T

he Constitutional Court’s decision to dissolve the upstream oil and gas regulator BPMigas caught most of us by surprise. The legal move against BPMigas had been launched by several organizations that deemed the institution “pro-foreign interests”.

This Court’s verdict comes as our oil production carries on its downward trend and consumption continues to go up.

Meanwhile, our domestic companies remain unable to contribute much to the national oil production (less than 25 percent), and state-owned oil and gas company PT Pertamina continues to generate comparatively low net income (roughly one sixth of Malaysian counterpart Petronas’).

What was this court ruling really all about? Let’s consider the issue at its most basic level.

Managing national petroleum resources involves three key functions: 1) Policy, which is conducted by the Energy and Mineral Resources Ministry (ESDM) and the House of Representatives, 2) Regulation/Operation, which was entrusted to BPMigas but has now been transferred to ESDM after the court ruling, and 3) Commercialization, which involves Pertamina, domestic companies such as Medco, and of course international investors such as Chevron, Total and BP.

The main question that is hotly debated is whether to unify these three functions within one entity or separate them.

Some energy analysts contend that integrating them within a state-run business is the best system, while others say it’s best to have separate organizations do each job. I can imagine that audiences are confused with so many different opinions.

Many analysts have offered guidance based on professional experience, academic theory or personal opinion. I suggest a different approach — use performance benchmarks to identify other national systems that have been successful and then look at how they are managed and administered. It would give valuable insight on what works in the real world.

Mark C. Thurber, an economist from Princeton, benchmarked petroleum governances from all over the world and concluded that whether the government separates or unites those three petroleum management functions does not affect the performance of a domestic petroleum industry.

Consider Brazil and Norway whose national oil companies Statoil and Petrobras are both international giants.

The countries separate those three functions into different agencies and provide an environment conducive for growth to the domestic petroleum industries.

On the other hand, Malaysia and Saudi Arabia integrate those functions into one business entity and their national companies Petronas and Saudi Aramco also do very well.

The organizational hierarchy set up by the government is not the issue. It turns out that what matters the most is whether the government can stay on track with regard to a high-level strategy and then carry out the plan.

The best system to manage petroleum resources will emphasize good governance, a unified strategy and then put it all together to deliver an effective implementation.

In the late 1960s and early 1970s, Norway discovered that it had lots of oil but didn’t know anything about the business.

It quickly saw that building a strong base of domestic petroleum industries was important for realizing the most economic benefit from the oil.

Norway set up its national oil company Statoil and supporting agencies with one purpose: To add value to national petroleum resources and bring them to market.

The Malaysian government set up Petronas in 1972 with the main goal to safeguard national sovereignty over oil and gas reserves, and Brazil set up Petrobras for the same ideal.

Surprisingly, it doesn’t matter whether those three key functions of managing petroleum resources are separated or combined.

So what does matter?

All of the successful countries entrust overall strategic responsibility — and the necessary power and control — to a single agency or team. Petronas is famous for keeping good fields to themselves while letting international companies handle fields with difficult geology.

As soon as a contract expires and the potential is still good, the fields are transferred to Petronas. This indicates a unified strategy and helps explain why Petronas has become a winner in the marketplace.

Indonesian oil and gas management regimes have conflicting objectives. While Pertamina naturally has the objective to maximize its value as a corporation and generate profits, BPMigas was set up to maximize the total amount of oil and gas lifted nationwide.

Let’s illustrate how these two objectives end up in conflict to become an obstacle as we try to generate more oil money for the government budget and help the people.

The chief of BPMigas always came under pressure to meet oil lifting. Because petroleum exploration and production requires large amounts of capital, advanced technology and the ability to manage high risk, BPMigas logically turned to companies which have those things ready to go.

Generally speaking, international oil companies have those things and our domestic companies do not. BPMigas was just doing its job. Unfortunately, the objectives set out for them didn’t produce results that supported the overall strategy.

Now let us consider our national oil company Pertamina. They give almost all of the oil profits to the government and so have very little of the aforementioned capital and new technology that is needed. They are not allowed to hold back money to ensure the company can grow.

For example, in Malaysia the government takes a smaller cut and Petronas invests the money on new exploration and production with marked success.

To measure this factor, we can look at capital expenditure: Pertamina’s is the lowest when compared to Petronas, Petrobras and other national oil companies.

So how can we move forward and make things better? Let us have a unified strategy that is coordinated by one agency that provides thorough leadership on high-level strategy and is responsible for effective implementation.

There is a lot of flexibility in the organizational hierarchy but it’s not as important as having a good leader with a strategic plan who has what it takes to get the job done.

The endgame is to be the dominant player in our own oil fields and then break out globally. As we stand at the threshold of what some are calling the “Asian Century” and with the need for energy supplies greater now than ever, we need to get it right this time around.

The writer is director of Indonesia Center for Green Economy at Surya Institute and energy economist and editor at petronomist.com