate, license and
supervise operations in the upstream sector, while the latter
will take over its rights to regulate and manage fuel
distribution across the nation in the downstream sector.

Pertamina is expected to emerge in late 2003 -- that is two
years after the implementation of the law -- stronger, more
efficient and more capable of competing with multinational
companies in domestic and international markets and able to give
greater contributions to the nation's economy.

The public has for several decades considered the state
company as the nation's worst symbol of corruption, collusion and
nepotism. This is caused by the dubious tanker deal in the 1970s
which almost bankrupted the company with debts of more than US$10
billion, and the rampant involvement of former President
Soeharto's family and cronies in its business.

After the downfall of Soeharto in mid-1998, Pertamina has been
trying to improve its image with initiatives such as scrapping a
number of projects owned by businessmen linked to Soeharto.

During former president Abdurrahman Wahid's short tenure he
helped speed up reforms in the state company by placing
professionals from outside the company in its top management,
ending the long tradition of senior positions in the company
being filled by retired military members and governmental
officials.

The introduction of the new oil and gas law is considered the
most significant and most daring effort by the government to
speed up reforms in the state company.

"Through this law, the government wants to turn Pertamina into
an efficient and stronger company capable of competing on the
international market such as Petronas," Minister of Energy and
Mineral Resources Purnomo Yusgiantoro said, referring to the
Malaysian-owned oil and gas company.

Getting rid of corrupt practices at Pertamina is one of the
main aims initiated by the government after the downfall of
Soeharto.

Another agenda, which is no less important in view of the
domination of foreign investors in the country's oil and gas
upstream sector, is how to boost national participation in the
country's oil and gas industry.

As a matter of fact, under the production sharing contract
system, the government receives 85 percent of oil production and
70 percent of the gas production of the contractors. This means
that theoretically, despite the domination of foreign contractors
in the country's oil and gas industry, the nation still controls
most of the output.

Still, many legislators and local industry players feel
unhappy with the fact that after 57 years of independence, the
country has not produced more oil and gas companies to make
significant contributions to the country's oil and gas
production. Aside from Pertamina, there are only two national
firms with a significant output, specifically Medco Energy
Corporation, which is partly owned by Arifin Panigoro, and Kondur
Petroleum SA, which is partly owned by Aburizal Bakrie.

Pertamina's data says that as of September this year the state
company's own operations only produced 86,000 barrels of oil per
day (bpd) or 7.2 percent of the country's total output of 1.19
million bpd.

Another national oil and gas company Medco Energy Corporation,
through its subsidiaries Exspan (Nusantara) Kalimantan and Exspan
(Nusantara) Sumatera, has surpassed Pertamina in oil and gas
production with a total output of 87,038 bpd of oil and 108,315
million cubic feet of gas per day (mmcfd), according to the data.

The third largest national oil and gas company Kondur
Petroleum SA produces 13,627 bpd of oil per day and 5,257 mmcfd
of gas per day.

Thus, the national oil companies account for only about 15
percent of the country's oil output and a mere two percent of the
country's gas output of 5.38 billion cubic feet per day.

In comparison, Petronas, which learned the ins and outs of the
oil and gas business from Pertamina in the 1970s, produced about
230,000 bpd in Malaysia or about 33 percent of the country's oil
output of 690,000 bpd in 2000. Furthermore, the company has been
regarded as a main international player given its expansion to
many parts of the world.

As a matter of fact the government has long tried to boost
national participation in the oil and gas upstream sector by,
among other things, requiring foreign investors to sell its
shares to national firms or forcing Pertamina to award contracts
to them. Pertamina created a new contract scheme, called the
technical assistance contract, under which Pertamina allows
national firms to develop oil and gas fields that have been
explored by the state company. The firms that receive the
contracts, therefore, do not need to spend a lot of investment on
exploration.

But most of the contracts and stakes went to Soeharto's family
and cronies who are proven to have failed to perform.

Humpuss Patragas, which is controlled by Soeharto's youngest
son Tommy, is a good example.

In 1990, Pertamina awarded this company with a technical
assistance contract for the Cepu block located in Central and
East Java.

Humpuss later sold a stake to Australian firm Ampolex Pty Ltd,
which was controlled by United States energy giant Mobil, which
is now called ExxonMobil after merging with another U.S. company
Exxon. In 1999, amid pressure from Pertamina for all of
Soeharto's family and cronies to quit the oil and gas business,
Humpuss sold its entire stake to ExxonMobil.

Humpuss could only produce less than 5,000 bpd when it ran the
block's operation. After taking over the block, ExxonMobil
discovered an oil reserve of more than 250 million barrels in the
field and has laid out plans to produce 100,000 bpd of oil at the
block starting 2004.

Concerns over the low participation of the national firms in
the oil and gas industry have prevailed this year.

Many analysts argue that the Riau provincial administration's
insistence on taking over the operation of the Coastal Plains
Pekanbaru oil block in Riau from Caltex is not only driven by the
province's wish to increase its oil and gas revenue but also the
wish to participate in the oil and gas business.

The province has agreed to set up a joint venture with
Pertamina to develop the field and both parties are now
negotiating on the share of ownership arrangement.

While few local firms are engaged in oil and gas production,
thousands of local firms are active in providing services and
goods to the sector.

But, in the middle of this year, protests erupted over
Pertamina's outsourcing policy. The policy, which is aimed at
improving efficiency in the oil and gas industry, is considered
by local small goods and service providers as intending to put
them out of business, allowing foreign players with big capitals
to dominate the oil and gas service sector.

The Goods and Services Communication Forum, which claims to
have 1,500 members, said the outsourcing policy, among others,
required a goods and services provider to have at least US$40
million capital -- a requirement which can't be met by the
forum's members who have a maximum capital of $10 million.

In apparent efforts to boost the national company's role in
the country's oil and gas companies, the legislators and the
government agreed in the new law to allow all interested local
companies to do business in both the upstream and downstream
sectors, from exploration to pumping gas.

"Upstream and downstream business activities may be conducted
by state-owned business entities, regional government-owned
business entities, cooperatives and small companies as well as
private business entities," the law says.

The law has laid out a strong legal foundation for any
citizens wanting to enter the oil and gas business.

But boosting national participation in the business is not
easy as the oil and gas business needs big capital and expertise
that few locals have, analysts say.