Sharing oil, gas income

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.