No reimbursements for Indonesian oil PSCs

No reimbursements for Indonesian oil PSCs Will Hickey ;  The writer, A Former Fullbright Professor of Energy and Human Resources, is Chair of Global Management at Solbridge Int. School of Business in South Korea

JAKARTA POST, 29 Oktober 2012

Recently, the Libor scandal highlighted that banks were manipulating interest-rate benchmarks for many rates, such as mortgages, derivatives and commercial loans.  Libor, or “London interbank offer rate”, is essentially the benchmark or standard for setting interest  rates around the world.  Estimates vary as to how much finance around the world is affected by Libor, but it is safe to say it is well over US$500 trillion.  To put that in perspective, that is enough money at current values to keep Indonesia’s GDP going for the next 500 years.  It is simply an enormous sum to think about. Many have now commented that the Libor system is “structurally flawed”. Libor is calculated by banks in the UK (but not limited to UK banks, such as Deutsche Bank and Citibank), where bankers set high and low rates they would expect to pay for a loan from another bank.  The banks then reported this amount to Thomson Reuters (a financial information firm) who set the Libor rate daily by calculating a middle or average number.  Needless to say, this can be open to all types of interference and manipulation without regulation or public scrutiny.  The public trusted these banks to set fair and honest rates, but it has been brought to light there was manipulation. Namely, the banks may have set rates artificially high or low that benefitted them, at the public’s expense, and for a long time. If rates were set artificially high, then people, businesses, and governments paid too much for their loans.  On the opposite side, some banks may have set rates artificially low, not to benefit the public, but to benefit their own credit structure. Meaning that a low interest rate implies a stronger bank, in essence, advertising something they are not, especially in a world of low interest rates and systemic risks.  Some central banks knew this was going on, but did nothing about it until it was well publicized. Now there is talk about scrapping or changing Libor for a system subject of less insider abuse.  In my Aug. 27 article in The Jakarta Post about production sharing contracts (PSCs) I detailed the enormity of the sums involved not just in Indonesia but in much of the world regarding this system that is complicit with governments in developing countries and international oil companies.  Again, it is noted that PSCs are banned in developed countries as abusive investment schemes. Effectively the PSCs are guaranteeing the profits of the investing entities via charge backs to host governments, such as Indonesia.  Like Libor, these charges are set by the oil and gas companies, so not only is insider abuse possible, but a recent story in Reuters (10/14) “Lonely, hard work on oil rigs, but salaries soaring” should suffice to give Indonesia a color commentary on how these PSCs have direct effect on mitigating their workforce development.  The story that Reuters reported on is that a 45-year-old oil worker, who started at the low end of  the roustabout scale (oil rig laborer) 20 years ago, has worked his way up in the company to a $500,000 a year salary as offshore rig manager (Indonesia also utilizes many offshore rigs, many held under foreign leases).  It is noted this work is largely vocational by design, and that he has received these compensation rewards by being in the right place at the right time as a dedicated company insider.  He is now working in deepwater rigs in developing Asia. There is no doubt his large salary then will be paid out of the cost recovery oil under whatever PSC the operating consortium that uses him has in place. Surely $500,000 can go a long way. It could support an entire kampong for a year or more in many of Indonesia’s far-flung provinces. It could lift the living standards of many. In a more realistic analysis, there is nothing that this manager is doing vocationally that could not be transferred via a strategic poly-technical or on the job training program to any Indonesian or any worker with medium competence and opportunity.  Yet, like the Libor bankers, this manager is an insider of a PSC system reaping large profits and salaries at the expense of the public in a developing country.  Many locals would not know how to get these jobs or how to be engaged in them even if they wanted to. The PSC system by its nature, like Libor, promotes secrecy and patronage for a select few.  To put it another way, if Indonesian managers could be trained to equal competence, would there not be enough locals to fill these positions, and at considerably lower labor rates?  This is one reason that Indonesia, needs to scrap PSCs and mandate tech transfer initiatives and strategic education, linked academic and vocationally, via its Education Ministry, for value added capacity building in its resource-based industries.  Some have previously commented on my articles that an energy policy or energy security for Indonesia comes by way of PSCs.  That is nonsense: PSCs have never “developed” any country and continue to ensure energy insecurity as the contract in itself makes Indonesia (and other developing countries) a hostage to the cost structures, expertise and investment strategies of foreign (and some domestic) investors.  Further, PSCs are an old contractual mechanism developed almost 50 years ago, in a time of new nationalism, political risk, and low liquidity. Companies then needed the assurance of government for long term payback on capital intensive projects.  Real energy or investment security is not in government guarantees to companies that enslave impoverished communities. Security comes from skills development for these indigenous resources to create long-term value added by way of better resource extraction, such as life of mine technology for coal or reservoir enhancement techniques in upstream oil projects, and using these crude products such as CPO, oil, or coal to create pharmaceuticals, chemicals, and different grades of fuel on the downstream.  Both activities will create a plethora of jobs with knock on jobs that will diversity economic growth. Why then is there an assumption that PSCs, like Libor, are still needed in Indonesia?  ●