Seeking the right balance for energy sector's growth
Seeking the right balance for energy sector's growth
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.
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