Future oil and gas development : Some harsh realities (2 of 2)

Future oil and gas development : Some harsh realities (2 of 2) TN Machmud  ;   The former president and resident manager of ARCO Indonesia; He also served as president commissioner of PT Perusahaan Gas Negara (Persero), Tbk;      A senior advisor at the Law Office of Hakim dan Rekan in Jakarta; He teaches business subjects at the Business School of Binus University in Jakarta; An industry observer

JAKARTA POST,  16 Juli 2014

                                                

Let us not forget that one other big reason for the production sharing contract’s (PSC) popularity was that it advocated collaboration, instead of expropriation that had been the norm in the Middle East in the 1970s. The PSC had reduced the position of the investor to that of a contractor but it was elegantly handled and the investors still felt secure despite having given their management rights away. The management prerogative was — then — being executed in a manner that was acceptable to the investor. The PSC was hailed as “an elegant alternative” to expropriation efforts in other places. Because of the success of the early PSCs, those major foreign operators are now being accused by certain elements of our society of dominating the industry and therefore robbing the country of its sovereignty over its mineral resources. Personally I think that is an unfair and misleading verdict. These producers actually became the victims of their own success. They had no intention of dominating. They were quite willing to submit to the management and control of Pertamina, the Upstream Oil and Gas Executive Agency (BP Migas) or the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas). However, they now feel frustrated and believe they are no longer welcome as their contracts are not being extended and their complaints about heavy-handed micro-management are not being heeded. They are increasingly more concerned about the negative attitudes and overtones in the media against the oil and gas investor community. There is no reason to believe that under the PSC concept this country has lost its sovereignty over its resources. If anything, it is the other way around because the government is now perceived to be over-controlling, over-regulating and under-managing. What about gas? Well, gas is now very much on the radar. We no longer burn gas, if it can be avoided. We now utilize the gas and it has emerged as our prime energy source. The wisdom on the street is that we have enough gas to supply our energy needs for the near future. I agree with that statement. However, the problem with gas is that we do not have sufficient infrastructure in place. Gas is normally found in places far from the market. Companies like state-owned enterprise PT Perusahaan Gas Negara (PGN) have become gas producers in their own right and proceeded to build a floating storage and regassification unit (FSRU), which has now been completed and is parked in Lampung to commence conversion of liquefied natural gas (LNG) into pipeline gas as we speak. It sends a message to all parties, including traders, that infrastructure is key. That said, it needs to be understood at least that the PSC has a “cost recovery” scheme, allowing it to recoup most of its expenditure from production, although cost recovery is still being attacked from all sides. To those downstream players trying to turn a profit in the downstream business of building and operating pipelines, there is no guarantee that an investment in the downstream will ever be recovered. The regulatory system in place for pipelines provides for the application of a toll fee, which only provides for a very marginal return. Hence, the investor bears most of the risk, but the upside is tightly capped. Further, there is no guarantee that the gas transported through that pipeline will be allocated to the party that built the infrastructure, although it should be. As things have turned out, brokers and traders end up getting allocations of gas, rather than the infrastructure builders and investors. These factors, among other things, have raised very minimal interest in infrastructure projects. Those who are involved in the domestic gas trade should also be obligated by regulations to build the much-needed infrastructure, as without that they will just be a broker and not support the government’s effort to create more gas infrastructure. We do not need brokers, we need explorers and developers. The future government needs to define the criteria that has to be met by those who wish to “play” in the oil and gas industry, like performance bonds for participants in tenders for new blocks. The challenge before the new government in regards to oil and gas is to regulate a more level playing field, and provide a higher sense of urgency at all levels in all matters related to oil and gas development. It goes without saying that oil and gas remain a prime source of revenue for the state. It is still the single largest source of revenue and we have to keep it that way. But how? We already flagged exploration as an absolute requirement. But exploration is only one of the many problems. First order of the day, therefore, is for the new government to immediately sit down with the major producers in this country, local and foreign, and to start a meaningful dialog on a regular basis. Be a good listener. Keep the group small. Set up a task force that is empowered on both sides to bring things to a close. Put a timeline on it. The deliverable at the end of the timeline is a document that in no uncertain terms outlines a mutually acceptable action plan designed to get the industry moving again. This action plan must be endorsed at the highest level of government. The purpose of this effort is to get the industry back on track after it derailed a long time ago. This effort must, therefore, be directed from the very top and it must be a collaborative effort between stakeholders. It may call for allowing producers more latitude to run with the ball, to do what they do best, without intervention. Try to significantly improve the investment climate and the operating environment. Cut the bureaucracy down to the very minimum. It will call for “fast track” development and aggressive de-bureaucratization and de-regulation. Design incentive packages to the producers for any field brought on production within the timeframe. This must be a collaborative effort that, at the end of the day, will hopefully restore trust and rekindle a spirit of partnership. The key word is trust. Without trust, business cannot exist. Starting a serious dialog is a wise way to start. The next steps will flow from that dialog. It is imperative that the media must be transparently involved to counter some of that past misinformation about the industry, a poison that has already influenced the mindset of the man on the street. Strong and out-of-the-box leadership will be called for, as there will be strong resistance against such measures from vested-interest groups. However, even if all of the above is implemented next week (which it will not be), its results will not become noticeable until many years later. We have lost that much momentum. Hopefully from this effort, a new era will be born. An era of a level playing field. An era based on mutual respect and of a true spirit of partnership. Let us give it a try. We are flat out of time. ●