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
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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. ●
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