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Work for The New Energy Minister: Restoring Public Trust

 

After a few delays, finally President Joko “Jokowi” Widodo announced his Cabinet. And once again, he successfully surprised many.

One of the surprises was the appointment of the energy and mineral resources minister. Sudirman Said, the new minister, was not among the names initially circulated as candidates for the post, and furthermore, he is less-known to the industry than other candidates. Regardless of how well-known he is, many tasks needs to be solved immediately.

Sudirman Said, an anti-corruption activist, graduated from the prestigious State College of Accountancy (STAN) in 1984 and continued his education in one of the best MBA schools in the US, George Washington University, in 1994. His experience in the energy sector started in 2008, when state-owned PT Pertamina recruited him.

But his service in Pertamina was very brief, lasting less than one year. Before he accepted his appointment as minister, he was a vice president at a private oil company and president director of state-owned PT PINDAD weapon manufacturer.

Sudirman needs to take immediate action to clean and distance the ministry from the oil mafia in order to restore the public’s trust in the ministry. Perhaps what he can do is to follow Jokowi’s initiative, i.e. to involve the Corruption Eradication Commission (KPK) and the Financial Transaction Reports and Analysis Centre (PPATK) to screen, select and appoint key personnel in the ministry.

This organizational clean up needs to be done immediately, not only to prove that the speculation is wrong but also to restore the ministry’s credibility, which was badly tattered after a series of corruption cases involving a former minister and the former head of the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas).

Failure to restore the ministry’s credibility and prove that the speculation is wrong will make it more difficult for Said to get support from key stakeholders when he has to make a tough call, let say increasing the fuel price.

Jokowi has said repeatedly the fuel subsidy must be reduced. It seems that this will be the first major policy in the energy sector.

Like it or not, the public will perceive any fuel price increase is a ministry policy. Therefore, gaining credibility and the trust of the public should be his first and most important task.

There will be another uphill battle for him after the fuel price increase. The global economy is slowing down and commodity prices are slumping, external factors he has to cope with. This global phenomenon is likely to continue throughout his term.

In 2013, energy and mineral resources contributed Rp 398.4 trillion (US$33 billion), or approximately 26 percent, to the state revenue. With this new global economic landscape, revenue derived from energy and mineral resources is likely to decrease significantly.

What Said needs to do is slow the decrease. This can be done by ensuring the production levels of key commodities, such as oil and gas.

This brings up the next issue in the oil and gas sector. During his term, 20 oil production sharing contracts (PSCs) will expire.

These PSCs represent about 635,000 barrels of oil equivalent/day or roughly 76 percent of domestic oil production.

Production continuity in these areas is very important. The government needs to give clear direction and make decisions as early as possible on the fate of these areas.

It is also worth noting that taking over these areas arbitrarily, nationalizing them and giving the privilege of managing these concessions to state or domestic oil companies immediately on contract expiry may be a risky decision.

Giving preferential treatment to national companies is good political rhetoric.

But what we need at this moment is more than mere political rhetoric. We need a policy and action that will ensure prosperity for Indonesians.

Giving privileges to national companies, in most cases, poses a moral hazard. While in some cases local preference is needed, this must be done transparently.

No company should be given the right to manage these concessions without a transparent competitive bid.

To maximize benefit for the country, other forms of contract may be introduced for these areas. The PSC format may no longer suitable because these blocks carry no (or minimum) exploration risk.

As we know, exploration risk is the key feature in a PSC. A service agreement may now be more suitable for these blocks.

In a service agreement, the government can maintain complete control and ownership of the block, as mandated by Article 33 of the Constitution.

Contractors are engaged only to produce the oil and gas on a cost plus fee basis. This form of contract is not uncommon in the oil business. Many Latin American and Middle Eastern countries are using pure service or risk service agreements.

Whatever contractual relationship or fiscal regime the government decides to use for these expired contracts, it should be governed under the prevailing oil and gas law.

Unfortunately, the existing oil and gas law (Law No. 22/2001) has articles ruled unconstitutional by the Constitutional Court (MK).

Therefore, it is also important that the new government works closely with the House of Representatives to expedite the issuance of a new oil and gas law.

While the new law is still under discussion in the House, the government should issue a government regulation in lieu of law (Perppu) to address critical governance matters.

One of these critical governance matters is the existence of the SKKMigas. The new government has reportedly considered disbanding SKKMigas. Whatever the reason for the disbandment, the government must not repeat the chaos caused when BP Migas was dismantled by the court in 2012.

The disbandment of a regulatory body of this significance should be done with due consideration and planning.

A new body assigned to complete jobs left by SKKMigas should be supported by an adequate legal basis. A Perppu instead of a presidential decree (Perpres) could be used to support the establishment of a new regulatory body.

A strong legal basis is necessary to provide the legal certainty required by oil and gas companies to invest and operate in Indonesia.

Many other issues require immediate action by the new minister, ranging from electricity shortages to the amendment of mining contracts.

Having limited exposure to the industry, he has a lot to prove and a lot to do.

 

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No company should be given the right to manage concessions without a transparent competitive bid.

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The writer, a Harvard University alumnus, is founder and director of the PPRL Group, an Indonesian oil company. The views expressed are his own.