Oil firms' spending autonomy

Oil firms' spending autonomy

Budgeting or spending autonomy, an ongoing issue between oil
and natural gas production-sharing contractors (PSCs) in
Indonesia and the government since the late 1960s, was again the
subject of debate between oil firms and BP Migas, the upstream
oil and gas authority, last week.

The issue is certainly of great interest to both parties. PSCs
want more autonomy to manage their operating or production costs
to avoid bureaucratic rigidities, while the government, which in
this case is represented by BP Migas, is tasked with controlling
production costs because the government take (share) from PSCs is
based on the output after production costs are recovered.

No wonder, BP Migas, which replaced Pertamina as the authority
to award oil and gas contracts and supervise PSCs under the new
oil and gas law of 2000, always sees to it that what is accounted
for by PSCs as costs are genuine expenses incurred in production
operations.

It is also in the light of securing maximum revenues for the
government that equipment and machinery bought by PSCs have been
subject to inspection by an independent survey company to ensure
that their procurement costs reflect normal market prices.
Inflated prices for production equipment would certainly cut into
the production which the government and PSC would share according
to the agreed formula.

The government recently changed the standard formula for
production-sharing contracts -- 80:15 for oil and 70:30 for gas,
(both in favor of the government) -- to a ratio of 75:25 for oil,
and reduced its share of gas production to as low as 55 in a bid
to attract more PSCs to explore new blocks.

But while the new production-sharing formula should improve
the attractiveness of oil and gas prospecting in the country,
this advantage would be nullified if PSCs and BP Migas were
constantly embroiled in disputes over the categories of
recoverable costs.

Last week's meeting in Yogyakarta discussed draft standard
operating procedures that BP Migas plans to apply to PSC spending
on community development and community or public relations.

BP Migas apparently wants to control PSC expenditure in these
two areas because some expenditure, such as that for inspecting
officials, which is often simply bundled up and classified into
entertainment expenses and is accounted for as production costs,
is considered unnecessary.

BP Migas does not want to entirely prohibit PSC spending in
these areas. The operating procedures are meant only to make such
expenses more transparent and accountable through PSC budget
planning to prevent dubious and questionable expenditure. Hence,
spending in the form of cash payments is entirely banned in these
areas.

For example, entertainment expenses will still be allowed
under what is classified as a community or public relations
program, but the operating procedures will require that such a
program be elaborated in PSC budget plans, which have to be
approved by BP Migas.

The procedures will ensure that what is booked by PSCs as
expenditure for public relations or community development
programs is fully accountable: The objectives of the programs
must be clear-cut, the spending reasonable and the target
recipients clearly identified.

However sensible and rational the objectives of the operating
procedures for spending on community or public relations and
community development programs may be, a balancing act is still
needed, especially now under local autonomy.

Since the introduction of local autonomy two years ago, PSCs,
like other mining companies, have increasingly been coming under
strong pressure from local people, non-governmental organizations
and other local stakeholders, who demand "a slice of the pie."

PSCs, like other mining companies, even need to expand their
local community development programs now to nurture good rapport
with local people and local administrations, which have become
more assertive in voicing their aspirations.

BP Migas should realize that in many remote areas PSCs are
often seen by local people or administrations as the only
entities from which they can ask for help in the event of an
emergency, such as a major accident or natural disaster like
fire, flooding or landslide. Rigid spending procedures in such a
situation could land the companies in a lot of trouble.

The procedures should not put too much emphasis on approval
from BP Migas. What is most important is accountability and
transparency in the expenditure.

The government should also ensure that the standard procedures
for spending for community relations and development will not put
PSCs at a disadvantageous position vis-a-vis mining firms
operating outside oil and gas sectors.

It would be unfair to tightly control PSC spending on
community relations and development, while allowing greater
freedom for other mining companies to deduct similar expenditure
from their taxable income.