Row over oil revenues

Row over oil revenues

We cringe on learning of the threat by 48 regents to block and
halt oil and natural gas production throughout the country unless
the finance minister revokes his recent decision on the oil-
revenue split between the central government and local
administrations. This decision regents claim gives them a much
smaller revenue than what is mandated by law.

The outburst points to an increasing tendency among local
administrations to resort to intimidation and even destructive
actions to get their opinions accepted or their aspirations
fulfilled before more sensible, constructive alternatives of
consultations have been exhausted. The intimidation by the
Association of 48 Oil and Natural Gas Producing Regencies very
much reflects the behavior of a radical trade union.

However, the central government is not entirely blameless for
the unnecessarily radical attitude on the part of local
administrations. It seems insensitive to, and sometimes even
ignorant, of such an important element of regional autonomy as
revenue sharing.

But as both parties to the dispute -- the energy and mining
and the finance ministers representing the central government on
one side and the association on the other elaborated on their
respective arguments and positions, one cannot help but conclude
that frank and open discussions could have prevented the row.

Intensive consultations become even more imperative because
right from the launch of regional autonomy early last year, local
administrations have suspected, with legitimate reasons, that the
central government has been halfhearted in devolving power and
resources to local administrations. Suspicion certainly breeds
prejudice.

True, the formula for oil and gas revenue split between the
central government and local administrations has been clearly
stipulated in the 1999 law on intergovernmental fiscal relations
and its implementation regulations: Local administrations get 15
percent of the central government's take of oil production and 30
percent of natural gas output.

However, the formula is not as simple as it appears when
translated into revenue calculation. The association's claim that
the revenues allocated for the 48 producing regencies represent
only between one to two percent of the government take seems to
be based on a misunderstanding or lack of comprehension of the
technical details of the formula.

The 48 regency administrations seem not fully informed as to
how oil and gas production in the numerous fields in each of the
48 producing regions is estimated. They also appear uninformed as
to how such variables as production costs in each field, the
price of particular crude streams and the rupiah exchange rate
would influence the net government take from each production
sharing area.

The regency administrations also seemed unaware that the
revenue-split formula is based on net government take, meaning
that the tax should first be deducted from the government's share
from each concession area. Then, the total sum resulting from
this multi-step calculation is not allocated only to the
producing regions but also to the province and other non-oil-
producing regions in the same province.

So complex and technical are the calculations involved in
deciding on the revenue split that representatives of the
producing regions should have been involved in the whole process,
right from the discussions between energy and mining officials
and Pertamina and contractor executives to estimate the average
lifting from each area up to the process of calculating
government take from each concession area.

Such direct participation by regency representatives would
make the process totally transparent, thereby preventing
suspicion. That could also serve as a learning process because
local administrations previously did not know how the central
government estimated its revenue from the hydrocarbon sector. In
this context, the association would be the right partner for the
government in the annual process of calculating the revenue
split.

However, what the regencies seemed to have received was only
absolute figures in rupiah, resulting from the calculations made
by the finance minister on the basis of production levels and
other variables such as production costs and the price of each
particular crude stream submitted by the energy and mining
ministry.

Hopefully, common sense will prevail among both the central
government and the regencies in resolving the row and both
parties will draw a valuable lesson from the misunderstanding.

Most important, though, is that local administrations should
refrain from emotional outbursts, let alone intimidation, in
striving for their interests, because such a rebellious stance
could easily be emulated by the common people in their day-to-day
dealing with the authorities, including with the regents
themselves.

The regents grouped in the association would also be wise to
realize that resorting to intimidation would not serve the
interests of the people in their regencies, but on the contrary
be detrimental to their interests. Such arrogance would only
damage their credibility, especially since they were not elected
directly by the people.

Even more damaging is that such radical behavior would scare
away investors from their areas, depriving them of the ability to
create jobs for locals and to create assets for generating
revenue.