After BP Migas, IPA’s role to help dispel uncertainty

After BP Migas, IPA’s role to help dispel uncertainty Rohmad Hadiwijoyo ;  An IPA Member and Executive Director of the Center for Information and Development Studies (CIDES)

JAKARTA POST, 16 Desember 2012

Many members of the Indonesian Petroleum Association (IPA) — the main grouping of oil and gas players — expressed dismay over what the government’s task force will do to resolve uncertainties surrounding the disbandment of upstream oil and gas regulator BPMigas. During IPA’s general meeting earlier this month, many of its members expressed worry that the outlook of the industry was becoming bleaker, with no new investment and technology transfer amid dwindling production. New investment and technology transfer are two key ingredients to increase oil and gas output. This industry always seeks new technology to improve lifting of oil and gas, such as the newest technology in seismic operation and drilling. But, only investments such as new technology can be brought into the country. Thus, without new investment, it is hard to expect that this industry will grow in the future. The Constitutional Court’s decision last month to disband BPMigas — then the main authority in the oil and gas sector — was really beyond any prediction from industry players. The decision caught many of us by surprise. The court’s arguments were classic: That BPMigas could not secure the position of the state in relation to its contractors ( i.e. the state is in a weaker position vis-á-vis the contractors) and that the contracts between BPMigas and its contractors do not favor the people’s welfare as called for by Article 33 of the 1945 Constitution. The court then tasked the Energy and Mineral Resources Minister to take over the tasks of the disbanded BPMigas. Fortunately though, the President acted quickly. On the same day that the court verdict was announced, the President issued a presidential regulation that confirmed the court’s verdict, assigning the Energy and Mineral Resources Minister to take over the role and mandate of BPMigas and declared all contracts signed by BPMigas valid until expiration. Businessmen in the oil and gas sector, grouped in the IPA, have no choice but to accept the court’s verdict and its consequences. What we businessmen need now is more certainty over the future of this industry as well as transparency about rules and regulations that will follow. Unless rational information is easily available, the cost of doing business in this industry will increase. According to Ferdinand Banks’ book The Political Economy of the World Energy, the management of energy in the 21st century needs rational and accurate information that dispel wrong assumptions, therefore creating trust among industry players and encouraging them to invest more to tap more profits in the future. We expect the government’s task force to provide accurate and clear information on its regulations and what they will do to at least to encourage existing players to continue investment and technology transfer. The task force — officially named the Upstream Oil and Gas Business Activities Implementation Unit (UPKUHM) — has to create a conducive atmosphere for these existing players to do business so that they do not run away from this country. If one global player pulls out of Indonesia, it would serve as a vote of no confidence on Indonesia. This has to be prevented. The government cannot by itself prevent the situation of uncertainty from worsening. It needs the support of industry players themselves, especially those grouped in the IPA. As the most powerful oil and gas organization, IPA has to play its role to help create a conducive climate for investment by giving the government input on what its members need to investment more in the country. Also, IPA has to look into the public debates on the people’s interests, as amplified in the Constitutional Court decision last month to disband BPMigas. The debates that prompt social and religious organizations and senior citizens to take cases to the court address questions on the cost recovery mechanism that is alleged to benefit more industry players than the state or the people.  The terms and conditions of the production sharing contract (PSC) have also been considered rather ignorant of people’s welfare. IPA has to come up with alternative proposals that satisfy most stakeholders. On contractual relationships, for instance, PSC should be awarded only to green fields, where no proven reserves of oil have been found. Meanwhile, fields with proven reserves of oil and gas should be managed under the Technical Assistance Contract (TAC) where all interests are held by the government through state-owned enterprises.  While PSC has a cost recovery clause in the contract, TAC has no such cost recovery mechanism. Thus, such an arrangement could solve at least the contentious issue of cost recovery because it is only applicable to new investment in new (green) fields. Only with the active involvement of industry players grouped in the IPA can the government mitigate possible disputes in the future. Better relationships between the regulator — the government — and the players would also provide better access to information to the public. ●