New oil and gas law:

New oil and gas law:
Threat to government?

Parulian Sihotang
and Alex Russell
Department of Accountancy
and Business Finance
University of Dundee
United Kingdom

By its very nature the passing of state legislation is a
process designed to bore the pants off the average Indonesian
citizen; the creation of opaque and jargon-laden legal
gobbledygook possesses none of the charms of an intellectual
aphrodisiac and is certainly not a light read before bedtime.

But the passing of the new oil and gas law on Oct. 23 seems an
exception to the rule. It has triggered deep emotions throughout
society. Why? Well the power stakes which underpin the oil and
gas game could not be higher. And despite the modest claims of
legislator Emir Muis of the Indonesian Democratic Party of
Struggle (PDI Perjuangan) that it "will become a masterpiece
among the country's laws", the more objective view may be that it
is a time-bomb with the potential to unseat the government.

What are the relevant issues?

First, the future well-being of the nation is dependent on the
successful management of its natural resources, the exploitation
of which must be under state control, according to the
Constitution.

The "liberalizing" nature of the new law, leaving market
forces to determine optimal exploration, development and
production practices, has a hollow ring to it; especially in the
light of dramatic "liberalizing" failures in the UK where the
privatized railway network, for example, is now almost in
terminal decline and is having to be brought back under public
control.

The notion that government-controlled "steering" and
"regulating" bodies will act as effective buffers against the
possible anti-Indonesian excesses of market-led investment trends
may well be wishful thinking. The stakes are too high for the
government to get this wrong. The economic contribution of the
industry to gross national product is irrefutable.

For example, a staggering US$209 billion have been stacked
into the government coffers from the signing of the first
Indonesian petroleum production sharing contract (PSC) in 1966 to
1999, which is an average of $6billion per year. In contrast, oil
companies took $1.4 billion per year. This contribution to the
economy must be maintained or improved upon.

Second, in keeping with the economic importance of the
industry, the management barons who run the petroleum industry
have power and influence beyond the imagination of other industry
gurus. And in such circumstances it seems unremarkable that
accusations of corruption, collusion and nepotism (KKN) abound.
The new law fails to address specific ways to eliminate the
alleged rampant KKN disease.

Third, the political aspects associated with having foreign
oil companies encamped on Indonesian territory in almost colonial
style must attract greater public attention in the wake of the
current United States-led war on Afghanistan. Media speculation
has already suggested that the "anti-terrorist" war has been
partly motivated by the desire of the Western superpowers to
secure Western sovereignty over vital oil pipe-line routes.

Finally, it is crucial to remember that the influence of the
Indonesian citizen over the exploitation of oil and gas reserves,
which arguably are their birthright, is at best minimal, and that
the application of oil and gas revenues to improve society and
the environment should be uppermost in the minds of those who
wield power.

The main casualty of the new legislation appears to be the
state oil company Pertamina, which loses its authority to sign
agreements and manage the activities of foreign oil companies
operating in Indonesia. Even more alarmingly it will have to
compete with the international oil giants if it is to survive.

A cynic would shed few tears over the emasculation of
Pertamina. After all, the World Bank has identified
inefficiencies in Pertamina's management functions. In particular
Pertamina's considerable discretionary powers to accept or reject
a wide range of activities, transactions and business requests
covering annual work programs and budgets, development plans,
authorization for expenditures, tender and procurement of
materials and services, and audits of contractors' personnel
policies, have led to unacceptable delays in these areas (World
Bank Report, June 2000).

In addition, according to the Boston Consulting Group
Restructuring Report in 1998, Pertamina could save $25 billion by
(a) introducing faster approval processes, shorter
discovery/production cycles and increased production rates ($6
billion), (b) improving industry-wide performance through sharing
facilities/equipment, lowering costs and adopting new
tenders/procurement processes ($16 billion), and (c) increasing
recoverable reserves ($3 billion).

Finally, Pertamina seem implicated in the failure to promote
the use of local goods and services as stipulated in the
production-sharing contract. The clause says "contractors shall
give preference to such goods and services which are produced in
Indonesia or rendered by Indonesian nationals, provided such
goods and services are offered at equally advantageous conditions
with regard to quality, price, availability at the time and in
the quantities required".

Unfortunately, it has been difficult for the government to
ensure that contractors have adhered to such a loosely and
ambiguously worded provision. The spirit of this clause intended
to support local needs has not been religiously enforced by
Pertamina.

In mitigation, Pertamina might claim that direct inputs into
the petroleum processes would be difficult to procure
domestically, due to the level of technological sophistication
required in their manufacture, and as insufficient skills have
been available within the country to create industries for
supplying such products.

Other countries do not have this problem.

For example, in the UK, 44 percent of the jobs created by the
petroleum industry are located in the region surrounding the
exploration and development sites (United Kingdom Offshore
Operators Association Economic Report, 2000).

So, if the cynic's view is valid, is the new oil and gas law
good news? The jury is still out on this one.

Who will occupy the new positions of power in the new
executive? If the government wishes experienced managers, then
they appear to be between a rock and a hard place. They either
turn to the current managers of Pertamina (perish the thought!)
or they employ foreign managers and surrender all pretense of
being in control. Or, they gamble with the nation's wealth by
employing untainted but inexperienced managers. These options do
not present a happy prospect however you look at it.

And if Pertamina fails to compete effectively with the
international oil giants, is it politically acceptable to witness
the demise of the National Oil Company?

Given the current anti-Western mood here, if the new law is
seen to bring about the Pertamina's destruction and the
consequential strengthening of U.S. and UK interests, then this
could well be political suicide for the government.

Will the desired improvements in social and environmental
affairs be bought at too high a price? Will KNN continue to raise
its ugly head in the new executive? We live in interesting times!