Criminal charges haunt Indonesia’s oil industry

Criminal charges haunt Indonesia’s oil industry Johannes Simbolon ;  The Editor of The Energy Monthly Ogeasia

JAKARTA POST, 29 Oktober 2012

The detention of four executives of PT Chevron Pacific Indonesia (CPI), the subsidiary of American energy giant Chevron Corp, by the Attorney General’s Office (AGO) has shocked oil and gas industry players operating in the country. They deem the AGO’s move as exacerbating the gloomy investment climate facing the industry. National oil production has been declining for many years, while gas output has yet to show a significant increase to meet the growing demand. All agree that the solution to the problem is more investment in the industry. Instead of luring more oil and gas investment to the country, the AGO has added legal uncertainties plaguing the industry. The AGO is charging the four CPI executives with corruption related to the company’s environmental project, called the “bioremediation project”, aimed at remediating soil in CPI’s working areas in Riau, whose quality and fertility have been much degraded due to the impacts of decade-long oil exploitation.  According to the company’s website, the project started in 1994, when the company — in collaboration with the Environment Ministry — launched a pilot study on bioremediation in Indonesia. As the study was considered successful, the ministry granted approval to CPI in 2002 to begin full-scale bioremediation treatment in the company’s working areas in Riau.  From 2003 until now, the company has successfully treated more than half a million cubic meters of soil, which equals 200 Olympic-size swimming pools. The treated soil has been used to rehabilitate 60 hectares of land in Riau. CPI claimed that the project was a successful one and was one of the reasons that it last year received a “blue” environmental award from the ministry, the third highest award. However, the AGO has a different opinion. State prosecutors claimed to have found irregularities indicating corruption in the project.  First, the contractors assigned to carry out the project do not have certifications and qualifications to handle environmental projects. Second, the AGO claims to have conducted laboratory tests indicating the “bioremediated” soil still contains pollutants. This, according to the AGO, shows that no work has been done on the project.  The agency thus claims the project has caused an estimated US$23.36 million in state losses. State losses refer to the costs of the project that have been reimbursed by the government — a practice known in the industry as “cost recovery”.  CPI insists that all costs related to the bioremediation project are not included in cost recovery, but, instead, have been fully covered by the company.  That means there has been no state money spent on the project. The criminal investigation has brought the production sharing contract (PSC) system into the spotlight. The question is: Does PSC allow the AGO to file criminal charges against PSC holders in cases related to their oil and gas operational activities? A PSC is a contract signed by oil and gas contractor and BPMIGAS, the upstream oil and gas regulating authority, which details the rights and obligations of each party.  The PSC states among others that the contractors have to hand over a large portion of their oil and gas production (typically 85 percent of their oil output and 70 percent of their gas output) to the government through BPMIGAS.  Meanwhile, on behalf of the government, BPMIGAS has to reimburse the costs incurred by the contractors to explore, develop and operate their working areas.  A PSC is considered a business-to-business contract despite the fact that BPMIGAS is a government institution. As such, industry players and BPMIGAS say any dispute related to the PSC holder’s operation should be considered a civil case, which can be settled either through arbitration or business to business negotiation. For instance, BPMIGAS’ head R. Priyono said that in the case of a PSC holder being proved to have collected cost recovery more than it is entitled to receive, BPMIGAS may recoup the cost recovery by withholding the contractor’s oil or gas production share.  The AGO has a dissenting opinion. As evinced in the detention of CPI workers, the agency believes any oil and gas project is subject to criminal investigation since cost recovery is state money, which is included in the state budget. (Cost recovery has been included in the state budget since 2009).  This is both a dangerous and wrong idea. It is dangerous because it will sooner or later kill the investment climate in the industry. It is wrong because cost recovery is basically direct foreign investment that deserves reimbursement from the government after the latter receives oil and gas from the investors. Following the detention of the CPI workers, oil and gas players now feel they are being watched over not only by BPMIGAS but also by the AGO or police. Any accounting mistake they are likely to make in their operation may not only result in reprimands or fines from BPMIGAS but also bring their workers into jail on charges of corruption.  No oil company, particularly highly reputable multinational firms such as Chevron, is willing to see their workers in jail on charges of stealing state money.  Indonesia is no longer considered an attractive destination for oil and gas investors due to the massive depletion of its resources. The criminalization of CPI has made Indonesia less alluring. ●