The Energy sector, particularly oil and gas, is in a dire condition due to the mismanagement of natural resources, when actually as a nation we should be grateful to have such abundant resources. Due to overcomplicated management, crude oil production has consistently missed targets for the last couple of years while in the downstream sector,consumption keeps increasing uncontrollably.
Up to the end of this year’s first semester, the volume of subsidized fuel consumption reached 19.55 kiloliters whereas the 2011 State Budget only allocated 38.5 kiloliters for the year. This means that consumption had already reached 50.68% of the allocated annual quota by the end of just the first semester.
The same thing has happened to both the gas supply for domestic consumption and the evidence of lackluster renewable energy development. All of these lead to an ever-increasing energy budget while state income from the energy sector dwindles. In reality, several oil and gas policies were devised when the country realized its status as a net oil importer, a country which was plagued with declining production levels due to over reliance on mature oil wells.
These policies were to optimize mature oil wells through enhanced oil recovery (EOR) technology and to open new working areas, 48% of which are offshore, in addition to implementing improved oil and gas managerial systems. All of these efforts are intended to increase oil production. Unfortunately, even as President Susilo Bambang Yudhoyono started his second term in office, those aforementioned efforts failed to show significant results. What’s worse, the President ordered oil and gas contracts to be reviewed.
He stated that the current contracts have violated the law and hurt the national interest. Statements such as this threw the oil and gas sector into chaos, thus angering foreign investors. Other than the Energy and Mineral Resources (ESDM) Ministry that mostly handles regulations, there are other institutions in place to manage the oil and gas sector, for instance the Upstream Oil and Gas Regulator BPMIGAS that was established under Law No. 22/2001. The authority of BPMIGAS is also enhanced by Government Decree No. 42/2002.
The function of BPMIGAS is clear, to monitor and control upstream oil and natural gas activities in accordance with production sharing contracts to ensure that oil and natural gas extraction generates the most state income to ensure the most benefit for the Indonesian people. Coordination, understanding, and harmony between the ESDM Ministry and BPMIGAS is expected to become the main foundation for oil and gas activities that are beneficial for the country, and not merely for certain circles.
Unfortunately, the establishment of BPMIGAS failed to boost performance. Oil production continues to underperform, particularly relating to the formulation of macro economic assumptions within the 2011 Revised State Budget. On one hand, BPMIGAS could only drive production up to 920,000 barrels per day (bpd) while on the other hand, the ESDM Ministry vehemently believes oil lifting could go beyond 945,000 bpd.
“We are optimistic that 945,000 bpd is feasible by making some breakthroughs to address certain issues, particularly about overlapping regulations and land acquisition,” said ESDM Minister Darwin Zahedy Saleh. Unfortunately, he refused to comment on BPMIGAS’ statement that it could only produce 920,000 bpd. He only remarked that BPMIGAS was often conservative in its executive role. “As the extension of the government, we must set the target above the upper limit. So we must indeed aim for 945,000 bpd,” he said.
Not in Harmony
The strained relationship between the ESDM Ministry and BPMIGAS is a public secret. The last incident involving the placement of one official triggered a cold war between the two that escalated into a public debate in the mass media. That was, however, an internal case. .In regard to production sharing contractors (KKKS), SBY’s statement about contract renegotiation and Decree No. 79 on Cost Recovery has made most of them uneasy about the investment climate in the oil and gas sector.
The US Deputy Ambassador to Indonesia Ted Osius warned that the US was not so happy with the Government Regulation No. 79/2010 on Cost Recovery. He begrudgingly said that contract renegotiations caused by the decree could hurt the overall investment climate in Indonesia.
“This renegotiation plan will create uncertainty among investors. Any uncertainty in investment must be discarded if Indonesia wants to attract more foreign investors,” he said. Oil and gas contractors under the Indonesia Petroleum Association (IPA) even brought the matter to the Constitutional Court by filing a judicial review on June 18th, 2011. They also warned that the implementation of Decree No. 79 could decrease investment in the oil and gas sector by up to 20% and reduce production by up to 150,000 bpd.
The Oil and Gas Director General at the Energy and Mineral Resources Ministry, Evita Herawati Legowo, tried to curb contractors’ anxiety by saying that the contract renegotiation would only discuss state income and address issues about liquefied natural gas (LNG) export prices. She also assured contractors that the government would soon issue detailed regulations for implementation of the decree. “No wonder they are upset,” she said in regard to the contractors’ complaint.
Such indecisiveness in terms of current government policy in the oil and gas sector was also highlighted by an economic observer from Econit Advisory Group, Hendri Saparini. He also went so far as to call the contract renegotiations as mere lip services.
As an established oil producer, Indonesia should implement policies intended to secure domestic energy supply. In reality, the country is still importing crude oil and fuel as domestic refinery capacity is incapable of meeting domestic needs. Moreover, fuel scarcity still happens in several regions regardless of quotas set by the government that were supposed to be in line with each region’s needs.
The Indonesian Oil and Gas Community day-to-day chairman S. Herry Putranto said that domestic oil and gas issues could be solved gradually and wisely if only the government employed professionals, and not politicians, to run the energy and mineral resources sector.
According to him, the overlapping political interests in the management of the energy sector have biased oil and gas operational activities in the field. “Each policy would be welcomed by investors if it was rational and prioritizing national interest. The thing is, each policy is riddled with vested interests. That is the main problem.”
Going forward, the SBY administration that will enter this year’s second semester and the second year of his second term, must be firmer and more assertive in managing and regulating the energy sector for the sake of energy security. For that, coordination, cooperation and stakeholders’ professionalism at government level and business player level must be improved to ensure better performance in the energy sector.