For President Joko “Jokowi” Widodo, reforming the oil and gas sector seems be like opening Pandora’s box; the harder he tries to clean up the mess, the more problems appear.
When Jokowi took office in late 2014, he vowed to eliminate what his administration called an “oil and gas mafia,” deemed to impede accountable and transformative policy-making.
By doing so, he aimed at better transparency and efficiency that could eventually bringing higher gains from the sector, traditionally the biggest contributor to state revenue with a more than 10 percent share each year.
However, after a series of structural overhauls in the Energy and Mineral Resources Ministry, regulatory authorities and state owned enterprises, within nearly three years of Jokowi’s presidency, the country has a bitter pill to swallow as it has proven hard to boost the competitiveness of its energy sector amid persisting low oil prices.
Investment in the oil and gas sector only reached US$4.8 billion in the first half of 2017, representing 21.6 percent of the fullyear target. Of the figure, contractors spent a mere $30 million on exploration activities, making it more difficult for the country to find new reserves against the backdrop of declining oil production in contrast to ever-growing domestic demand.
At the same time, state income from the sector stood at Rp 69.4 trillion ($5.2 billion), or 65.7 percent of the full-year estimate of Hp 105.5 -trillion, which when achieved, would represent one-third of what it earned in 2013 when oil prices were at a favorable level.
The Indonesian Employers Association’s (Apindo) head of energy and mineral resources division, Sammy Hamzah, attributed the current situation to the President’s mind-set when he began his tenure.
“As he vowed to eliminate the oil and gas mafia, many policies, including those set in ministerial decrees and government regulations [PP], have been drafted on the basis of mistrust ever since,” Sammy told
He cited Energy and Mineral Resources Ministerial Decree No. 8/2017 on the gross-split sliding scale for new oil and gas production sharing contracts. Unlike its predecessor, the cost recovery scheme, the gross-split mechanism exempts the government from the obligation to reimburse contractors tor exploitation expenses .during the period of their contracts.
The gross-split scheme was introduced to curb soaring government spending on reimbursing investors from one year to another. The government reimbursed an average of $14.29 billion a year to all upstream oil and gas contractors within the 2010 to 2016 period. However, the Supreme Audit Agency (BPK) found that in 2014 and 2015 alone, contractors had marked up their exploitation costs by Rp 5.14 trillion and Rp 3.89 trillion, respectively.
“Indeed, the country will benefit more by applying a gross-split scheme. But the government should also consider the burdens contractors have to bear,” said Fahmy Radhi, an energy economic observer from the Yogyakarta-based Gadjah Mada University.
“Otherwise, this scheme will only make the investment climate less attractive.”
Indonesian Petroleum Association (IPA) executive director Marjolijn Wajong has repeatedly voiced the group’s concerns over the lack of two-way communication between oil and gas stake-holders and the Energy and Mineral Resources Ministry, which in turn caused prolonged uncertainties triggered by a number of policy flip-flops.
“In almost all discussions with the government, there is no narrative to ensure a policy will make [the oil and gas sector in] Indonesia more competitive," Marjolijn said.
In the BMI Mining Risk/Reward Index published recently by Fitch Group’s BMI Research, Indonesia only earned 25.4 points out of 100 in the category of mining regulation, which indicates the unattractiveness of its mining sector and this is attributable to its nationalistic policy stance.
Jokowi himself has criticized some of its ministers over the issuance of some unfriendly policies that might have scared investors away. Fabby Tumiwa, the executive director of Jakarta-based think-tank Institute for Essential Services Reform (IESR), said there should be systematic efforts to identify all problems experienced by investors, particularly in the oil and gas sector, such as further reforms in the Upstream Oil and Gas Regulatory Special Task Force (SKK Migas).
ln mid-August, SKK Migas, now led by former Corruption Eradication Commission (KPK) deputy chairman Amien Sunaryadi, started preparations to carry out internal reforms that will be done through the implementation of ISO 37001 anti-bribery management system next year.
Earlier in July, it also signed a memorandum of understanding with the Financial Transaction Reports and Analysis Centre (PPATK) for a joint effort to enhance transparency and prevent money laundering among stake-holders involved in the upstream sector.
"An overhaul at SKK Migas will certainly boost the investment climate and, hopefully, lead to more eflicient cost recovery,”
Jakarta Post, Page-13, Saturay, August 26, 2017
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