T

he government’s enthusiasm to review contracts in the national mining, oil and gas sectors could not be reckless or against the law. It has to heed to the sanctity of contract to maintain a conducive climate for investors.

President Susilo Bambang Yudhoyono’s speech on June 1 explicitly noted the government’s intention to renegotiate contracts in the oil, gas and mining sector as an effort to regain the nation’s sovereignty.

The government further established a plan to renegotiate the contracts in the Master Plan of Indonesian Economic Development Acceleration and Expansion (MP3EI).

Contract renegotiaton is one options to create fair revenue sharing between the government, in this case the central and well as local governments and foreign contractors in the future.

The President’s concern of alarming foreign domination in the oil, gas and mining sectors is understandable. As a nation blessed with abundant natural resources, Indonesia cannot yet act as a master of its own soil.

Though the head of state’s stance on such a sensitive issue was a little bit late, we have to appreciate his wish to regain national dignity.

Indeed, the President’s positive sign was followed by the establishment of a special team on renegotiation under the Coordinating Economic Minister, involving techinal ministries such as the Energy and Mineral Resources Ministry and Finance Ministry.

The most important point is not inter-departmental coordination, but a concrete result as a win-win solution.

The benchmark, therefore, is how far the abundant natural resources could bring prosperity to the Indonesian people.

Article 33 of the Constitution clearly states: “Natural resources are controlled by the state and used mostly for the people’s prosperity”.

According to the National Development Planning Agency (Bappenas), there are 113 mining contracts that will be reviewed, comprising 37 working contracts (KK) in the metals and mineral mining sectors and 76 PKP2B (working agreements on coal mining) in coal production.

Only 11 KK signers have agreed to amend their contracts, with five refusing. For PKP2B, 13 foreign companies have rejected the renegotiation.

In the oil and gas sector, more than 150 oil and gas blocks in Indonesia are operated under production sharing contracts (PSC) with different sharing ratios. Some 80 percent are controlled by foreign contractors.

It is important to note that under the cost recovery system applied by the government, the investment is paid later after the field is producing. However, the government could not generalize that all investment contracts could be renegotiated.

There are requirements that need to be completed before reviewing a contract.

The government must have a strong legal umbrella to avoid a blunder. Not all running contracts, both in the general mining sector as well as oil and gas, could be amended.

In case of revision of the contract, it is not a matter of period, but it has to look at a certain point that could be revised fairly.

For instance, revision of the gas sales-purchase between Tangguh LNG operators and the Chinese government. This could be done with a business to business approach.

Therefore, the government needs to be more selective in reviewing contracts with private foreign companies. The government, for instance, could not cut a running contract, but could renegotiate expired contracts.

During the renegotiation, the government could add a clause to stop contract renewal, as well as a clause that requires the use of better technology, which will potentially increase production.

Certainly, such a condition could spark anxiety among contractors. Uncertainty could disturb their business and the impact could be harmful for the government, not to mention the current unfavorable investment climate in the nation’s mining, oil and gas industries.

Now, Indonesia ranks only slightly above Timor Leste in the Asia Pasific for investment in the oil and gas sector according to a research of the Fraser Institute of Canada.

Contract renegotiation is different from nationalization of all foreign investment in the oil and gas sector, but it is a matter of giving a fair portion to state companies to make it more competitive and profitable.

To state the matter precisly, PT Pertamina is a state-owned company in the oil and gas sector that will hold the first right of refusal to be an operator. This right would show Pertamina’s competence as a full operator.

This is an actualization of the government’s alignment to state companies as one pillar of sustainable economic growth.

Another crucial issue is the mechanism of contract renewal for blocks whose contracts have expired. This must be mentioned clearly in the new regulation by stating that extension of a contract could be made in 5-7 years before the expiration of the contract for the sake of certainty.

The House of Representatives, especially Commission VII on energy and mineral resources, should encourage the government to prudently review investment contracts in the mining sector.

The principle of contract renegotiation is very important to regain the country’s sovereignty from foreign domination. But renegotiation could do more harm than good if it is conducted without respecting the running contract.

As a positive response to the government’s commitment, the House has arranged an intensive discussion on revision of Law No 22/2001 on oil and gas and review of articles on the Law No. 4/2009 on mineral and coal. By involving all stake holders in mining and oil and gas, the House intends to make prudent revisions of those laws.

It is the House’s responsibility to make regulations that protect all parties under the principles of fairness, equality and transparency that could bring prosperity to all Indonesians.

The House is optimistic that revisision of the law on oil and gas and amendment of the law on minerals and coal could offer a win-win solution to the nation. In brief, revision of the two laws would become pillars for contract renegotiaton.

It is time for us to emerge as a sovereign nation in natural resources.

The writer is member of Commission VII on energy and industry affairs at the House of Representatives, representing the Golkar Party.