The importance of rethinking the shelved oil and gas bill

The importance of rethinking the shelved oil and gas bill

By T.N. Machmud

JAKARTA (JP): The chorus of incoherent voices debating the
merits of the oil and gas bill has, at least for the moment, died
down. The House of Representatives (DPR) has elected to do
nothing by shelving the bill and saving it for the next
government. Does it mean that the oil and gas industry goes back
to business as usual? One would hope not.

Aside from the flaws in the bill and the timing of its
submittal, its concepts need to be revisited and ought to be
picked up on by the new government in order to be given serious
and immediate consideration. We may perceive the bill as a wake
up call for the nation as a whole, to the effect that the oil and
gas industry needs reform and it needs it now.

First and foremost, before we resume the debate on the oil and
gas bill, we need to realize one important fact of life, namely,
that this country may very soon run out of exportable oil if
production levels of crude oil do not increase.

Our national production has, since 1977, never exceeded 1.5
million barrels per day, including condensate, while our domestic
consumption is steadily increasing. Imagine that we may have to
pay the bill for imported crude oil to meet our domestic needs
for refined products, in addition to having to pay the bill to
service the debts on money borrowed from among others, the
International Monetary Fund (IMF), plus having to pay the bills
on imported rice to feed the population.

This is a likely doomsday scenario that perhaps can only be
mitigated if we manage to significantly increase our national
production of oil and gas. Petroleum is still the single largest
export commodity that can provide much-needed relief. Exports of
handicrafts and TKW (domestic servants) are not enough.

Current high oil prices confirm that petroleum can boost
foreign exchange reserves. However, what is the use of trying to
benefit from a market high if your production is way down or when
you have just run out of exportable oil? Worse still, if you have
to sell your refined product at subsidized prices?

The obvious answer is to raise production. One caveat: we can
not "order" an increase in production. Unfortunately, it takes a
heavy capital outlay to undertake exploration, especially in
remote areas or in deep water. That kind of capital is also risk
capital. It means you cannot go to the bank and borrow it. Banks
are risk averse. In order to carry out exploration, some fool
will have to reach into his back pocket and write a check for a
large amount of money that he may never get back.

Luckily there are risk takers like that who are willing and
able to risk equity funds on exploration projects. These
investors bankrolled the highly successful exploration efforts of
the 1970's and 80's. Not all of them were fortunate. For each of
the few that eventually became producers, there were an even
greater number of failures.

Failing in this sense does not mean incompetence but rather
that their contract area did not yield the exploration result
that was hoped for and having reached the limit of the portfolio
provided by their shareholders, they then subsequently withdrew.
The reason why Pertamina was not as successful as their foreign
partners, the Production Sharing Contractors (PSC), again is not
a matter of technical competence but simply a matter of money.
Pertamina simply did not have the money to expand their own
operation because the regulatory framework did not permit them to
do so. Pertamina became a cash cow for the power elite at the
expense of their own company.

Law number 8/1971 is the main regulatory culprit causing
Pertamina's predicament. It is everybody's hope and desire that
eventually Pertamina will become a world class petroleum company
and at least catch up with Malaysia's Petronas. It needs to play
its part by eventually being able to produce, by itself, a
substantial share of national production and by becoming an
international player.

Only then it can call itself a "world class company". Petronas
now produces roughly one third of Malaysia's overall production
of 700,000 barrels per day, has invested in 17 countries and is a
producer in some and a downstream player in others. For Pertamina
to start on the road toward becoming a "world class player",
first the regulatory framework needs to be overhauled, primarily
Law 8/1971. Pertamina will need access to risk capital and
flexibility to spend it. It will need to restructure and perhaps
go public or to privatize. It is reassuring to hear from
Pertamina's President Director in his key note address at the
International Indonesian Oil and Gas Exhibition '99, held in Bali
recently, that these restructuring efforts are well on their way.

While Pertamina is restructuring and while the new House,
hopefully, makes it a priority item to overhaul the regulatory
framework that will indeed enable Pertamina to eventually become
a world class player, the question is who is working on raising
production so this country can defer that dreaded moment when it
becomes a net importer?

This task may fall on the shoulders of the PSC group. Already
they are collectively responsible for about 95 percent of the
current national production capacity of 1.5 million barrels per
day. The good news is that Indonesia is geologically still
considered to be both prolific and attractive.

The bad news is that in order to spend more risk capital the
PSC group will need incentives to do so. Given the increased
political risk in Indonesia caused by the many uncertainties that
have popped up and an increasingly more nationalistic
environment, investors, including PSC's with long established
operations and relationships, will be more inclined to sit back
and wait while the corporate dollar goes elsewhere.

To reverse this trend and to encourage investors to spend
their money here, some real, meaningful incentives are required.
The kind of incentives desired by the PSC group are known to
Pertamina and to the Ministry of Mines and have been discussed ad
nauseam. One example where Pertamina agrees with the PSC is with
regard to Presidential Decree number 16/1994 which imposes severe
restriction on PSC operations because of bureaucratic tendering
procedures.

The bottom line is that we disagree with the heading of The
Jakarta Post's Sept. 27 article "House's rejection of oil and gas
bill praised". This is not a time for praise. This is a time for
deep concern. Bill or no bill, we need to get our petroleum
industry back in shape. We can not go back to business as usual.
We need to get production up and there is no time to waste.

We need to start conducting a serious caucus with our
investors and we need to do what is necessary to increase
investment in the petroleum sector to defer that dreaded moment
when we become a net importer. In fact, we need to make it a
matter of national priority. It should be so stated in the new
GBHN, the formal guidelines for the new government to be
inaugurated soon.

Without all of the above we will simply slip further down the
slippery slope. The petroleum sector, once the nation's proud and
single largest foreign exchange earner, may shrivel up and the
sad thing is... it is not even necessary.

The writer is a lecturer at several local business schools and
is the former President and Resident Manager of ARCO Indonesia