Uncertainty about how Indonesia will update its Oil and Gas Law is discouraging the very investors whom policy-makers want to attract, a task already made difficult by historically low oil prices, energy experts say. Draft revisions to the law could decrease private companies' control of budgets, end a system to repay exploration costs and give priority to a state energy company when granting contracts.
When parliament takes up the 2001 Oil and Gas Law later this year, it is likely to adopt revisions that transfer more power from the private to the public sector. Lawyers say the proposed changes might take away private companies' ability to make day-to-day decisions about budgets and operations, such as where to drill and what infrastructure to build. Instead, the companies would serve only to provide money and technology.
"The draft suggests that the state may have operational control, and the foreign investor would be contributing capital and expertise," said Sean Prior, a Singapore-based partner at law firm Ashurst.
Crony Capitalism. Efforts to change the Oil and Gas Law got a boost in 2012, when Indonesia's constitutional court dissolved energy regulator BP Migas, ruling that the government must control all production and BP Migas didn't have the capacity to fill that function. Its role was integrated into the energy ministry.
But some believe the draft changes also are driven by the lobbying of crony capitalists. They would benefit if the new law gives greater power to state entities with which they have close ties.
The revised law could form a new entity to oversee oil and gas production on behalf of the state. Or it may grant some oversight authority to a state-owned corporation like PT Pertamina. But that could create a "double identity" for PT Pertamina, said Emanuel Bria, senior officer for the Asia Pacific at the Natural Resource Governance Institute. The state firm would have its own commercial interests, yet it also would have access to the operating budgets of direct competitors.
Some don't trust PT Pertamina with so much power because of its history with corruption. The company acted as both referee and player before the turn of the millennium, a period when it became notorious for abusing its regulatory position to extract unofficial payments. The 2001 Oil and Gas Law was meant to snuff out the abuse by transferring regulatory duties to BP Migas, so that PT Pertamina would focus on purely commercial ends.
"When you have so much discretion and no accountability systems in place, no oversight, then you tend to have corruption," Bria said by phone from Jakarta. "That's the basic theory."
Bria said Indonesia must ensure a separation of interests, but critics worry that the updated law could once again blur those lines by further aligning PT Pertamina with the government.
Cost Recovery in Doubt. Abuses of a different sort are motivating another major proposal for the Oil and Gas Law, which would eliminate the cost recovery model. Currently, private companies foot the entire bill to explore new oil or gas fields. If they're able to turn a profit, the companies use revenues first to recover exploration costs, before splitting the remaining money with the government. Under these so-called productionsharing contracts, as much as 90 percent of postexploration money goes to state coffers.
A team set up by Indonesian President Joko Widodo, however, accused energy companies of inflating their budgets in order to claim more recovery costs. The team suggested doing away with the opaque system of cost recovery altogether.
But that would remove a key incentive for investors at a time when Widodo is trying to expand investments in fossil fuels. The country, which left OPEC in 2013, is struggling to meet targets for oil production, which has been on the decline for years.
"If the companies won't want to invest, it will affect the increase of oil development in Indonesia," said Surya Darma, who serves as chairman of the National Research Council of Indonesia's energy committee and advises the trade ministry on the draft law.
Analysts say the Widodo team's recommendation brings further insecurity to the energy sector. It is unclear whether parliament will heed the recommendation and approve a different contract system, or partially retain the cost recovery structure.
"Chevron believes that investment-friendly policies and legal certainty are essentials," Chevron spokesman Brad Haynes said by e-mail.
Multinational companies Chevron and Total dominate the upstream oil sector, while ConocoPhillips, ExxonMobil, and BP also operate in the country. Indonesia ranks as the world's fourth-largest exporter of liquefied natural gas and the twenty-third biggest oil producer.
Some observers expect the new Oil and Gas Law to switch to a royalty system in place of cost recovery. Bill Sullivan, a foreign counsel at Christian Teo Purwono & Partners, said companies would agree to pay royalties to the government if the process is transparent.
"Conceptually, I think there would be some support for a royalty system," Sullivan said, "provided it was done properly."
To contact the reporter on this story: Lien Hoang in Ho Chi Minh City at lhoang@bnaglobal.com
To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com
