Monday, March 1, 2010

The Threat to Indonesian Energy Development

More layers of government mean more hands are out

Evita Legowo, the director general of oil and gas in the Ministry of Mines and Energy said recently that the implementation of a new Environmental Law could reduce oil and gas production by up to 50 percent because of the requirement to reduce the temperature of waste water from their oil and gas production processes from 54C to 40C. She sees how hard it will be to lift 965,000 barrels of oil per day in 2010, and that Indonesia reached only 960,000 barrels in 2009, down from 1,005,600 in 2006.

The focus in Jakarta has been the continuing impasse in the legislature, where a House of Representatives special investigating committee appears determined to end the political careers of two of President Susilo Bambang Yudhoyono’s most respected advisors over the US$710 million Bank Century scandal. But far below their level is where Indonesia is really crippling itself, not just through corruption but bureaucratic inefficiency and indecision.

The fact is that Legowo does not mean there should be no environmental controls on oil and gas. She is nervous about what she called the “increased complexities” resulting from involving local government in permit processes affecting energy and mining, she told local reporters. Although she didn’t say it, those “increased complexities” have to do with how officials in the local governments will have their hands out.

Between December 2008 and November 2009, the government offered 40 oil and gas blocks for development but only found eight firms as takers. An astounding 75 percent of the blocks on offer attracted no qualifying bidders. The problems are weak pre-feasibility studies, previous underinvestment and the sunset scenario for Indonesian oil and gas, which is getting harder and harder to explore and exploit as the reserves diminish.

Part of the problem, however, is also a political and regulatory framework that looks tired and tattered. Improved environmental standards sound fresh but the problem is that in Indonesia everything can become a commodity with a price tag on it, or a new excuse for more complication including new environmental controls backed by well-intentioned NGO lobbyists. Some countries have tradable carbon credits. Indonesia seems to be evolving tradable corruption charges.

In 1999, after the fall of former President Suharto, the administration set out to radically overhaul the role of the regions and make government more responsible to the people, devolving power away from the central government in Jakarta to governmental bodies at the provincial and local levels. Decentralization began to go into effect in January of 2001. But many of the new decentralized government units created in the wake of the reform movement have failed because they are being led by people incapable of putting development plans in place for local communities, or who simply sought control of the salaries and benefits that must go to every local government unit.

A recent UNDP forum revealed an estimated 48 new local government units in Indonesia are spending 70 percent of their budget only on paying civil servants. These people dreamed of getting rich by being bureaucrats and local political leaders.

And who should pay for their dreams?

Evita Legowo is concerned that state oil and gas producer PT Pertamina and multinational PT Chevron Pacific Indonesia would be the two companies who would pay the most for these potential new complications, and she warns this could seriously hit oil and gas production. Bagus Sudaryanto, operations director of PT Pertamina EP, confirmed these complications could lead to Pertamina failing to reach its 2010 production target of 128,000 bopd, while Chevron was already lifting 458,800 bopd of petroleum and condensate by 2007.

Only eight companies produce 90 percent of Indonesian oil and condensate (Chevron Caltex and Chevon Unocal, Pertamina, Total, Conoco-Phillips, CNOOC, Medco (Exspan), Petrochina and BP). Similarly 90 percent of Indonesian gas production in 2006 was in the hands of almost the same eight companies (Total, Pertamina, ConocoPhillips, Exxon Mobil, Vico, BP, Chevron-Unocal and Petrochina/Devon Energy) according to the Petroleum Report Indonesia 2007-2008 by the US Embassy in Jakarta).

So which is the real Indonesia?

The one led by Gita Wirjawan,* the new chairman of the Indonesian Investment Coordinating, Evita Legowo, Karen Agustiawan, president director of state oil and gas company Pertamina and the embattled Finance Minister Sri Mulyani Indrawati, all held together by democratically elected president, all of them trying to push Indonesia from being an extractive resource-based economy to a proactive knowledge-based economy and a world economic power by mid-century? Or the bureaucrats backed by brokers who can block the nation from getting the oil, gas and electricity it needs?

Too many Indonesian investors are confronted with the old Indonesian bureaucracy, especially as decentralization and the rise of regional government democratize political culture, spreading the aspirations to join the gravy train, but failing to carry with it the new capacities that modern administrative culture needs.

In fact not only do they sell permits, but they sometimes sell them twice to different people for the same land and projects. Gita Wirjawan visited the World Bank in Washington, DC on Feb. 23 to talk about unblocking Indonesian bureaucracy to promote investment, telling Washington how busy he was collecting old permits from 15 Ministries to have them reissued in double quick time by his increasingly interventionist agency. But at the same time the traditionalists were busy in the political boutiques putting the wrappers on new environmental permits. And new legislation always seems to mean new regulations and yet more permits and payments.

The problem is not the politics of the environment, but the environment for the politics. The problem is not democracy but what corrupt people will do with it. Asia Terry Lacey is a development economist who writes from Jakarta for Asia Sentinel

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