Part 2 of 2: Bad proposition for oil mining contractors
T.N. Machmud, Jakarta
The operating agreement is an internal agreement between the PSC partners. The Government or Pertamina (in the past) and BP Migas (at present) do not get involved in an operating agreement as it is strictly internal PSC.
The operator, however, cannot make a different operating agreement with one partner (for example only because he happens to be an Indonesian regional company) than for other partners. They all execute the same operating agreement. It has to be a level playing field or else the operator may get sued for favoritism.
The operating agreement and its cash call provisions may have to be explained carefully to the regions if the government is serious about this 10 percent offer as it may quickly become a financial nightmare to those regions instead of the bonanza they are looking forward to.
The capital outlays in an oil and gas venture are quite substantial. For example, the foreign partners may decide on a major exploration or development program and a majority vote may vote the national regional partner into accepting the program. By voting in favor of a project, the foreign partners could even, albeit unintentionally, "vote the national partner into bankruptcy", so to speak.
Also, very importantly and often overlooked, the national and regional partner can not "cherry pick" projects. All partners participate in all projects that the partnership votes to spend money on. There may be a development project with relatively low risk but there may also be exploration on the block, which is always high risk. One can perhaps go to a bank to borrow for the development capital but the banks will shy away from exploration risk. The latter is strictly equity funding.
All partners are therefore required, proportionate to their respective working interests, to participate in all projects and to meet the cash calls on all projects in the Work Program and that includes exploration programs. These respective working interests are called undivided interests. Partners can not cherry pick projects.
The above describes, in a nutshell, the situation faced by a would be partner, any partner, whether regional or foreign. There are sufficient examples around to prove that this is not the Disneyland that many believe it is. The deputy head of the Bodjonegoro regional legislative council quoted in the Post article may want to seek expert advice before he gets his region involved in a business venture which is financially prohibitive to the region.
It is, therefore, a matter of grave concern that the notion of giving priority to a national partner in a farm-out and the notion of offering a 10 percent share to regional companies may result in massive underestimation of the real problems in the field.
Let us take inventory of the 10 percent offerings to Indonesian Participants in the past and see how many have been successful. That ought to be an indication of where to go instead of making politically expedient statements.
We may suggest that at this early stage of the regions' autonomy, the regions be satisfied with their share from the distribution of oil revenues from the central government to the producing regions under Laws 22 and 25 of the year 2000. That money is indeed the region's entitlement.
By forcing a new rule of an additional 10 percent sharing onto PSC's plus taking away the freedom in farm-outs, the result will be to heap more frustration upon a group of important investors than they can bear. Already additional tax burdens, labor troubles, insecurity, loss of control are weighing heavily on the PSC.
We caution the conceptors of the RPP Hulu that this very well could be the straw that breaks the camel's back. All that the PSC needs now is one more burden and we could, as a nation, lose all goodwill from our oil and gas investors. What we need is the opposite...
We need to do everything in our power to remove the obstacles in the way of the investors and listen to their complaints and act upon them.
At the very least, if all else fails, we should make the new farm-out provision and 10 percent rule applicable to future PSC contracts only and not make that rule retroactive. This would still be a disaster scenario but at least somewhat mitigated by the fact that present contracts remain unaffected.
We may respectfully suggest that, for a change, the government be firm and educational in dealing with pressure from the regions. We suggest to tell them we can not take a chance. At least not at this time. Your investors will salute you for your moral courage.
The writer, formerly CEO of Arco Indonesia, is now Executive Director of the Graduate School of Business of Bina Nusantara University