Thu, 31 Jul 2003

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.