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.