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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