Economically, low oil production creates considerable losses to the state. The potential for state income becomes greatly reduced, energy resilience grows highly vulnerable and Indonesia has to drain even greater amounts of foreign exchange for oil imports to meet domestic needs.
The Constitutional Court in its decree dated Dec. 21, 2004, canceled article 12, paragraph 3 of the oil and gas law, originally meant as the legal basis for oil companies and contractors to conduct exploration and exploitation in a working block.
But this provision was seen as too generous, so the court eliminated it. It is not appropriate to grant mining concessions to contractors. With the removal of article 12 paragraph 3, the legal basis for contractors' exploration and exploitation activities became unclear.
The other provisions deleted by the Constitutional Court were article 22, paragraph 1 on domestic market obligation (DMO) that was limited to a maximum of 25 percent and article 28, paragraph 2 on fuel oil and natural gas prices being set to market forces
The Constitutional Court excluded the article on BBM and gas price liberalization stating that prices should be left totally to market forces. It's because all over the world, including advanced industrialized countries (OECD), fuel selling prices at gas stations have always been subjected to the intervention (distortion) of their governments through fuel tax policies.
In countries such as Germany, Britain, France, Italy, Norway, Holland and Spain, fuel taxes can reach 300 percent of the untaxed retail pump price. Of the 100 percent BBM price components at gas stations, some 75 percent comprises of government imposed fuel taxes, with only about 25 percent of fuel prices reflecting market rates.
It is thus improper to leave fuel prices at gas stations completely to the market as stipulated in article 28 paragraph 2 of the oil and gas law. The government should intervene in the determination of levels of prices paid by the public. In Europe they take the form of fuel taxes and in Indonesia negative taxes (subsidies).
Politically, the law is no longer supported by the House because its special committee has recommended the replacement of this law by the government. With the relatively high rates of poverty and unemployment, the government needs huge financial resources to create more job opportunities through the development of infrastructure.
Oil and gas production as a potential source of state income remains high in view of the country's relatively vast oil and gas resources.
This great potential demands large amounts of investment. Oil and gas exploration and exploitation investment should not utilize funds from the state budget as the oil business bears major risks.
To this end, bigger flows of oil and gas investment from foreign as well as domestic private sources are needed. It is therefore necessary to introduce a national oil business management system that is simple and efficient, without bureaucracy and the reapplication of the special fiscal policy based on the lex spesialis principle.
Although the doors are wide open to foreign and domestic investment, the state's sovereignty over its oil and gas reserves (mineral rights) should remain guaranteed. To make the oil business management system simple and efficient, mining concession rights (KP) should be granted to state-owned business entities (special BUMN) so the relationship with investors is on a B-to-B (business-to-business) basis.
Foreign and domestic oil investors are contractors of state own company possessing the economic rights to gain benefits from the oil and gas produced.
With the KP given to state firm, besides a simpler bureaucracy-free process of investment, the state's share of oil and gas derived from contractors can be developed and sold by the state owned firm optimally. Domestic crude oil production can be maximized for the fulfillment of local needs without having to cover transaction costs.
Through the firm, gas production can be more easily allocated to meet the entire local demand and the remainder should be allowed to export destinations as long as the business principle is followed by referring to the prevailing crude oil price without any limitations.
If approved, state owned firm as KP holders have ample opportunity to utilize national oil and gas assets or reserves for monetization, with the revenues being partly spent on the repayment of state debts to reduce the burden of coming generations.
For all this, the 2001 law on oil and gas should be totally improved or replaced, according to the following principles: The government (Energy and Mineral Resources Ministry) remains the policy holder and regulator, oil and gas investment is processed under one-stop service, KP's are granted to state own firm at the same time as KPS signatories, the lex spesialis principle is applied, state owned firm get the chance to monetize national oil and gas resources for state debts repayment and infrastructural development funding, and so forth.
If the improvement or substitution of the law on oil and gas through amendments takes a long time and is feared to become counterproductive, the President should promptly issue a government regulation in lieu of law, in the way premier H. Juanda did in 1960 as a substitute for the Dutch mining law (Indische Mijnwet 1899), which inflicted huge losses on the state.
The time has come for national oil and gas resources to be wisely and efficiently managed to bring maximum benefits to the population in accordance with the Constitution. Simultaneously, foreign and domestic investors can also undertake business operations prestigiously, in a mutually profitable way and with greater certainty.
The writer is an alumnus of Colorado School of Mines, Denver and Ecole Nationale Superieure du Petrole et des Moteurs, Paris, currently a postgraduate program lecturer at the School of Economics, University of Indonesia.
