New oil and gas law an accident waiting to happen

New oil and gas law an accident waiting to happen Or New oil and gas law does more harm than good

By Kurtubi, energy analyst in Jakarta

There is seemingly no turning back in the enactment of the new law on oil and gas even though it is clear it will weaken Indonesia as the world's largest exporter of liquefied natural gas (LNG). In the future, Indonesia will be much more dependent on foreign exchange earnings from LNG than on crude oil. State-owned Pertamina will not be able to bask in the glory of its monopoly over oil and gas mining in Indonesia. By virtue of Law No. 22/2001 on oil and gas, which replaces Law No. 8/1971, Pertamina is no longer entitled to control and sell the country's production of the vital resources. The new law stipulates that every company signing a production- sharing contract with Pertamina will have the freedom to sell their oil and gas as long as they get the green light from the Oil and Gas Executive Agency (BP Migas). Apart from weakening the position of Pertamina as the monopoly holder in Indonesia's oil and gas mining sector, the new law will also undermine the position of the country as the world's largest producer and exporter of LNG. Indonesia's annual LNG exports have stood at 28 million tons worth US$ 6 billion, earnings that are directly deposited into the state treasury. Another disadvantage resulting from the enforcement of the new law is that investments in the oil sector will drop. The law holds no attraction for oil investors to invest in the upstream sector, and any of its articles are, in fact, disincentives to these investors. One of the articles in the new law, for example, stipulates that oil investors are obligated to pay various kinds of taxes, ranging from those on imported goods they bring into Indonesia to regional levies and other taxes. For investors, these levies are burdensome as they are usually collected at the stage of oil exploration. If finally there is nothing to exploit, they will have to sustain double losses. Recently, of 11 mining areas that the government offered to investors, only one had a taker. Investors preferred the 1971 law because it stipulated that taxes would be imposed only after they had found oil resources. One thing to remember is that Indonesia's oil and gas industry is still overshadowed by investment in the upstream sectors in the country. The government does not turn a blind eye to this reality, but it is resolved to enact the new law. The government is ready to cut its profit portion in order to be able to lure investors to invest in the country's oil and gas sectors, but this policy will disadvantage Indonesia in the long term. In future, LNG development will not have a certain course to follow as every company signing a production-sharing contract with Pertamina will be allowed to market its products on its own. As a result, there will be competition among Indonesian LNG companies, the kind of rivalry now visible in the marketing of LNG products from the Tangguh field, whereby their has been an attempt to win over customers of their rival, the Badak LNG field, and sell their products at a lower price. As long as the policy regarding the marketing of LNG remains as it is, prospects for the LNG business will no longer be bright. Before further damage is done, efforts must be made to ensure that the state and the production-sharing companies will be benefit from the country's LNG resources. In this light, the government must immediately reinstate the one- roof policy in the national LNG industrial system. The development of Indonesia's LNG industry in the next five to 10 years must be returned to the one-roof policy to ensure that Indonesia's position will be stronger and that there will be no "cannibalistic" competition among Indonesia's LNG companies. Strong negotiations with prospective buyers will ensure a higher price. Pertamina can obtain a loan to finance this industry at a lower cost. Creditors will see that the management will be integrated, a factor that will provide satisfaction to buyers. Under a one-roof system, when the supply of LNG in a particular region is hampered, another supply may be obtained from an LNG plant from another region. It is sad to note that despite much criticism that the new law on oil and gas will disadvantage Indonesia's oil and gas industry, the government is inexorably resolved to go on with the enforcement of this law, with the House of Representatives providing its backing. In fact, the government should spend more time studying this law to ensure that when it is enacted, it will not harm Indonesia's interests. In contrast, the tenets of Law No. 8/1971 are still valid and the procedure must be returned to the one-roof policy. The government must wake up to the reality that it will be highly dependent on LNG exports in the future. Given the threat posed by Indonesia's competitors such as Brunei, Australia, Malaysia and Qatar, Indonesia must strengthen its competitive edge and the mechanism that has profited the country over the years must not be disrupted. The management of the LNG industry must be quickly returned under one state-owned company, not a government institution, with a state-owned enterprise with a lot of experience in this business, not the fledgling BP Migas, assigned to take care of the LNG industry. The future of the oil industry is inseparable from the market structure. Today, the domestic oil fuel market structure is still dominated by Pertamina. It must be noted, though, that the monopoly in the hands of this company is not a profit-maximizing monopoly but rather a natural one. These two kinds of monopoly differ in principle. The profit- maximizing monopoly is the kind practiced by private companies such as cement or noodle companies. These companies are profit maximizers: In their attempt to maximize their profits, they will raise prices and slash their levels of production and supplies. This kind of monopoly is harmful to the idea of common prosperity. The monopoly that Pertamina practices is the state's monopoly in the framework of Article 33 of the 1945 Constitution. The oil and gas industry is important for the state as it is vital to many people. There is yet to be a substitute for natural oil or gas, and the purpose of this monopoly is not profit maximizing but the fulfillment of the demand for oil and gas from all over the country. Therefore, the management of oil and gas industry is vertically integrated, a reason why the price of oil fuel can be kept low enough despite the assumption that all crude oil production that comes into Pertamina oil refineries are valued at international prices. With the enforcement of Law No. 22/2001, which is oriented to the competitive market system, fuel oil will be higher in price, compared with the price set under a one-roof policy that the government has adopted. Under the competitive market system, there will be unbundling in oil production, and there will be separate companies managing oil refineries. Other companies will focus on the management of oil tankers. Some other companies will deal with storage only, and others will focus on distribution to gasoline stations. All these companies, naturally, are profit maximizers. Actually, the competitive market system will pave the way for the free market system, which will soon be put into effect. The government must realize, however, that the free market system may apply to other commodities, not oil. This system is not applicable in the energy sector. If it is enforced anyway, the state and the people will be disadvantaged and profits will go to other countries. To bring back bright prospects to the oil and gas sector, the government must consider returning to the old one-roof system. If Law No. 22/2001 passes judicial review, Pertamina will be turned into a limited liability public corporation and undergo privatization. In the next five years, the subsidiaries of Pertamina will change ownership. As the sales of oil and gas move into the hands of the private sector, the prices of oil fuel will be higher. The price of oil fuel at the refinery in Sorong, Papua, will be high to ensure its survival, and the same goes for other regions. Perhaps the government will set up a special agency to regulate this matter. It must be borne in mind, however, that the law says that the price of fuel oil will be left to the competitive market mechanism, which only means that ultimately the selling price must be the same as the market price. Aside from the problems related to this competitive market mechanism, in the next five years to 10 years, the future of oil will remain bright, either in the case of Pertamina remaining monopolistic or the competitive market system being enforced. One thing to remember is that fuel oil will always be needed. Even the United States, despite the other energy resources it has developed such as free cell, solar power or wind power, remains dependent on oil. The latest study has shown that through 2050, the world's dependence on oil will be great, although by that time widespread non-oil energy development will have succeeded. In future, if the oil and gas business is conducted under the monopolistic system of Pertamina, the price of oil fuel will not be too burdensome for the public. However, once this business is put under the competitive market system, the price of oil fuels will be at least on par with the market price and prices of oil and gas will differ from one region to another. Players in the oil and gas business will enjoy selling the fuel oil at least at the market price because at this level they can enjoy a profit margin. The government must devise a long-term list of oil fuel prices, and the policy must be clear and take account of the relatively small oil and gas deposits. As Indonesia is an archipelago, the government also needs to think about using another energy source. The public needs a low oil fuel price. To keep the price of oil fuel low enough without a subsidy, the government must reintroduce the one-roof system. Only in this way can the cost of Pertamina oil and gas remain at an affordable level.

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