A new oil and gas law for people’s welfare

 

The oil and gas law (Law No. 22/2001) has been challenged in the Constitutional Court (MK) many times since 2004. The most recent challenge was on Nov. 13, 2012, when the MK ruled that the Upstream Oil and Gas Executive Agency (BP Migas), was unconstitutional.

 

 

 

Having a law that has articles ruled unconstitutional is a sign of poor governance. Poor governance in the oil and gas industry could risk national energy security, which would severely hamper the government’s ability to provide better welfare for Indonesians. Thus, it is crucial for newly elected President Joko “Jokowi” Widodo to make sure that a new law is enacted soon.

 

Energy security is a complex, multi-factor issue. It goes beyond energy independence. It is not an issue that can be defined based on the assumption of self-sufficiency and autarky. In most cases, energy security depends on where, in the geopolitics of energy, a country stands.

 

A constitutional mandate to the elected president is to create welfare for Indonesians. Energy security plays an important role in creating welfare by ensuring sustainable economic growth.

 

In Indonesia (and in most countries in the world), the governance of the oil and gas industry is a key element in energy security.

 

Poor governance has caused the Indonesian oil and gas industry to perform poorly in all aspects. On the production side, oil production has declined continually since 1995, despite a surge in global oil production in the same period. Oil reserves have not increased. Indonesia’s proven oil reserves have fallen by 1.9 billion barrels since 1992. Meanwhile, our closest neighbor, Malaysia, has increased its proven reserves by 2.2 billion barrels.

 

Neither do we fare any better on the consumption side. Large fuel subsidies have created a significant hole in the state budget. An increase in fuel consumption and volatile fuel prices have caused the energy subsidy portion of the state budget to double since 2010. In 2010, the energy subsidy accounted for about 8.45 percent of the budget; this had risen to about 18 percent in 2013.

 

There is also the issue of gas infrastructure. Poor gas infrastructure has hindered a substantial increase in the portion of gas in the energy mix. Current domestic gas consumption is barely half that of oil. This is much less than the government’s targeted energy mix, which sets gas consumption as high as 150 percent of oil.

 

Another issue to consider is unconventional hydrocarbon. Indonesia’s unconventional hydrocarbon is currently dominated by coal bed methane (CBM). Even so, CBM production in Indonesia is still very low and it does not represent its true potential. Indonesia’s CBM resources are among the 10 largest in the world. Indonesia has approximately 453 trillion cubic feet (tcf) CBM, almost triple its proven natural gas reserves. However, production is still very limited. Currently there are only four CBM-producing areas.

 

In the global arena, unconventional hydrocarbon has shifted the geopolitics of energy. Energy resources are known to be regionally concentrated. For many years, hydrocarbon resources were concentrated in Asia and Africa. But with recent developments in unconventional hydrocarbon, this is no longer true. In 2002, North America’s proven oil reserve only accounted for about 5 percent of the world’s total.

 

Today, with unconventional reserves in play, North America’s oil reserve is higher than the proven conventional oil reserve of the rest of the world.

 

Conventional reserves are getting harder to find. In Indonesia, most of the potential reserves are located in frontier areas, such as ultra-deep water. Only a few companies in the world have the technical know-how and financial strength to explore hydrocarbon in deep-sea areas. Chevron’s ultra-deep water project is the country’s first.

 

But due to uncertainty with government approval, this project is now in jeopardy. Looking at the technological and commercial challenges of pursuing major conventional reserves, it is more logical for the government to push for the development of unconventional sources.

 

The standard Production Sharing Contract (PSC) concept also needs to be revisited. Most countries that are using the PSC mechanism have advanced its legal structure. Some are using hybrid systems, where the government has a certain percentage of ownership in the operator company. While the government, through its business proxies, is involved in the daily management of the contract area.

 

Employing a different contract system for conventional and unconventional hydrocarbon may be necessary. Unconventional hydrocarbon involves different extraction techniques and technology. Unfortunately, these technologies, such as fracking, have an environmental impact that many environmentalists oppose.

 

Thus, the risk and reward for unconventional hydrocarbon may be significantly different to that of conventional reserves. As such, a different contract system could be introduced to accelerate the production of unconventional hydrocarbon.

 

Another barrier to investment in hydrocarbon development is bureaucracy as related to operation permits and licenses. Currently there are more than 250 permits and licenses that an oil company needs to operate. Many of these are a result of the unclear segregation of authority between the central and regional governments. As a result, many projects are potentially delayed and thus production is hampered.

 

Last, but not least, is the issue of regulator. After BP Migas was disbanded by the Constitutional Court, a new unit was formed. This unit is currently structured under the Energy and Mineral Resources (ESDM) Ministry. There is no question that having this regulatory board under the ESDM Ministry gives it better coordination with other energy sectors, such as electricity and coal.

 

However, since it was established by a presidential decree, and not by law, its legal standing can be challenged. If this were to happen, there would be legal chaos; which would make oil companies hesitant about further investments in Indonesia.

 

All of these issues urgently need to be addressed by the new law. The outgoing house will most likely not be able to complete deliberation of the new oil and gas bill before it ends its tenure later next month. Many people in the industry doubt that the new oil and gas law can be enacted soon, or that the new law would be comprehensive enough to cover all the important aspects outlined above.

 

Yes, indeed, that doubt may prevail if Jokowi approaches this legislation with a business as usual attitude. But isn’t that the reason we voted for Jokowi, because we believe he will make breakthroughs, do things differently and get things done effectively? Let’s hope that he delivers.

 

 

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The writer is founder and director Indonesian oil company PPRL Group. The views expressed are his own.