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Interview

Part One: Sacha Winzenried – Partner & Leader of the Energy, Mining & Utilities Practice, PwC Indonesia

In part one of a two-part interview, the head of the energy division of one of the world’s leading management consultancies discusses emerging opportunities in the LNG, bridging infrastructure spheres and regulatory changes.

PwC is the largest professional services firm in the world, ranking among the top four auditors globally. How would you describe the scope of your offering to the Indonesian oil and gas sector?

In Indonesia, we maintain a stronger presence in energy than any of our competitors: auditing over 60 percent of total oil and gas production. Our Energy, Utilities and Mining practice now comprises some 300 personnel working across our three core service lines: assurance, tax and advisory. Aside from our traditional audit and tax base and our advisory function on mergers and acquisitions, we have also been expanding our local capabilities in the management and performance sphere. Increasingly we encounter oil and mining clients seeking assistance in enhancing their operational efficiency and organizational structure. This is very much the latest space that we are vying for now.

No doubt as oil and gas firms find themselves having to make themselves ‘fit for 50’, is the performance consulting area one where you can expect the workload to increase?

We certainly believe this is an area that holds a great deal of potential and where there are real needs for companies to make themselves more efficient given the direction in which prices are trending. Initially we noticed this particularly in the local mining sector and now with global oil prices plunging, the oil and gas companies are also feeling the pinch and having to reevaluate their business practices. PwC can assist them by analyzing their capital expenditure and reassessing their return rates under the prevailing market conditions so as to determine whether the Capex and project business model still makes sense in a transformed operating climate. We can advise them in identifying which specific areas they should be pulling back, where they should be concentrating their energies and how they can realize performance improvements.

Globally PWC recently released a paper on working capital in the hydrocarbons sector dedicated to identifying ways in which oil and gas firms can go about making their balance sheets more fit-for-purpose and aligned with the current price environment. Obviously most of the IOCs determine these strategies at the global level, but the indigenous players such as the Pertaminas and Medcos will be needing to go through these processes themselves and PwC has positioned itself as on hand and ready to assist.

What other areas do you identify as prospective in terms of business development?

The big opportunity we notice right now and where we’ve been investing quite heavily is in the capital projects and infrastructure advisory sphere. This is about positioning ourselves to be able to support the huge spend on infrastructure that the incumbent administration is promoting. The government has promised large-scale infrastructural intervention encompassing road, airport and port development to the construction of new power plants, energy installations and the entire supporting architecture that that entails. It’s quite clear in my mind that the primary factor holding back national energy production is the complete inadequacy of the existing natural gas infrastructure. It’s logical that we’re going to see a lot of activity in this space as energy supply and demand continue to diverge and the country endeavors to stave off an energy security crisis. PwC, for its part, will be ready to contribute.

You speak about the inadequacy of existing Indonesian energy infrastructure and how it is harming production rates and the ability to cater to domestic consumption levels. Which areas should the state be prioritizing if a turnaround in the national energy scenario is to be achieved?

Firstly there’s a need for bridging infrastructure to link up the future pools of supply with the main markets of demand and to turnaround the massive under-exploitation of known gas deposits in Eastern Indonesia. Right now, the western half of the archipelago is much more developed in terms of supporting energy infrastructure than the east. There will need to be considerable capital expenditure to address this imbalance and to put in place the requisite pipelines and regasification terminals to make oil and gas production viable and to incite new exploration activity.

Secondly there will be a need to undertake substantial investment in LNG transportation fleets and port infrastructure if Indonesia is going to be able to harness its natural resource endowments for domestic consumption. Right now we have a situation where Indonesia possesses a large quantity of natural gas that should be being used to address the nation’s needs and power the economy, but simply cannot be utilized because of the absence of supporting architecture to get that resource out of the ground, processed and to the end user.

The country simply cannot afford to ignore this paradoxical state of affairs much longer. The legacy mega fields in Sumatra that have supported the national economy for so long are in irrevocable decline and clearly depleting in spite of very significant investments and the titanic efforts of companies like Chevron to maintain production levels wherever possible. To illustrate the point, we need only look at the figures coming from some of these fields. The Duri field, for example, has a natural decline rate of 14 percent per annum, but Chevron manages to decrease that to 4 percent by managing one of the world’s largest steam-flood operations and employing costly but cutting edge technology to recover heavy crude oil from what are relatively shallow reservoirs. Even so, such a scenario cannot be sustained indefinitely.  The compelling need for fresh gas infrastructure remains.  The problem is that areas where it is required – subsea, offshore and remote regions – mean it will be costly to implement and big-ticket investors are far and few between given the current economic climate.

One area where PwC has been able to carve out a niche and establish a strong reputation has been in analyzing the local hydrocarbon legislation and regulatory framework form a financial perspective and in clarifying the impact on client business models. What, then, are your first impressions of the new oil and gas law, currently in draft version in Parliament?

There’s a clear bifurcation between competing factions in the government each of which are striving to place their stamp on the new legislation. One group would like to see a greater involvement of the state as a holder of the concessions, whereas the other would prefer a reversion to the original PSC centric model with professional oil and gas companies invited in to develop the more difficult plays to the best of their abilities with all the efficiency gains that this would entail. Whether or not Indonesia can complete an orderly energy transition and stave off a national energy crisis may well hinge upon which of these factions gains the upper hand in drafting the law.

The nationalists would do well to remember that Indonesia’s oil and gas legacy was very much forged out of pioneering a PSC model in which contractors would take on full risk initially, but ultimately be allowed to generate a reasonable return on that investment once they found something to develop. Such a process worked very well for all stakeholders for more than 40 years, but over the past decade, we have witnessed an erosion of the terms that held that compact together. Successive rounds of legislation such as GR79 have been chipping away at some of the core tenets of the original agreement so that today the private sector encounters additional rules on cost recovery, the exclusion of certain reimbursements and a creeping bureaucracy in SKK Migas intent on interference and micromanaging the E&P process. It’s fair to conclude that combined factors have impacted adversely on a willingness to invest particular with regard to developing unconventional resources and the more complex fields.

Quite how the new regulations will play out is difficult to predict right now and it will likely take quite some time before we get a definitive answer. Even the priorities of the Presidency can be difficult to interpret. If we assess the first year of the new administration in terms of energy policy, the emphasis has been squarely on cleaning-house, anti-corruption campaigns and sweeping away perceived special interest groups rather than on maximizing productivity and raising efficiency. We will have to wait and see whether there is now a change of tack.

An existential question mark currently hangs over SKK Migas with the regulator likely to be disbanded as part of the forthcoming rule changes. What are the different models under consideration for regulating the upstream oil and gas segment?

If you look back at history, Pertamina originally took on this function in house. Part of the NOC’s responsibility was to oversee the contractors and there was a dedicated small group of some 500 personnel charged with monitoring the work program budget up front, agreeing work plans and conducting some post-audit style activities.

By 2002 these powers had, quite naturally, been transferred to a regulator specific to upstream oil and gas, BPMigas, so as to avoid any conflict of interest derived from Petamina being simultaneously a player possessing acreage and the sole supervisory body. However, in 2012, BPMigas was unceremoniously abolished as a result of constitutional court findings that it had contravened Article 33 of the constitution stipulating that Indonesia’s natural energy resources belong to the nation and must be coordinated by the government. Essentially BPMigas was judged to have presided over a degradation of state control over the country’s oil and gas wealth and to have failed in its mandate by outsourcing its responsibility to private sector entities.

The swift establishment of the temporary executive task-force, SKK Migas, however seems to have done little to allay concerns over the unconstitutionality of the way day to day operations of exploration work and PSC licenses are ceded to foreign entities and the private sector in general and thus that mechanism will also be dismantled as part of the forthcoming revised oil and gas law. Even more worrisome has been SKK Migas’ tendency to mission creep and indulge in a disproportionate level of micromanagement to the extent that it has massively elongated the approvals process.

Today, for example, the regulatory task force constitutes an unwieldy and bloated bureaucracy totaling some 2500 staff and an entire new layer of hoops and hurdles has been placed on top of the existing framework making it very difficult for oil companies to secure the necessary expenditure authorizations and turn around the projects speedily. Decisions can literally take from months to years leading to lengthy project delays, suspension of field activities and spiraling costs. The fact that many of the IOCs now have a full time SKK Migas official posted to their offices is indicative of the farcical levels of interference that currently have to be endured.

The industry will be very much hoping that the next iteration of upstream regulator will be more business minded and will strike the right balance between having a lean, mean, efficient machine while retaining sensible levels of checks, balances, transparency and impartiality in its executive functions. Perhaps the most logical suggestion put forward to date would be to revert all supervisory tasks back to the Ministry, or more precisely Migas, and to create some sort of new business orientated SOE that can work as the counterpart to and liaison point with the PSC holders.

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country.

 

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