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Interview

Kardaya Warnika – Chairman, Commission VII, Indonesia

Commission VII - Kardaya Warnika photo

The chairman of the Indonesian parliament’s influential energy commission voices his opinions on a whole host of topical issues affecting the local hydrocarbons industry from the restructuring of the regulatory apparatus to the new oil and gas law in the making. Advocating much more emphasis on EOR to reverse declining productivity rates, he also calls for greater local ownership and administration of Indonesia’s natural resource endowments.

What have been the hot topics on your desk in recent weeks pertaining to oil and gas policymaking?

The main focus of the Commission VII’s energies right now is to turn around a fast-deteriorating energy security scenario by holding the government to account and by intervening at the policymaking level. Hydrocarbons were previously a great source of Indonesian prowess and indeed the country used to enjoy the status of net oil exporter until 2005 when the tables turned and we found ourselves having to import more than we could domestically produce. Such an about turn in affairs can be attributed to two factors: firstly a sharp increase in energy consumption which is logical for a fast industrializing economy and heady national growth-rate, and secondly a very worrying and dramatic fall in production. The other stark reality is that we currently produce more than we can make up again. By that I mean that the reserve replacement is less than one. These are trends that we need to reverse through the legislative process and specifically the formulation of the new oil and gas law.

The House of Representatives can be defined as performing three core functions: legislative, budgetary, and supervisory. Within that, Commission VII comprises a cross-party committee on energy and mining mandated to carry out oversight of the work of three ministries: Energy, Environment and Research & Technology. For example, right now we are requesting that the Energy Ministry explain why it is that the global oil price has fallen, but local consumer prices for petroleum products remain exorbitant.

The fact that our members are drawn from an array of different political persuasions confers on us a degree of independence and neutrality. Not only do we play a critical role at the forefront of energy policy initiation and the review and passage of new legislation, but we also influence the definition of the yearly budgets and set the annual oil lifting targets.

What can be practically done to reverse the productivity decline?                           

There are two possible pathways to raising overall production: either we can increase our reserves by engaging in fresh exploration, discovering new fields and bringing them on-stream, or we can seek to get more out of our existing assets base by reassessing the capacity of the fields and applying improved oil recovery (IOR) techniques to extract more than the 30 percent that is traditionally captured. For Commission VII’s part, we are keen to see a marked and tangible improvement on both fronts.

My personal opinion is that Indonesia has not been delivering enough incentives to the international investment community to encourage them to engage in meaningful exploration and production (E&P) activity. It is clear that there needs to be much greater flexibility within the fiscal terms of the PSCs so that a higher split can be offered to oil and gas companies relative to the probability of successful discovery and the complexity of carrying out the exploration and exploitation activity. Given that much of Indonesia’s easy oil has already been discovered and that most of the future exploration endeavors will be taking place in remote locations and the deep water domain, it seems logical to revisit the concept of the PSC model that has served us the nation so well in the past, but may not be considered so fit-for-purpose today.

It is important to bear in mind that investment decisions do not take place in a vacuum and that we are competing for inward investment and technology transfer with the other oil and gas producers of the world. If we fail to get the fiscal terms in order the investment, capital will gravitate elsewhere and Indonesia’s hydrocarbons industry will risk being left behind.

And with regard to Improved Oil Recovery..?

As for IOR, we mustn’t underestimate the real benefits that such techniques can deliver. Improved Oil Recovery is basically used to describe any combination of processes that may be applied to economically increase the cumulative volume of oil that is ultimately recovered from the reservoir at an accelerated rate. This may involve deploying a chemical or mechanical approach. One specific form is Enhanced Oil Recovery (EOR) which is used to mobilize and recover that percentage of residual oil that cannot be captured by water flooding alone and is usually performed by injecting nitrogen gas, carbon dioxide or specific polymers or by utilizing thermal processes like steam.

As a longtime industry practitioner, I personally believe that the reserves that EOR could unlock within Indonesian acreage rivals anything that new exploration could bring. We have to remember that the Iocal oil and gas industry dates back over a 100 years so the national portfolio of hydrocarbon assets comprises a great many ageing, brownfield sites that are absolutely ripe for this type of technique. One only needs look at the success that Chevron has been having with steam flooding in the Duri field.

Obviously the exact methodology that is appropriate very much depends on the characteristics of the geology in each specific instance and that is precisely why we need to be inviting in best of class, technically capable firms as reputable partners. What’s more, this should be accomplished through direct selection rather than the traditional tendering process, partly because of the specialist nature of the work and partly because there is an opportunity cost with the best EOR results commonly linked to early application. For it’s part, Commission VII has been encouraging operators to include an EOR aspect to their work despite the initial high costs and will continue to demand provisions in the new legislation to that effect.

You implied earlier that the PSC model might no longer be fit for purpose. Does that mean that parliament would be willing to consider alternative models?

Personally I think that all options should be on the table so that we can study them and weigh up the pros and cons in a dispassionate and methodical manner. The PSC model has been used to great effect worldwide for virgin territory and new green field discovery because it places the burden of risk on the private contractor and compensates them reasonably. Logically the split of production should be decided on a sliding basis in direct proportion to the degree of the risk assumed. Deploying such a system for extensions to contracts when the reserves are already known and the facilities in place and up and running would seem to go against the very philosophy of the PSC so an alternative mechanism would likely be more appropriate.

Furthermore, even though Indonesia pioneered the concept of the PSC, what we are witnessing today in terms of contracts has, in many cases, already departed from the original principles and resembles something more akin to profit sharing. This is something else that needs urgent review. Any such an undertaking could actually form part of a more wide reaching review, as one of the responsibilities of the parliament constitutes ensuring that legislation adheres to the spirit of the constitution. My own concern, and one shared by many parliamentarians is that article 33 of the constitution (that stipulates the state holds ownership over the national resource wealth and that those endowments must be utilized to the greater good of the nation) is on occasions being violated.

You’ve spoken at length about improvements that can be enacted on the supply side. What about the demand side?

Energy conservation certainly shouldn’t be overlooked. The national energy demand curve has been increasing sharply at around 7 percent per year and, even though energy consumption is driver of economic growth, we could and should be much more efficient in our usage. Electricity intensity is abnormally high compared to our neighbors and as a nation we tend to consume a lot for each dollar’s worth of growth. Part of this is due to a lack of stringent regulations. In many countries, the law obliges citizens to use energy saving light bulbs and insulate houses and apartments. Indonesia would do well to follow suit. To conserve one unit of energy compared to creating a new unit is not only much quicker, but also much cheaper.

Returning to the supply side but continuing with the theme of speed, we also need to be diversifying and broadening the national energy mix to include alternative sources and renewables. Green energies such as mini-hydropower, solar, wind and biomass can all rapidly be networked into the power grid and can provide short-term alleviation of the widening gap between supply and demand. Nuclear also presents a possible solution, but would likely face public resistance because of safety concerns in a tsunami and earthquake prone region.

Given your previous stewardship of one-time upstream regulator BPMigas, what can we expect from the new oil and gas law with regard to overhauling the regulatory apparatus?

The intention is that SKK Migas, which was only ever going to be a temporary structure, will be disbanded and the regulatory powers transferred over to a new type of entity. The new law will have to delineate exactly what resources belong to the state. Many of the petroleum products on the market, for example, have been refined from imported oil which makes it difficult to argue that they should be subjected to national ownership.

My personal feeling is that the successor to SKK Migas should be leaner, more efficient and streamline, but that this should go hand in had with a transfer of powers to Pertamina or some other type of SOE that could act as the counterpart to the PSC holders on a business-to-business basis. China perhaps serves as a good model to follow as you have competing national oil companies that perform well commercially but never take on a supervisory, oversight function that could be construed as a conflict of interests.

How would a “multiple-NOC” scenario benefit Indonesia?

For a start I’m a big believer in enhancing the privileges of Pertamina, because I believe that hydrocarbons represent an asset of strategic national importance. As such they need to be controlled by the state even if they sometimes lie beyond the reach of state ownership. Handing Pertamina first-preference and joint ownership of new and expiring block fits well with this vision and simultaneously helps us to grow the NOC as it allows for technology and know-how transfer at an early stage. For the very same reasons I would oppose any attempt to part-privatize Pertamina to have an IPO because the moment that the company becomes a private actor the linkages between national privileges and responsibility for the welfare of the nation become lost.

Having multiple NOCs makes a lot of sense because it retains that element of state control while simultaneously injecting an element of market forces and internal competition. There are numerous historical examples of such as system working efficiently. In China, the ascendency of PetroChina and Sinopec has served to strengthen both entities. The same could be witnessed in France with the establishment of Total alongside Elf Aquitaine producing performance benefits for both.

What do you seek to have achieved by the end of your term as chairman?

My aspiration is that we will have realized a much greater level of energy security. Energy has to be available, accessible and affordable for the nation. My dream is to bring about a security profile where all three tenets are enforced.

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