Seeking the right balance for energy sector's growth

Wed, 16 Apr 2003, 00:00 WIB

By Purnomo Yusgiantoro, Minister of Energy and Mineral Resources

The Law 22/1999 on regional autonomy transferred the
control of mineral resources, except oil and natural gas, to
local administrations. However, the central government retains
the authority for setting national policies in the mining sector
and standards for such areas as safety, health and the
environment, as well as overseeing the contractual terms and
conditions of major mining contractors.
Certainly not all local administrations are immediately
well equipped and competent enough to manage the licensing of
mineral resource development in their areas and related aspects
of mining operations.
A special team of the Ministry of Energy and Mineral Resources
has therefore been assigned to assist local administrations to
build up adequate institutional capacity to manage the
development of mineral resources.
The management of mining operations involves complex technical
matters related to exploration and exploitation and economic,
social and environmental issues. Local administrations must be
equipped with high technical competence for such matters as
processing licenses and drafting contracts.
But, as with most other laws, the implementation also requires a
learning process with some inevitable excesses. Many local
administrations, for example, have exercised their newfound
authority by imposing new taxes and other levies on mining
operations, thereby creating legal uncertainty and discouraging
investments.
The central government and local administrations have been
dealing with these excesses because the regional autonomy law
clearly stipulates that local administrations shall not enact or
issue regulations that contravene national laws and regulations.
Local administrations are free to take initiatives within the
management of mineral resources as long as these measures are
designed for the greatest benefit of the people and are fully in
conformity with national laws and regulations.
In fact, it is for the greatest benefit of local administrations
and the public to ensure that existing mining firms can grow
soundly and profitably, with new investments flowing in for the
development of mineral resources. It must be remembered that
under the regional autonomy law, local administrations get a
greater share of revenues from mining operations.
It is most imperative for local administrations to issue clear-
cut regulations in this sector in order to create legal certainty
and a conducive climate for mining investment operations.
Local administrations can become directly involved in mining
operations by setting up regional government-owned companies to
take equity shares in mining ventures. The central government is,
however, obliged to see to it that the acquisition of equity
stakes is fully in accordance with laws and regulations, and that
direct investment by local administrations in mining operations
is commercially feasible and meets the set technical standards.
Most importantly, the investment must be designed to achieve the
greatest benefit for the people.
Even though the central government still retains full authority
over oil and natural gas resources, it is always on the lookout
for any problems that may arise as a result of local regulations
in the trading, transportation and storage of oil products.
Both the central government and local administrations remain in
constant consultation over these issues, including any future
plans by local administrations to take equity stakes in oil and
natural gas production sharing contracts which come up for
contractual renewal.
The central government is finalizing a national policy guideline
for the marketing of oil products that will act as the benchmark
for any trading regulations that may be issued by local
administrations in refined oil products.
Likewise, the central government and local administrations are in
close consultation about the technical calculations of local
administrations' shares of revenues from oil and natural gas
development, and the schedules for the transfer of those
revenues, to avoid misunderstanding and unnecessary issues.
The government, through the 2001 law on oil and gas, has also
significantly improved the investment climate in the hydrocarbon
industry by fully liberalizing this industry to new investors and
abolishing state-owned oil company Pertamina's monopoly in the
upstream industry later this year, and in the distribution of
refined oil products in 2005.

New incentives are also being offered to oil and gas
contractors. The Ministry of Energy and Mineral Resources, for
example, has opened a tender for 11 new blocks or concessions
that offer contractors a greater share of revenues, amounting to
20-25 percent for oil and 35-45 percent for natural gas,
depending on geographical locations, geological structures and
potential oil and gas reserves.
As investors will be allowed to get reasonable margins from both
crude oil mining and refining and final products (unlike now when
oil contractors are restricted only to crude oil production),
they will be encouraged to increase investments in exploration.
This in turn will increase the volume of proven hydrocarbon
reserves, thereby prolonging the period of sustainable oil
production in the country.
The government and the House of Representatives are also tackling
new problems that have virtually stopped exploration of mineral
resources over the past four years. Problems arose because
Forestry Law No. 41/1999 bans open pit mining operations in
protected forests despite the previous licensing of a large
number of mining concessions in such areas.
Many of the mining contractors, who had invested a great deal in
their concessions, have stopped operations due to the uncertainty
caused by the forestry law.
The government faces a dilemma: Fully enforcing the new forestry
law would scare away mining investors from Indonesia and may even
set off a string of messy litigation proceedings because the
contractors lawfully obtained their concessions long before the
ban on open pit mining in protected forests was imposed.
Even more damaging is the impact on the economy in general.
Without new exploration, the country would soon run out of major
mineral deposits such as coal, nickel, gold and tin as no new
proven reserves would be found.
It is also worth recalling that general mining (outside oil and
natural gas), besides contributing more than 10 percent to the
gross domestic product, has a multiplier impact on the regional
economy through employment, the building of basic
infrastructures, community development, the training of skilled
manpower and various local tax payments.
After thorough analysis of 50 mining concessions affected by the
forestry law, the Ministry of Energy and Mineral Resources has
recommended that 22 concessions with US$12 billion in investment
commitments be allowed to continue operations.
These concessions were selected on the basis of the size of
investment by the concessionaires, the importance of their
operations to the economy and the least damage their operations
may incur on protected forests.
President Megawati Soekarnoputri has set up a joint team of the
Ministry of Energy and Mineral Resources and Ministry of Forestry
under the coordination of the chief economics minister,
Dorodjatun Kuntjoro-Jakti, to negotiate new conditions and terms
of operations with each one of the 22 concessionaires.
This team has been given three months until the end of June to
solve the problems in consultations with the House. Whatever the
final solution may be, the most important thing is that mineral
resource development should not in any way damage protected
forests.
Resolving the problems of the 22 concessions that are located in
Papua, Sulawesi, Nusa Tenggara, Kalimantan and Sumatra will
accelerate the process of regaining investor confidence in the
credibility of the government and in the country's economic
prospects as well.
Mining concessions have made an important contribution to the
national economy and regional development, and will continue to
do so. Even before their mines come on stream, the
concessionaires need large numbers of workers for exploration
work in the construction of plants.
When they start production, they recruit more workers. Their
production will increase the country's exports and generate about
US$900 million a year in fiscal revenues for the government.
The government is also drafting a mining bill to replace the
existing law, which is no longer adequate to accommodate the
latest developments in the mining industry and the changes
brought about by the law on autonomy.
The new regulation would strengthen the legal framework in the
mining sector, thereby making the industry, which is capital and
technology intensive in nature and involves high risks, much more
attractive to investors.
Indonesia needs to step up the development of its mineral
resources not only to increase mineral production for exports and
domestic use, but also to diversify the sources of its commercial
energy.
Moreover, as mineral resources are located mostly in the least
developed eastern part of the country, mining investments will
contribute greatly to accelerating the development of this region
to catch up with the other part of the country.
Most important is to apply the strictest standards of
environments, health and safety and community development to all
mining concessionaires.
The development of mineral resources has thus far reduced
Indonesia's heavy dependence of its commercial energy on oil from
64.5 percent in 1992 to 55 percent in 2001.
The role of natural gas in the energy mix instead increased from
20.4 percent to 23.4 percent in the same period, and coal from
7.8 percent to 15.7 percent. While the role of hydropower has
virtually remained stagnant, the contribution of geothermal has
also increased, albeit still in a relatively minor role.
This commercial energy mix will continue the shift away from oil
as the development of the other alternative energy sources
expands.

---30---

View JSON | Print