Mon, 24 Jan 2000

The 2000 state budget

Having reviewed the 2000 State Budget draft, I see that oil and gas revenue still has a crucial role even though it is not too dominant in generating funds for the state coffers. From a projected income tax of Rp 53.02 trillion, oil and gas are projected at Rp 8.83 trillion, about 17 percent. While from a projected natural resources revenue of Rp 30.32 trillion, the oil and gas revenue is projected at Rp 28.63 trillion, about 95 percent. In total, the oil and gas revenue is expected to contribute Rp 37.46 trillion, about 27 percent, of a projected domestic revenue of Rp 137.70 trillion.

The government assumes that an average oil price will be US$18 per barrel at an average exchange rate of Rp 7,000 per dollar.

There are two factors which will influence whether the target of Rp 37.46 million can be achieved, i.e. the crude oil price and the rupiah exchange rate. Unfortunately, those two factors are beyond the control of the government.

To get a good crude oil price in the future is very difficult, almost impossible. Too many factors should be considered. Our record shows that the average Indonesia crude oil price was $18.94 per barrel in 1997, and in 1998 the price dropped to $12.35 per barrel. In 1999 the figure rebounded to about $18. Such a record tells us how crude oil price fluctuated heavily.

We are also aware that our exchange rate is very sensitive to the political and economical climate, both domestic and international. Hopefully the government's assumptions will not be far from the actual figures. Otherwise, additional loans will be needed in order for the government to spend the expenditures as planned.

Actually, there is still room for the government to secure the oil and gas revenue if it really wants to do it. As we are all aware, more than 90 percent of oil and gas production in Indonesia is produced by foreign oil companies (contractors) under production sharing contract (PSC) terms. Only a small portion is produced by state-owned company Pertamina. Under the PSC terms, in short, we may say that contractors have an obligation to conduct exploration and production of oil and gas.

If the exploration is successful and production reaches the economic rate as set forth in the contract then they will get a reimbursement of all their expenditures related to their exploration and production activities. For the capital expenditures they will get reimbursement through yearly depreciations, while for noncapital expenditures they will get reimbursement in the same year. Because the government, in this case Pertamina, will reimburse all expenditures, there is an obligation by Pertamina to verify whether such expenditures are eligible for a reimbursement.

On top of that Pertamina should control contractors in such a way that they conduct operation efficiently. In 1998 total reimbursement was about $3.4 billion. Using an exchange rate of Rp 7,000 per dollar, the amount equaled Rp 23.8 trillion.

If contractors could enhance their efficiency by 10 percent, and I am sure they could, we would get additional revenue of Rp 2.4 trillion. To have a better control, it is not necessary for the government/Pertamina to involve deeply in the day-to-day operation of the contractors. Instead Pertamina only gives more authority to contractors and at the same time sets a benchmark for efficiency. So far, the government/Pertamina is considered to have too heavily involved in the day-to-day activities of the contractors which, to some extent, creates a high-cost economy.