Tuesday, January 8, 2013

Nationalism Undermining Indonesia's Oil and Gas Sector

After blowing like a wrecking ball through Indonesia's mining industry, the winds of nationalism are now buffeting the oil and gas sector, with a legislative revision raising fears of a perfect storm breaking ahead of the 2014 parliamentary and presidential elections.

Thrown into a tizzy by an adverse constitutional court ruling, the government is hurrying to get an amended oil and gas law through Parliament. But as one analyst warns, "If they try to rush it through in such a highly charged nationalist environment, it could be disastrous."

And that's not just a private-sector view. When Evita Legowo, the Energy and Mineral Resources Ministry's director-general for oil and gas, retired in November, she said the rise in nationalist sentiment had now become the industry's No. 1 headache.

Just a fortnight beforehand, the constitutional judges had stunningly ordered the dissolution of BPMigas, the upstream regulator, following a legal challenge to provisions of the 2001 Oil and Gas Law which led to its creation in the first place.

In essence, the court found that placing commercial and regulatory responsibilities in the hands of BPMigas contravened Article 33 of the Constitution in which the state — and not an executive agency — is the guardian of the nation's natural resources.

By signing production-sharing contracts (PSCs), BPMigas was seen to be on the same level as the private entities it is a counter-party to. The court wants a regulator whose authority is not contravened by contract provisions — even if contracts are supposedly inviolate.

The most likely outcome will be the creation of a new state-owned enterprise as the industry regulator, leaving the management of PSCs and other commercial activity in the hands of the ministry's oil and gas directorate-general.

What companies want is a regulator which acts as a facilitator and enabler, not one like BPMigas which they complain focused on command and control, adding another layer of bureaucracy, slowing down the approval process and only adding to costs.

Before it went into recess in mid-December, Parliament had already been working on three conflicting amendments to the 2001 law, one of which addressed the constitutional issue. The court decision appears to have resolved what draft has to be followed, but time and how far the revisions actually go are now crucial factors.

The 42 petitioners who brought the case included Nahdlatul Ulama and Muhammadiyah, the country's two biggest Muslim organizations, a host of other mainly Islamic groups and economic nationalists such as former ministers Kwik Kian Gie and Rizal Ramli.

Interestingly, when the oil and gas law was being thrashed out in the early 2000s under the Abdurrahman Wahid and Megawati Sukarnoputri administrations, Ramli, Kwik and constitutional court chief judge Mahfud MD all held Cabinet posts.

Perhaps the greater irony is that while the petitioners accused BPMigas of favoring foreign interests, the opposite was the case. In fact, it did more than any other entity to push a nationalist agenda and turn the industry into a greater economic multiplier.

Misperceptions like this have been massively damaging, none more so than the public belief that the money repaid to oil companies under the cost recovery system comes out of the national budget. In fact, it comes out of production revenue.

Indonesia's nationalists prey on ignorance, sometimes for personal or political benefit. But they are also bolstered by an expressed state objective to have half of all producing fields in domestic hands by 2025, along with 90 percent of goods and services.

That's why the same group of petitioners are renewing their efforts to nudge the government into handing over East Kalimantan's gas-rich Mahakam block to the state-owned Pertamina oil company when French firm Total's contract expires in 2017.

The offshore concession is one of about 20 foreign-operated oil and gas blocks, still containing tens of billions of dollars of reserves, which come up for contract renewal between now and 2020.

Signed in the 1970s and extended for 20 years in the 1990s, it was always understood they could be rolled over again. Not only is that now in doubt, but the latest debacle has only created more uncertainty for a sector which contributes to 25 percent of government revenues and 7 percent of gross domestic product.

Legowo, who sees the importance of finding a balance between creating an attractive investment climate and meeting the demands of society, does not think Pertamina is capable of managing so many blocks after falling short of its 2011 production target.

Granted it may have pumped up the sagging output from BP's former north-west Java block, from 24,000 to 41,000 barrels a day in the past two years, but that was because it inherited the Anglo-American company's expert Indonesian production team.

Far less successful was its acquisition of the West Madura concession from South Korea's Kodeco Energy, which stopped producing when Jakarta reneged on a proper handover as it fought off efforts by two district governments to take control of the block.

Of far greater concern is the decline in exploration over the past decade. Delayed for years by land problems, ExxonMobil's Cepu field could lift Indonesia back over a million barrels a day when it finally comes on stream in 2014. But for how long?

Foreign oil companies have so far spent more than US$2 billion drilling in deep-water frontier areas such as the eastern Makassar Strait and the waters off northern Papua without anything but dry holes to show for it.

Lacking the cash and the technology, Pertamina, private Indonesian companies and local governments have little appetite for high-risk ventures that carry no guarantees of success. That's a crucial shortcoming the nationalists prefer not to address.

Analysts say to even have a hope of maintaining production, Indonesia needs to have three times the current level of new wildcat exploration by 2015 and five times that figure by 2020.

Lost in translation is the fact that companies eat all their costs until they go into production. "We can't force investors to keep pouring in money here if the situation is unfavorable," Legowo told the Jakarta Post. "At the same time, we are competing with other countries that also need investment."

Indonesia's nationalists, however, do not appear to be listening. John McBeth - Straits Time

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