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JAKARTA
POST, 21 Juli 2013
Another bombshell in the hydrocarbon industry: The Jakarta
Corruption Court this week jailed three executives from Chevron Pacific
Indonesia, the largest oil producer in the country, in a controversial case
that should have been handled as a civil case.
Reports said the debacle faced by PetroChina after 14 of the 140 oil and gas wells in its Jabung concession were sealed off by Tanjung Jabung Timur regency administration in Jambi province on May 24 remained unresolved despite intervention by SKKMigas, the upstream oil regulatory body.
SKKMigas, which represents the central government in dealing with all oil mining contractors, seems unable to deal with the local administration even though its unilateral act of sealing off the wells was a blatant breach of the law.
There seemed to have not been any sense of urgency at all in resolving the problem even though the closure of the wells caused an estimated daily output loss of 435 barrels of oil and 11.01 million standard cubic feet of natural gas.
Based on the 2001 oil and gas law, companies prospecting and developing hydrocarbon resources are treated simply as contractors even though they are fully responsible for putting up all the investment and bear all the risks in the mining venture. Fixed assets procured for the concession and the oil and gas wells developed within the block belong to the state (central government), not regional administrations.
No wonder a production-sharing contractor is required to get SKKMigas’ approval for its annual spending/investment program. Yet more mind-boggling were the points of disagreement between PetroChina and the Tanjung Jabung administration.
The local administration demanded Rp 50 million (US$5,000) per well as an annual licensing fee. This means PetroChina is required to pay about US$700,000 in well licensing fees alone each year. This kind of recurring fee is by no means known in the production-sharing contract (PSC).
The Tanjung Jabung administration also demanded that PetroChina implemented more corporate-social responsibility (CSR) programs. The fact is spending for CSR projects must also be approved by SKKMigas; otherwise that expenditure cannot be reimbursed through the cost-recovery scheme.
Several other oil companies such as ExxonMobil, Mubadala Petroleum of the United Arab Emirates and Inpex had also encountered problems in their operations due to protests from local people or regulatory (licensing) problems with local administrations.
Other oil mining contractors are likely to encounter such a hostile business climate if the central government does not act firmly to rein in misguided, renegade regional administrations that abuse regional autonomy.
Even though oil mining firms operate under the concept of PSC with the central government (through SKKMigas), mining contractors have still to obtain dozens of permits from the local administration.
Latest data from SKKMigas shows an oil mining contractor requires 32 kinds of permit for exploratory drilling, 25 for production development and seven for production operations from the central government and regional administrations.
Needless to say, the business climate for oil prospecting in the country has been much less attractive than in other countries in the region, as evidenced by the sharp decline in oil output to 830,000 barrels per day (bpd) today from as high as 1.2 million bpd a few years ago.
But not only is the hydrocarbon sector affected. Many foreign companies operating in general mining such as coal, copper and gold have encountered imbroglio.
That is quite unfortunate because mining, besides fisheries and plantations, should be one of the most promising resource-based ventures in Indonesia, thanks to the country’s major reserves in oil and natural gas, copper, gold, nickel, coal, tin, silver, diamonds and base metals.
Legal and regulatory certainty is vital, especially for mining investment, because the business is capital and technology intensive, highly risky, has a long payback period and operates mostly in remote areas where basic infrastructure is inadequate.
But it is legal and regulatory uncertainty that has increasingly become a big issue, especially after the devolving of licensing authority for mining concessions, except for oil and natural gas, to regional administrations.
Mining companies also often encounter unreasonable demand from the local people as their oil mining operations generate a sharp rise in local expectations and become a magnet to migrants looking for jobs.
The central government is keen to develop the vast natural resources — vital to keep the economy growing — but often faces determined, and often violent, protests from local communities or rent-seeking measures from local administrations.
At stake are tens of billions of dollars. It is a pity that rather than generating peace and prosperity, the presence of mineral and oil wealth in the regions, which have been poor, often leads to political conflict or corruption.
Many analysts call this anomaly a resource curse. Political noise about foreign mining operations would most likely rise in the run up to the legislative and presidential elections next year. But hopefully, all parties will refrain from destructive acts.
If mining is shut down the economic benefits will be wiped out. Indonesia’s reputation as a world-class exporter of various minerals will disappear. The enormous pool of talent and skills developed in the mining industry over the past five decades could be destroyed.
But as experiences around the world have shown, one essential precondition for overcoming the resource curse is a reasonable level of social unity and public trust. ●
Reports said the debacle faced by PetroChina after 14 of the 140 oil and gas wells in its Jabung concession were sealed off by Tanjung Jabung Timur regency administration in Jambi province on May 24 remained unresolved despite intervention by SKKMigas, the upstream oil regulatory body.
SKKMigas, which represents the central government in dealing with all oil mining contractors, seems unable to deal with the local administration even though its unilateral act of sealing off the wells was a blatant breach of the law.
There seemed to have not been any sense of urgency at all in resolving the problem even though the closure of the wells caused an estimated daily output loss of 435 barrels of oil and 11.01 million standard cubic feet of natural gas.
Based on the 2001 oil and gas law, companies prospecting and developing hydrocarbon resources are treated simply as contractors even though they are fully responsible for putting up all the investment and bear all the risks in the mining venture. Fixed assets procured for the concession and the oil and gas wells developed within the block belong to the state (central government), not regional administrations.
No wonder a production-sharing contractor is required to get SKKMigas’ approval for its annual spending/investment program. Yet more mind-boggling were the points of disagreement between PetroChina and the Tanjung Jabung administration.
The local administration demanded Rp 50 million (US$5,000) per well as an annual licensing fee. This means PetroChina is required to pay about US$700,000 in well licensing fees alone each year. This kind of recurring fee is by no means known in the production-sharing contract (PSC).
The Tanjung Jabung administration also demanded that PetroChina implemented more corporate-social responsibility (CSR) programs. The fact is spending for CSR projects must also be approved by SKKMigas; otherwise that expenditure cannot be reimbursed through the cost-recovery scheme.
Several other oil companies such as ExxonMobil, Mubadala Petroleum of the United Arab Emirates and Inpex had also encountered problems in their operations due to protests from local people or regulatory (licensing) problems with local administrations.
Other oil mining contractors are likely to encounter such a hostile business climate if the central government does not act firmly to rein in misguided, renegade regional administrations that abuse regional autonomy.
Even though oil mining firms operate under the concept of PSC with the central government (through SKKMigas), mining contractors have still to obtain dozens of permits from the local administration.
Latest data from SKKMigas shows an oil mining contractor requires 32 kinds of permit for exploratory drilling, 25 for production development and seven for production operations from the central government and regional administrations.
Needless to say, the business climate for oil prospecting in the country has been much less attractive than in other countries in the region, as evidenced by the sharp decline in oil output to 830,000 barrels per day (bpd) today from as high as 1.2 million bpd a few years ago.
But not only is the hydrocarbon sector affected. Many foreign companies operating in general mining such as coal, copper and gold have encountered imbroglio.
That is quite unfortunate because mining, besides fisheries and plantations, should be one of the most promising resource-based ventures in Indonesia, thanks to the country’s major reserves in oil and natural gas, copper, gold, nickel, coal, tin, silver, diamonds and base metals.
Legal and regulatory certainty is vital, especially for mining investment, because the business is capital and technology intensive, highly risky, has a long payback period and operates mostly in remote areas where basic infrastructure is inadequate.
But it is legal and regulatory uncertainty that has increasingly become a big issue, especially after the devolving of licensing authority for mining concessions, except for oil and natural gas, to regional administrations.
Mining companies also often encounter unreasonable demand from the local people as their oil mining operations generate a sharp rise in local expectations and become a magnet to migrants looking for jobs.
The central government is keen to develop the vast natural resources — vital to keep the economy growing — but often faces determined, and often violent, protests from local communities or rent-seeking measures from local administrations.
At stake are tens of billions of dollars. It is a pity that rather than generating peace and prosperity, the presence of mineral and oil wealth in the regions, which have been poor, often leads to political conflict or corruption.
Many analysts call this anomaly a resource curse. Political noise about foreign mining operations would most likely rise in the run up to the legislative and presidential elections next year. But hopefully, all parties will refrain from destructive acts.
If mining is shut down the economic benefits will be wiped out. Indonesia’s reputation as a world-class exporter of various minerals will disappear. The enormous pool of talent and skills developed in the mining industry over the past five decades could be destroyed.
But as experiences around the world have shown, one essential precondition for overcoming the resource curse is a reasonable level of social unity and public trust. ●
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