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Interview

with Agusman Effendi , Chairman, Parliament of Indonesia

13.08.2007 / Energyboardroom

How would you describe Indonesia’s positioning in Oil & Gas in the Southeast Asian region?

When we talk about ASEAN countries, we are talking about Philippines, Malaysia, Vietnam etc Indonesia is the biggest country in terms of energy production in the region. Indonesia is ranked n°4 worldwide in terms of population, we have over 220 million people, which means a great challenge in responding to energy needs.

How aware are the Indonesian people of the energy sector and its importance to the country?

That is a good question. We just celebrated our 62nd year of independence. Over the last 10 years there has been a very big increase in oil consumption in Indonesia. The biggest problem is our subsidy policy, which represents 20-25% of the total budget. But of course if the government needs to increase the price of oil and the gas, this would generate a big social outburst. Before, the subsidies were not a big issue because the barrel was under $20 dollars. Now the global price has gone up to over $70, while domestic demand keeps increasing because of economic growth. At the same time production is declining in Indonesia, so all of this creates a strain on the government’s capacity to maintain the subsidies. But eliminating them would mean higher prices for the people, and this would generate very serious social problems for the country.

How can the government create a consciousness within the population about the need to reduce the level of subsidies? How does the new Energy Law fit into the equation?

We have programs underway now to make a more efficient use of energy and to develop coal energy, geothermal energy and alternative sources, although this process is still in the initial phases. Just one month ago we announced the Energy Law, which is a very important initiative for Indonesia. In 62 years it is the first time the country makes a concerted effort to define a national energy policy. Many key issues are addressed in the law, but one of the main aspects is the creation of the Energy Council. It will be chaired by the president, who will be accompanied by the six ministers most involved with energy issues and by six other external stakeholders: consumers, producers, etc. The council members should be defined in six months, they will be chosen by the President.

What is the role of the commission in orienting and regulating the energy sector?

The Commission has mainly three main functions: legislation: making the laws, budgeting, and controlling.

How would you grade the level of interaction of the commission with the other governmental entities such as Migas, BP Migas, etc.?

Every session meeting we invite people from MIGAS and the other entities in order to discuss the issues at hand. Furthermore, we also invite other stakeholders, such as associations and companies, to give their inputs, for the budget, and the creation of new laws.

Does the commission have a say in the contractual conditions and fiscal regimes of the contracts?

The big issue today is the cost recovery, which according to law 22 is one of the issues of the contracts. We discuss this in the commission VII, but this issue is also addressed by other entities such as the ad hoc budget committee. Every year they analyze the level of cost recovery, which is rising, but we are still in charge of the control. It is something difficult to benchmark because for every contract there is a different situation.

What is the commission’s role in harmonizing all these fiscal issues and regulations?

Harmonization is very difficult in Indonesia. It is complicated to synchronize all the parts involved, because energy is a sector that supplies a lot of money to the government but also requires giving incentives so that there is investment. There are already laws that we have passed in this regard, but the problem is implementing and coordinating among players.

How about the role of the central vs regional/local governments in regards to Oil & Gas?

Oil & Gas policy is centralized at the federal level. There is a law (Number 25), regulating the financial attributions of local authorities vis-à-vis the central government.

There are many challenges today for Indonesia’s O&G sector, such as optimizing production and developing new fields. Investors seem more willing to focus on existing oilfields rather than exploring new areas, because they say there is a lot of inconsistency with the laws. What do you think about that?

I think that there are too many laws in Indonesia that intervene in O&G activities, coming from many other government entities besides those directly responsible for energy and mineral resources. Indonesia basically needs 3 new laws: natural resources management, ‘physical distribution’, and land management. These laws require coordination with other ministries like Forestry and Environment. For now the only law already completed is the second one.

You have been here nearly 8 years. Tell us about some of your main past initiatives.

We have passed many important laws during this time: electricity law, oil and gas law, energy law, geothermal law, etc.

How has the Oil & Gas sector been affected by the fundamental changes brought about by the Oil & Gas law of 2001?

Before there was one company, Pertamina, which was regulator and player in the market at the same time. This was not a good situation. Now there has been a separation of duties, with BP Migas as the regulator and Pertamina dedicated to the business side. However, real change takes time because it is still the same people in these organizations.

So why is it that many investors are complaining about the new situation, saying that it has become more complicated to get things done that before?

The problem is not BP Migas or the organizational structure defined by the law; rather it is the people in the Mineral and Energy department. There are problems in the management and implementation of the laws. There is a learning curve which takes several years to achieve, but we are confident that the Body is the correct one.

You just returned from Brazil, tell us about what Indonesia is doing in terms of renewable energy.

We have a great potential in different renewable energy sources such as geothermal, hydro, biofuels, etc. If you look at the Energy Law, we are offering incentives for the development of renewable energies. Our country also has climate and land conditions very similar to Brazil, which is ideal for biofuels. The problem here is the pricing policy, with the very high levels of subsidies given by the government. This artificially lowers the price of gasoline, and at the same time the production costs of renewable energies like CPO keep rising. They cannot be competitive under this system. I think that at present the most interesting things are happening with geothermal energy, and companies are starting to invest in this sector in Indonesia. Most of these IPP projects are in North Sumatra with Japanese and American companies.

Coming back to Oil & Gas, how involved are local players in the industry?

There are three big Indonesian companies: Star Energy (oil and geothermal), Medco (oil and gas and geothermal) and Energi Mega Persada. Apart from them, there are many smaller companies and service providers. But this industry often requires the participation of big international companies, because costs and risks are extremely high.

Is Indonesia going to continue being an important oil producing and exporting country?

The key is to increase exploration, and for this we need to give interesting incentives to companies and offer a stable regulatory environment. Our country is very big and the potential is surely there.

Despite becoming a net importer of oil, Indonesia insists on remaining part of OPEC. Is this membership motivated more by political or economic reasons?

It is mainly a political issue, we have Indonesia as a net importer and still being part of OPEC.

90% of Oil & Gas production comes from the private sector, and contributes to 10% of Indonesia’s GDP. If the government decides to give companies a reduction in terms of taxation, where would the money necessary to replace those revenues come from?

Indonesia’s private sector is not made up only of Oil & Gas. For example, mining is growing considerably these years.

What about the fiscal reform that is under discussion, when is it coming out?

This is what everyone wants to know. It is in discussion, but as you know it is an important issue that does not depend only on our commission.

Any comments about the situation with the Cepu block?

This is another hot issue in parliament. We need production to begin there in order to reach the 1.3 million bpd for 2009 announced by the president, but there are still disagreements on the matter of cost recovery.

Any final message to OGFJ’s readers?

In order to restructure the energy and mineral resources sector, we are discussing two new laws. They are the coal and minerals law and the electricity law. We are trying to harmonize those sectors with the era of decentralization, give interesting investment climate and offer a stable regulatory environment.

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