Pri Agung Rakhmanto ,
Contributor , Jakarta | Wed, 06/04/2008 10:14 AM | Supplement
As was the case in previous years, in 2008 the Indonesian Petroleum Association (IPA) has again organized the IPA Convention and Exhibition. This year’s event, however, may be special as it is being held amid three closely linked momentous phenomena, namely the high price of crude oil, the continued drop in Indonesia’s production of crude oil and the price increase of oil fuel at home.
The broad community at home, who until now has shown a thirst for information and a clearer picture of the present condition of the country’s oil industry, seems to obtain the right medium from the organization of this event. This is only natural as this event may be said to involve nearly all stakeholders in the country’s oil industry, namely the government, academics, production-sharing contractors as the main players in the oil business and other supporting industrial undertakings that are also actively involved in this event. In terms of organization, viewed from its festive and imposing nature, this can be said to be quite successful.
In line with the festive and imposing nature of this event, one basic question that arises is whether this event will produce anything new or concrete. And will the results of this event bring about real progress for the oil industry in Indonesia, in particular, and introduce an increase in the welfare level of the Indonesian community, in general?
It is not easy to give answers to these questions but these answers may be implied in the five points that, according to the IPA, constitute the main issues in the oil investment sector at home. These five points are: (1) settling differences involving taxation regulations, the Law on Oil and Gas and the content of production-sharing contracts; (2) coordination of relevant agencies to solve the problems related to land overlaps; (3) clarity about the domestic need for gas and the allocation for its exports; (4) trimming down the bureaucracy of government agencies and (5) coordination in audit work undertaken by a number of government agencies.
Further observation will show that all these five points refer to one main problem, namely the constraints in oil and gas investments in Indonesia. In investors’ opinion, these five points may be said to be the main constraints in oil and gas investments in Indonesia. If they are linked with the continued drop in Indonesia’s oil production, particularly with a drop rate of over 7 percent per year from 2000 to the present, these five points can also be said to be the main causes for this production drop. Regardless of whether or not this assumption is correct, one very obvious and striking thing is that an increase in production is still the key or the main paradigm that is always emphasized in the development of the oil industry in Indonesia.
An increase in production is certainly a good thing that we want. However, for a country like Indonesia, to make it a paradigm or even a goal that will always be prioritized may to a certain extent boomerang on us. The oil industry is capital and technology intensive. Indonesia, unfortunately, is still relatively weak in terms of capital and technology. As a result, the ongoing trend is the introduction of various incentives and policies, monetary or otherwise, that we believe can spur production. Unfortunately, the cost and benefit of these incentives are yet to be properly calculated to see whether they are really positively co-related with production increases or whether they will only benefit the investors or whether they will be beneficial to foreign exchange earnings over the short term only while sacrificing national energy security.
The enforcement of the stipulation of Domestic Market Obligation (DMO) holiday for oil categorized as new oil, which has as its impact a failure to guarantee oil supplies for domestic consumption, the allowance of the pre-tax production-sharing portion of 100 percent (contractor):0 percent (the government), which actually means the government is unable to control production sharing, the allowance of cost recovery of 120 percent of the entire expenses arising from the development of marginal fields so that the portion of the state’s receipts will shrink and the exemption of taxes and import duties on imported oil and gas goods when the price of oil is high, a policy that in turn may kill off the oil and gas supporting industry, are but a few examples.
From the examples above, we can see that if a rise in production is the main goal, then national energy security, independence in the national oil and gas industry and in its supporting industry, the multiplier effect of the presence of the oil and gas industry in relation to the national economy, and moreover, its real benefit to improve people’s welfare tend to be ignored. Therefore, it should come as no surprise that when the oil price is high while the Indonesian economy and community are facing a lot of problems, an accusing finger is frequently pointed at the main players of the oil industry in this country. Then the systems existing in the management of the oil industry, such as cost recovery and domestic market obligations, raise many questions.
In fact, these indictments and demands have contributed to the emergence of investment constraints, which the IPA has summarized into five main points. In other words, it may be said here that some or even perhaps all of the constraints in oil and gas investment have actually come about owing to mistakes committed by players in the oil and gas sector themselves. Close observation shows that at least since 2001-2002, the same complaints about constraints in oil and gas investment have never really shifted from the five points above. There is relatively nothing new about these five points. Perhaps it is only the coordination of audit work by government agencies (the fifth point) that has come up recently, following the heating up of cost recovery over the past two years.
So, if we do not wish to be hit once again by the always recurring boomerang of investment constraints, it is only proper that we change the paradigm in the development of the oil industry. On the country level, an increase in production should not be everything. It is only an interim goal for more fundamental and essential objectives, such as real improvement in community welfare (particularly communities in oil-producing regions), national energy security guarantees and the growth, development and independent standing of the domestic oil and gas industry and its supporting industry.
These are the things that should be brought forward and continue to be pushed forward by all stakeholders in the oil industry in this country, particularly the Indonesian government. On a more concrete and practical level, perhaps we can start this by no longer setting a production increase target in a way that tends to be rash and unrealistic, but rather by presenting credible figures based on well-thought out planning.
The writer is the executive director of the Research Institute for Mining and Energy Reform (ReforMiner Institute).