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The Jakarta Post
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Editorial: Misperception on oil

  • The Jakarta Post

| Thu, December 13 2012 | 09:55 am

Indonesia is changing the rules of a game that was designed to last for three decades only after 11 years of play.

That is how many analysts and oil company executives describe the current deliberations by the House of Representatives on amendments to the 2001 Oil and Gas Law.

This anomaly, according to the Indonesian Petroleum Association (IPA), seems to have been caused by misperception by the general public and politicians in the House about the role and special nature of the hydrocarbon industry.

The IPA was quite right to point out last week that, contrary to conventional wisdom, Indonesia’s petroleum industry is not controlled by foreign companies, who actually only work as government contractors under production sharing contracts (PSCs) managed and supervised by the Upstream Oil and Gas Regulatory Taskforce that replaced BPMigas, now defunct.

These misperceptions were also clearly reflected in the considerations leading to the Nov. 13 decision of the Constitutional Court that disbanded BPMigas, which was set up in 2002 under the 2001 Oil and Gas Law to supervise and manage PSCs.

True, the bulk of the country’s oil and gas output has been derived from concessions operated by foreign oil companies. But that is because of the nature of oil and gas prospecting — a high-risk, technologically intensive endeavor that requires immense capital with a long payback period. Under the current oil and gas law, all risks are borne by the contractors.

Thus, very few local companies have been willing to take the risks in the industry, as they simply do not have enough capital, technology or expertise. No wonder that only few local oil firms have bid on the concessions that are regularly tendered by the regulatory body.

As Eddy Purwanto, a seasoned oil analyst and deputy head of BPMigas from 2002 to 2009, said on the opinion page of this newspaper on Wednesday, foreign oil companies failed to discover oil in Indonesia’s eastern region, despite spending more than US$2 billion for offshore explorations between 2009 and 2012.

As the contractors, these foreign companies bore all the losses. Can national or state-owned companies afford to lose such a huge amount of money?

It is because of the special nature of the hydrocarbon industry that companies operating in the sector must have legal certainty and policy clarity and consistency for a long period of time, at least for the average 30-year lifespan of a PSC.

 But there seems to have been strong political pressure to give preferential treatment to national companies in the management of hydrocarbon resources.

If this demand is integrated into the amendments of the Oil and Gas Law — and the probability of that happening is high, in view of the mounting nationalistic sentiments amid preparations for the legislative and presidential elections in 2014 — our petroleum industry will be in great danger. The impact will be severe as the industry contributes 25 percent to government revenues and accounts for about 7 percent of the nation’s gross domestic product.

What is most important is that the upcoming new oil and gas should stipulate elaborate provisions that require foreign oil companies to transfer technology and expertise to national firms in order to build up a reliable domestic petroleum industry.

Over the past 10 years explorations by foreign companies have fallen steadily, due to the inimical local business climate. But exploration is the key to increasing the nation’s proven oil reserves to replenish those that have been exhausted.

This has been the main reason as to why Indonesia’s oil production has fallen steadily from 1.5 million barrels per day (mbd) in 1999 to 1.25 mbd in 2002 and to less than 0.90 mbd at present, while domestic consumption has increased to more than 1.4 mbd, which has turned the country into a net oil importer since 2004.


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