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New oil and gas law and its implication. (Focus).

The Parliament (DPR) of Representative on October 23rd finally approved the long awaited new oil and gas law which will end decades of lucrative monopoly by PERTAMINA. The new law, which has been declared as Law No. 22/2001 would replace the Oil and Gas Law No. 44/1960 and Law No. 8/1971 on PERTAMINA. It is aimed at liberalizing the country's oil and gas sector by abolishing PERTAMINA's regulatory and contract approval roles.

Old Oil and Gas Law made PERTAMINA very powerful and influential

Under the Law No. 8/1971 PERTAMINA is given exclusive responsibility for all Indonesian oil and gas activities, including the functions of exploration, production, refining, domestic supply, transportation and marketing, the granting of concessions in the form of production sharing contracts (PSCs) and the regulation of industry participants.

The new oil and gas bill had proposed to strip PERTAMINA off its upstream and downstream monopolies. Therefore, no wonder there were PERTAMINA's people who resist the Oil and Gas Bill. After executing the regulating and controlling functions, and acting as the single buyer and single seller of all petroleum fuels in the whole country for more than 30 years, PERTAMINA has become a huge company with an extremely strong money power and strong political influence. For example, because of PERTAMINA's resistance, to pass the new oil and gas bill in the parliament, the government had to fight and the people had to wait for no less than 5 years. It was because the new oil and gas bill is feared to disturb the comfort zone of established elite groups in and around PERTAMINA.

Other important players in the petroleum industry are the foreign production sharing contractors (PSCs) which produce most of crude oil and natural gas in Indonesia, The PSCs are regulated and supervised by PERTAMINA representing the Indonesian government which is carried out by its Foreign Contractor Management Body (BPPKA) later changed its name to Production Sharing Management (PSM). It is responsible for contractors' budget, work programs and future contracts. PERTAMINA is the only entity authorized to process the oil and gas and distribute the products to domestic consumers and export to overseas buyers. PERTAMINA is also the only entity licensed to import crude oil, natural gas and processed petroleum products.

Because of its power and influence, PERTAMINA is a popular target for accusations of having a long history of massive corruption and cronyism. A leaked audit report by Price Waterhouse recently suggested a loss in excess of US$ 6 billion solely in respect of the period between 1996 and 1998 through corruption and inefficiency, and the pressure for a formal investigation (and the allegations of a cover-up) have been mounting.

Two independent boards to be established under the new bill

As part of the intended process of reform, the authority for issuing oil and gas mining concessions would rest with the Minister of Energy and Mineral Resources and the responsibility for executing and regulating the activities of industry participants would pass to independent Executing and Regulating Boards. Most seriously from PERTAMINA's perspective, the bill sought to remove PERTAMINA's exclusive in oil and gas mining matters and to open the way for direct private sector participation and competition. PERTAMINA would, under the bill, become the equivalent of a private company holding its own oil and gas mining concessions, and competing directly with other oil industry players

Up to now in the upstream sector PERTAMINA has functions more as a regulator of government policies rather than as an actual oil and gas company. Its role in upstream direct operation is very small. In the downstream sector, however, is very powerful. PERTAMINA is to to distribute Oil-Based Fuel (OBF) in a number of regions in requiring OBF for which PERTAMINA will receive compensation from the Government. PERTAMINA is controlling refining and processing plants, OBF storage, transportation and marketing.

Later when the Oil and Gas Bill has been enacted into law, all Government roles in PERTAMINA will be transferred to different Government bodies. Its upstream sector will be handled by the Executing Board, whereas its downstream will be handled by the Regulating Board. PERTAMINA will no longer regulate Production Sharing Contractors and will lose its retention fee from the Production Sharing Contractor. The money which flows from the PSC will no longer go first to PERTAMINA's account, nor to PERTAMINA's Supervisory Board, but directly to the State treasury

Diagram

let's see in beside page

[FIGURE OMITTED]

The industry divided into upstream and downstream operations

According to the new Law (Art 5, sub 1), the oil and gas industry is divided into upstream and downstream operations. The upstream operations consist of exploration and exploitation, while the down stream operations cover processing, transportation, storage and marketing of oil and gas (Art 5, sub 2)

These upstream operations are executed and controlled through Cooperation Contract (Art 6, sub 1), which refers to a Production Sharing Contract or other form of cooperation contract on Exploration and Exploitation operations which is more profitable for the state and the produce of which is used for the utmost benefit of the people (Art 1, sub 19). This means, the Cooperation Contract may be in the form of PCS, JOA/JOB. EOR, JOA/JOB, and TAC.

There are 4 types of contracts in the exploration and production of oil and natural gas in Indonesia, namely Production Sharing contract (PSC), Joint Operation Agreement (JOA) or Joint Operating Body (JOB), Enhance Oil Recovery (EOR) and Technical Assistance Contract (TAC). Nearly all of the oil and gas operations are operated by foreign oil companies under Production Sharing Contractors (PSCs) which allow the contractor's profit after tax and cost recovery about 15-35% on oil and 30-49% on gas. The PSC now covers about 90% of the contracted petroleum acreage, thereby representing the dominant share of all the petroleum activities in Indonesia.

The upstream business operations could be executed by business entities or by permanent business entities, through a business agreement called Cooperation Contract signed together with the Executing Board, to be established very soon by the government. The Cooperation Contract may be in the form of PSC, JOA, TAC etc.

The task of the Executing Board, as stated in Art 44, sub 3, comprise:

a) Providing recommendations to the Minister as to his policy in preparing and offering Works Areas and Cooperation Contracts;

b) Signing Cooperation Contracts;

c) Studying and submitting for approval by the Minister the development plans of fields to be exploited for the first time in a Work Area;

d) Approving field development plans other than those referred to sub c;

e) Approving with program and budget

f) Monitoring the implementation of Cooperation Contracts and reporting about it to the Minister.

g) Appointing sellers of the government's share of Oil and gas who may make the best profit for the scheme.

Generally speaking, the Executing Board is taking over the tasks which are now carried out by PERTAMINA, through its Production Sharing Management (PSM) Directorate. Under Law No. 8/1971, however, PERTAMINA is more powerful than the Executing Board, because PERTAMINA carries out nearly everything related to oil business, including exploring, producing, transporting and selling. Article 62 of the New Law stipulates that until the time the new Law becomes operative, PERTAMINA would continue carrying out its task of supplying and distributing oil-based fuel to meet the domestic demand for a maximum 4 years, which means until 2006.

The Executing Board is a non-profit BHMN (Badan Hukum Milik Negara) or a state owned legal entity which is assigned to manage and control the Cooperation Contractors. The entity is independent as it is not subject to the Minister nor to PERTAMINA. This means that the Board cannot be intervened by the government in doing its tasks. The Board is directly responsible to the President of the Republic of Indonesia and it is under the supervision of the President.

The Regulating Board would be engaged in the downstream operations of oil and gas industry. It regulates and controls over the supply of OBF and gas transportation by pipe (Art 46, sub 1). The function of the Regulating Board is to carry out rules and regulations concerning oil and gas industry, to ensure the availability and distribution of OBF throughout Indonesia as determined by the government and to increase the utilization of gas in the country. (Art 46m, sub 2).

The tasks of the Regulating Board covers regulating and establishing the followings (Art 46, sub 2):

a) The availability and distribution of OBF;

b) The national stock of OBF;

c) The utilization of OBF transportation and storage facilities;

d) The tariff of piped gas transportation;

e) The prices of gas for households and small customers;

f) The business of gas transmission and distribution;

Downstream operations include oil and gas refining or processing and the marketing of their refined products. Downstream operation industry is operating under a market economy. The Regulating Board established by the government will not interfere with the business mechanism of the downstream industry. The functions of the Regulating Board is to regulate and control the supply of OBF for the interest of customers end users.

In other world to be able implementing its task, the Regulating Board should hold or control adequate supply of OBF to meet the demand from the end users. To procure the supply the Board could purchase its from PERTAMINA or any other domestic supplier. If necessary the Regulating Board can import the OBF from overseas sources. In other world the Regulating Board will operate like BULOG in Regulating and Controlling the distribution of essential consumer goods.

This mean, the Regulating Board should have or control storage and transportation facilities and should be supported by sufficient number of qualified human resources. These capacities and capabilities have already been possessed by Processing and Marketing directorate of PERTAMINA. It is a question whether or not the government will transform the existing Processing and Marketing directorate into the Regulating Board. It is assumed the government will at least employed experienced senior staff of the directorate to become the executive of the Regulating Board. It is also assumed that the Regulating Board would utilize the hardware and software now used by the directorate. Until now, it is still a big question, who will be assigned for the Regulating Board.

New oil and Gas Bill to liberalize the oil and gas sector

The new oil and gas bill had proposed to strip PERTAMINA off its upstream and downstream monopolies. PERTAMINA would, under the bill, become the equivalent of a private company holding its own oil and gas mining concessions, and competing directly with other oil industry players.

The Director General of Oil and Gas, Rachmat Sudibjo, stated that the old players in oil and gas industries such as PERTAMINA and State Owned Gas company (PGN) should not worry with the new bill, since they are already well ahead than the new comers. PERTAMINA is expected to be able to compete with the new comers because of they have already wide distribution networks, as well as storage and terminal networks in various ports. In the meantime the new comer in the industry has to establish their own terminal as well as operating their own tankers.

Meanwhile, Dr. Kurtubi, an oil observer, and opponent to the new bill, reckoned that the Oil and Gas Bill had no clear vision. Kurtubi explained that Article 14 of Law No. 8/1971 states that PERTAMINA gets the Indonesian Government's share from the sales of oil and gas from a PSC. Thereafter, PERTAMINA ought to deposit 60 percent of it to the Government, itself retaining the other 40 percent.

However, given Presidential Instruction No. 12/1975, Kurtubi revealed the mechanism was changed. The Instruction states that the amount of the money from the sales of products of a PSC which has become Indonesia's share was received direct by the Government through Bank Indonesia, while PERTAMINA, as the management of PSCs will only receive a retention of two percent from the Government share.

Furthermore, Kurtubi added Government Regulation No. 14/1982 obliges PERTAMINA to deposit 60 percent of the fee. "Finally PERTAMINA only gets two percent of the oil and gas sales derived from a PSC".

In order to implement the new law, the Government is now preparing at least five Government Ordinances, namely for the upstream and downstream sectors, to change PERTAMINA into a limited liability company and to establish the executing and regulating boards.

According to the plan, the implementation of the new law will start in 2002 by establishing the executing and regulating boards and abolishing the BPPKA or PSM directorate. In 2003 the status of PERTAMINA will be transformed into a Limited Liability Company (Persero) and in that year it will be still assigned to distribute OBF. By than OBF subsidy will be abolished and PERTAMINA will no longer assigned to distribute OBF. The free competition of downstream sector will begin.

The main difference between the old new and new law is that PERTAMINA would be no longer carrying out Government task to supply the OBF to the government OBF price.

Assuming everything well taken care and described properly, the most powerful entity in the structure under the new law, would be the Executing Board and the Regulating Board. All foreign oil companies will operate under the Cooperation Contract scheme, which is the continuations of the existing -- PSC, JOA/JOB, EOR and TAC, operation scheme will necessary adjustment to the new law, particularly with regard to financial and monetary matters.

The question still asked by the investors is the role of the Minister of the Energy and Mineral Resources and the Director General of Oil and Gas (MIGAS), of weather they are activity involved in the management and controlling the cooperation contractors or not If they are involved, than the bureaucracy will be not favorable to the investors as in the old law when PERTAMINA is in charge.

The capability of the Executing Board and Regulating Board are also questionable, as until now, the regulation and policy about them have not been issued. What is certain is that the board are new, the structure and the job description still need vague which are still limited to the description.

Another questionable matter is the involvement of regional administrations which is in line with the problem regional autonomy and decentralization law. Some prospective investors have worried about the deep involvement of the regional authority, while the central government still maintains its bureaucracy.

The reformation in downstream operation is more radical. PERTAMINA will have competitors in refinery operation and in petrochemical industry and in the operations of storage and transportation facilities as well as in the marketing of petroleum products. The new law will open opportunities to the private sector to operate in the downstream operations, including to invest in refineries, oil and gas transportation and in establishing a network of gas stations. This includes operating the storage and transportation services.
Table - 1

Stages of Change According to the New Oil and Gas Law

Year Changes

2002 - Executive Board established
 - PERTAMINA Production Sharing Management abolished
 - PERTAMINA receive no retention from oil and gas operations
 - Regulating Board established

2003 - PERTAMINA changes into a Limited Liability Company
 - (PERSERO), but still assigned to distribute oil-based
 fuel (OBF)
 - PERTAMINA must establish oil and gas business operations

2006 - OBF subsidy abolished
 - PERTAMINA is no longer assigned to distribute OBF
 - Free competition in the downstream sector begins

Source: Processed from various sources
Table - 2

Principal Differences Between the Old Law and the New Law

No. Item Old New

1. Mining Authority In PERTAMINA's Mining authority
 hand right transferred
 from PERTAMINA to
 the Government.

2. Contract Position
 - Upstream Sector Agreement to be Agreement to be
 concluded between concluded between
 PERTAMINA and the the Government,
 contractor. represented by
 The Minister the Executive
 approves on behalf Board, with
 of RI President. Business Entity
 or Permanent
 Business Entity
 in the form of
 Cooperation
 contracts (PSC,
 TAC, EOR or other
 forms which benefits
 the State)

 - Downstream Only eligible to Eligible to
 PERTAMINA State-owned
 (PERTAMINA's companies,
 monopoly) Region-owned
 companies,
 Cooperatives
 and small and
 medium enterprises,
 private business
 entity, that are
 regulated and the
 Regulating Board
 on behalf on the
 Government

3. PERTAMINA's Established under To be converted into
 Position Law No. 8 of a Limited Liability
 1971, as a Company (PERSERO),
 special state within two years
 owned business since the enforcement
 entity. of the Oil and Gas
 Law, PERTAMINA will
 be competing with
 other oil companies
 at equal standing.

4. Authority to PERTAMINA's The executive
 Manage, Develop Production Sharing board, which is a
 and Supervise Management (BHMN)
 Contractor's (BPPKA) established by
 Operations the government
 is an independent
 body.

5. Obligation to Pay The tax id Contractors have
 Tax deposited by the other options
 contractor itself of taxation, not
 at the amount always referring
 stipulated in the to the latest
 Tax Law in the Tax Law.
 form of corporate
 tax and Tax on
 interest,
 Dividends &
 Royalties
 (PBDR) calculated
 gross up. Other
 Taxes paid by
 the Government

6. State Income Obliged to deposit Obliged to
 60% of own surrender the
 business NOI and State's Take,
 OSC to the tax, import duty,
 State Treasury regional tax and
 retribution, and
 exploration/
 exploitation
 contribution, bonus.

7. Sharing the None Revenue sharing
 revenues between account to fiscal
 regional and decentralization
 Central law.
 Governments

Source: Processed from various sources
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Title Annotation:to end monopoly by Pertamina Humas P.T.
Comment:New oil and gas law and its implication. (Focus).(to end monopoly by Pertamina Humas P.T.)
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Feb 26, 2002
Words:2887
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