Questions Left On Hold As BPMigas Is Forced Out

Oil and gas regulator BPMigas was dissolved on Wednesday, leaving many unanswered questions for industry analysts. (EPA Photo/Bagus Indahono)

Oil and gas regulator BPMigas was dissolved on Wednesday, leaving many unanswered questions for industry analysts. (EPA Photo/Bagus Indahono)

The dissolution of the oil and gas regulator BPMigas by the Constitutional Court has sparked curiosity over Indonesia’s ability to manage its oil and gas resources. Many problems have been left unanswered since the court chopped off parts of Law No. 22/2001 on Oil and Gas on Tuesday. Oil industry analysts are now wondering whether it was the best move.

Legally speaking, chopping off parts of the law would mean all the contracts covered by BPMigas would be flawed or have “legal defects” because the agency has now been dissolved.

President Susilo Bambang Yudhoyono has issued a statement saying that all contracts are still honored, but this must be followed up with a written government guarantee or amendments to the contracts so that they will not lose their legal legitimacy. The Ministry of Energy and Mineral Resources, which now carries out BPMigas’ function, must do this.

The strongest reason cited by the court for annulling the Oil and Gas Law was that BPMigas was “unconstitutional.” One simple question that I want the government and House of Representatives to answer is, why only now have they unanimously agreed with the Constitutional Court that BPMigas is against the Constitution?

Why didn’t they make it an issue when USAID intervened at the government’s request to correct the draft bill that had previously been rejected by parliament? The pretext was that at that time Indonesia’s position was very weak because it was a “patient in the intensive care unit” of the International Monetary Fund.

But here’s a tempting question: Had BPMigas performed well to raise Indonesia’s oil production to the 1976 and 1987 level of 1.6 million barrels per day, to the extent that Indonesia could make a turnaround from its current net-oil importer’s position, would that declared “unconstitutionality” matter at all?

With a clear mind, one must agree that central to the issue is not the function of BPMigas per se , but the drastic decline of Indonesia’s oil production. Even before BPMigas came into existence, state oil and gas company Pertamina’s subsidiary agency, the Development Agency for Foreign Contractors (BPPKA), had been executing exactly the same function as BPMigas. In fact, the majority of BPMigas’ personnel was recruited from this institution.

The spirit of the Oil and Gas Law was to liberalize the sector to the extent that Pertamina would be privatized, domestic fuel prices would be left to a free-market mechanism, foreign upstream operators could operate on downstream levels, and the state oil company would be treated like any of the foreign players in the name of fair play and international best practices.

But in trying to achieve such goals, BPMigas had only found itself crippled by the country’s own regulatory environment.

One simple reason why Indonesia had difficulty increasing its oil production was that despite being a regulatory authority, BPMigas did not have mining rights, and it wasn’t a state-owned oil company, either. With no mining rights for BPMigas and Pertamina’s monopoly as a state company being interrupted, the only logical outcome for Indonesia was a decline in oil production.

Enforcement of the Regional Autonomy Law aggravated the situation. Under this law, foreign contractors have difficulty obtaining various licenses because the regency or district chiefs have their own interests to defend, not to mention overlapping of local bylaws that create confusion and uncertainty for investors.

The only solution was to seek help from BPMigas as their governing partner. But even this continued to be a problem because BPMigas did not have any authority or capacity to negotiate the kind of deal with local governments that would help smooth licensing procedures.

While this was going on over the past decade, Pertamina faced difficulty accumulating surplus and capital amid rising domestic absorption of fuel, which meant it had to focus on meeting short-term supply needs.

These developments were the result of the government’s faithful compliance with the remedy prescribed by the IMF, since former President Suharto bowed before then Managing Director Michel Camdessus to sign the Letter of Intent on Jan. 16, 1998.

Ten years later, on Sept. 10, 2008, Indonesia lost its membership to the Organization of Petroleum Exporting Countries after becoming a net oil importer in May of that year.

Things got worse in 2010 when the Canada-based Fraser Institute described Indonesia as the country with the worst oil and gas industry management in the Asia Pacific. In its Global Petroleum Survey, Indonesia was ranked 111 out of 133 countries on oil and gas investments, lower than Papua New Guinea, the Philippines and Brunei, and only just higher than East Timor.

The requirement stipulated in Article 31 of the 2001 law that investors were obliged to pay various taxes during the exploration period further reduced Indonesia’s investment charm. The old law only required investors to pay taxes after producing oil and gas.

More than 95 percent of production now comes from old fields. The Cepu Block, developed in 1998, is the only recent significant discovery. Indonesia has not found new proven reserves in the past 10 years.

Indonesia has an estimated 80 billion barrels of oil, but only about 4 billion barrels have been proven due to various circumstances. These exploited reserves will run dry in 12 years’ time, when a much bigger problem than arguing about BPMigas’ function will surely arise — unless the government buckles down now to establish a reliable road map for the energy sector.

Against that backdrop, a bigger question that must be asked now is whether returning BPMigas’ function to the Oil and Gas Directorate General at the Energy and Mineral Resources Ministry will indeed lead to increased oil production. If that is not the case, then we are all heading in the wrong direction.

Perhaps it is more reliable to assign Pertamina to handle it, but with a refined role under a new culture of good corporate governance.

As a state-owned company, Pertamina must be strengthened, not crippled. It must be turned into a proud symbol of GCG, not a target of constant criticism. Its bad track record of the oil boom era should not be made a perpetual excuse for not elevating it to be a proud and successful national asset.

The government must now initiate a more comprehensive oil and gas law rather than just deal with administrative works in the aftermath of BPMigas’s dissolution. We need a visionary law that would ensure investor confidence, but at the same time usher in energy sovereignty and self-reliance for the utmost benefit of the people of Indonesia.

Pitan Daslani is a senior political correspondent of BeritaSatu Media Holdings, of which the Jakarta Globe is a subsidiary. He can be reached at pitandaslani@gmail.com