Oil group defends controversial TAC system

Oil group defends controversial TAC system

JAKARTA (JP): An oil and gas association defended on Monday
the controversial technical assistance contract (TAC) system,
saying the system had the noble goal of empowering local oil and
gas investors.

Effendi Siradjuddin, the vice chairman of the TAC-Petroleum
Exploration and Production Company Communication Forum, said the
TAC system was introduced in the early 1990s by state oil and gas
company Pertamina to increase the role of local investors in the
country's oil and gas industry.

However, Effendi said the TAC system gained a bad reputation
among the public because politically connected businesspeople
during former president Soeharto's administration abused the
contract system to enter the country's oil and gas sector and to
make quick money acting as brokers.

"As a matter of fact, the TAC system is good in the fact that
it is aimed at creating strong local oil and gas firms aside from
Pertamina.

"Unfortunately, some people have abused the contract system to
the extent that the public now thinks all TAC contractors are
bad. In fact, not all TAC contractors are bad," Effendi said
during a media conference. He was accompanied by several top
executives of the association at the conference.

Most of the country's oil and gas contractors operate under
production sharing contracts (PSCs), under which the government
takes 85 percent of the output, leaving the remaining 15 percent
to the contractors.

The TAC system has gained public attention following a graft
case in which PT Ustraindo Petro Gas, which is controlled by
Soeharto's son Bambang Trihatmodjo, allegedly obtained four TACs
from Pertamina in 1992 and 1993 through corruption.

The Attorney General's Office, which is investigating the
case, has named former ministers of mines and energy IB Sudjana
and Ginandjar Kartasasmita suspects in the alleged graft, which
reportedly caused US$18 million in losses to the government.

Ustraindo obtained four TACs to develop oil fields in Pendopo
and Prabumulih, South Sumatra, Bunyu, East Kalimantan, and
Jatibarang, West Java.

The Attorney General's Office said awarding the TACs to
Ustraindo was illegal because the fields were still in production
and Ustraindo illegally used Pertamina's money to develop the
fields.

Effendi said a TAC normally covered oil fields that had
stopped production or been abandoned by large companies because
they were no longer considered economically viable. The abandoned
field is, however, still viable for local small companies, which
have lower production costs.

In comparison, PSCs cover areas which have not yet been
developed.

Under the TAC system, Effendi said, contractors are obliged to
provide all of the investment needed to resume production at an
abandoned field. It will receive 15 percent of the output, while
the remaining 85 percent will be delivered to the government via
Pertamina.

Effendi said a typical TAC contractor produced about 2,500
barrels per day and had about 100 workers, all locals.

Effendi said there were currently 33 TAC contractors operating
in the country, nine of them having come into production with a
combined output of about 12,000 barrels of oil per day.

Initially, TAC contractors were all local oil and gas firms,
but today more than 50 percent of the TACs are controlled by
foreign investors through share acquisitions.

Many local firms have sold their shares in TAC fields due to
financial difficulties caused by the prolonged economic crisis,
Effendi said.

"The main difficulty faced by local TAC contractors is the
reluctance of local financial institutions to provide them with
financing for their projects.

"As such, local TAC contractors are very reliant on financing
provided by foreign investors," Effendi said.

He explained that aside from the TAC system, Pertamina had
also introduced the Joint Operating Body (JOB) contract system,
which has a similar purpose of empowering local oil and gas
firms.

He said JOB contracts normally covered productive oil fields.
Pertamina invites contractors to invest jointly to raise the
output of the fields and share in the increased output. (jsk)