Sharing oil, gas income

Significant improvements have been made in the bureaucratic, regulatory, fiscal and legal environments for oil and natural gas investment but these achievements could be rendered meaningless if local administrations do not support the central government's policies in the hydrocarbon industry.

The Ministry of Energy and Mineral Resources, as the policy maker and the BP Migas, as the regulatory body in the upstream oil and gas industry, should therefore pay serious attention to the issues raised on Tuesday by a team of Regional Representatives (DPDs) in the People's Consultative Assembly.

The DPDs disclosed that several local administrations had overzealously fought for a bigger share of revenues from oil and gas mining operations, which seemed to be in violation of the 2001 Oil and Natural Gas Law and the law on fiscal relations between the central government and regional administrations. They cited Riau province and Garut and Indramayu regencies in West Java as examples where local demands for bigger portions of revenues from oil and gas mining could escalate into major hurdles to new investments in the petroleum industry and similar movements in other regions.

The 2001 oil and gas law clearly stipulates that the local administration of the oil or gas producing areas is entitled to a portion of the central government's share of the oil or natural gas produced by contractors. The portion amounts to 15 percent for oil and 30 percent for natural gas.

This oil and natural gas revenue-sharing ratio has been considered relatively fair and sensible because local administrations are already entitled to 80 percent of the revenues derived from the exploitation of other mineral resources. Forcing the central government to surrender a bigger portion of its income from oil and gas concessions could sharply curtail its financing ability to help poor provinces, which are devoid of natural resources.

However, simply ignoring the local administrations' demands is not wise either. The oil and natural gas law requires the central government -- Ministry of Energy and Mineral Resources and BP Migas -- to conduct consultations with local administrations regarding oil blocks in their areas that are to be tendered to investors. The law also stipulates clear-cut guidelines on land acquisition and compensation for local people.

The consultation, however, should not simply be perfunctory, but should be a meaningful and substantial exchange of views about the prospects and challenge of oil and gas mining, their direct benefit to the local economy and the country as a whole.

Only through meaningful consultations will the government be able to gain informed cooperation on the part of local administrations. And support of regional administrations are vital because almost all the prospective tertiary sedimentary basins in the country are located in remote, out-of-the-way areas.

However, the central government needs to be able to act decisively if consultations have been exhausted and local administrations continue to stubbornly push ahead with unreasonable demands that are contrary to the letter and spirit of the law.

The government also needs to investigate local administrations' complaints about late disbursement of their shares of oil and gas revenues and come out with a more expedient transfer system.

True, the finance ministry needs some time to assess the central government's share of the oil and gas produced by contractors because it is the net production (after production costs are recovered) that is used as the basis for the sharing ratio. Still, too-slow disbursement could cause cash-flow problems for local administrations.

Geologists still see Indonesia as one of the most promising areas for oil and natural gas prospecting but all the huge potential oil and natural gas reserves will remain meaningless and without economic value if they are not extracted. Oil and gas extraction require technology and huge funds, which unfortunately are not available locally.

Legal and regulatory certainty and conducive bureaucratic machinery are particularly vital for investors in the upstream segment of the hydrocarbon industry -- exploration, mining and refining crude oil -- as this business not only involves high risks and requires large amounts of capital but also has a very long payback period.

We are already a net oil importer and as domestic fuels are still heavily subsidized, the steady rise in consumption has been gauging a big deficit into the state budget with all its negative repercussions to the economy.

Since it usually takes about five to six years for an oil concession to produce, it is most urgent for the government to further improve the overall climate of investment in the oil and gas industry.