Is Indonesian oil buried, or dead?

Published January 19th, 2010 - 11:31 GMT

Indonesia left OPEC because it became a net importer of oil and its oil lifting is declining. Now political and industry leaders want to reverse this. New oil reserves are harder to explore and develop in deeper waters. As the first generation of Production Sharing Contracts (PSCs) expire, will the industry die with them, or will there be new life? And if so, how?

 

Suwito Anggoro, present director of PT Chevron Pacific recently said, “If Indonesia´s oil and gas industry is a restaurant, maybe this is the right time to offer menus other than the PSC”. (The Jakarta Post 05.01.10),

 

The new government of President Susilo Bambang Yudhoyono looks better equipped to make changes than before.

 

Reforming Karen Agustiawan  has been confirmed as president director of Pertamina, Indonesias top state-owned oil and gas company, but with all the directors around her replaced, (The Jakarta Post 08.01.2010).

 

Energetic and efficient Evita Legowo, director general of oil and gas in the Ministry of Energy and Mineral Resources is struggling to bounce back from failing to find investors for 75 percent of the 40 oil and gas blocks offered for bids last year.

 

With media moghul Dahlan Iskan as president director of crisis-ridden state power utility PLN backed by competent experienced technocrats like Nasri Sebayang as director for planning and technology and Yogo Pratomo as the new chief commissioner, there is now a chance for reform.

 

Incoming Energy and Mineral Resources Minister Darwin Zahedy Saleh is a fresh Minister of Energy and Mines, with a doctorate in economics and background in finance, banking, and management consultancy. He is as yet unproven as a Minister but his background may be helpful.

 

The international community never doubted the redoubtable Sri Mulyani Indrawati, as feisty Finance Minister nor the punch of her weighty document-filled economists´s handbag as she has taken side-swipes at vested interests, while Indonesian economic performance in the midst of a global crisis speaks for itself. But if she fell as a casualty to current political infighting over the Bank Century bailout, which could happen, then this would be a huge loss to the country and a blow to the government.

 

Gita Wirjawan, former country head of JP Morgan Indonesia, then head of Ancora Capital is now head of the Investment Coordinating Board (BKPM). As one of Indonesia's brightest young stars he should be able to grasp why oil and gas investors won´t bid into oil and gas blocks when they don´t get enough data with the dossiers while faced with bureaucratic delays from central and local government.

 

Finally newly installed Coordinating Economic Minister Hatta Rajasa is clearly the right man for the job, despite criticisms he was not an economist, but his background in petroleum engineering should help. He promptly reversed the recent decision to cap PSC cost-recovery payments, “The policy of capping cost recovery is not appropriate. This is not supposed to be capped. We will fix this matter”.

 

But the reversal of the cap may not be enough, and Suwito Anggoro of Chevron is right that a new approach may be needed.

 

There may never be a better time with a better team for the Indonesian top technocrats to think out of the box and take a new track.

 

And this has to start right now before the West Madura Production Sharing Contract operated by Kodeco to provide oil and gas supply to the Surabaya power stations reportedly comes to an end in six months. 

 

Why not consider the Independent Power Producer (IPP) approach which PLN is bringing into the power sector? Why fiddle around with all the complications of PSC, or PSC Mark II, into a declining oil market when the fields are getting further away and into deeper water?

 

Other countries just privatize or give contracts to independents and charge hefty taxes and royalties to oil companies.

 

This would not prevent Pertamina itself from becoming a modern global player with a major chunk of the action, but would mean much less strain on government departments, and the regulator could focus on broad issues, royalties and revenue instead of repayments and minute details.

 

Maybe the Indonesian government should let the professionals get on with the oil industry and go for counting the cash coming into the bank, instead of headaches.


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