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