with Jusuf Wibisana, President Director & Head, PricewaterhouseCoopers
As you both have been in Indonesia for many years, you have had to endure ups and downs, particularly the financial crisis which devastated many parts of the economy. How has the O&G sector in particular fared in the face of all the turbulence over the last few years?
W.D.: Even though Indonesia is the originator of the PSC system, the country’s Oil & Gas sector has been struggling to make progress for many years now. The Oil & Gas law of 2001 changed the framework, with the transformation of Pertamina into a limited liability company and the creation of BP Migas as regulator, but these changes have also generated a good deal of difficulties. There is a lot of uncertainty among the PSCs due to a lack of clarity on certain areas such as taxation, and to insufficient coordination among ministries. Certain groups in Parliament are also putting pressure on the authorities to limit cost recovery (as there is a general perception that oil & gas companies are inappropriately cost recovery certain costs) which is causing investors to question contract sanctity for existing contracts. From an investor’s point of view, the new system has created more bureaucracy, inefficiency, and fiscal uncertainty.
When PricewaterhouseCoopers (PWC) conducted a survey in 2005 among industry leaders regarding the competitiveness of the Indonesian O&G sector one of the main conclusions was that the country is still very prospective geologically, particularly in underexplored basins in the East of the country. However, there is an urgent need to catch up in terms of the legal and fiscal framework.
How is the current business environment for consulting services in the Indonesian O&G sector? What are the main trends and drivers of growth?
W.D.: PWC has a long list of audit clients in the O&G sector; in fact we are currently auditing the operations of 60% of the country’s production, with big clients such as Chevron, ExxonMobil, Petrochina amongst others. On the advisory and tax side, in a way you could say that all the uncertainty creates opportunities for PWC advising clients – which is true – but from a macro perspective it is not in anyone’s best interest because it doesn’t allow the industry to grow. In the short term, we see significant opportunities for tax consulting, as well as an increase in transactions and M&A activity due to growing private equity interest in the energy sector. On the contrary, big Greenfield projects are moving forward slowly; there is Tangguh which has been under development for a while already and is expected to commence first production in early 2009, and Exxon is still trying to get Cepu off the ground. Indonesia is experiencing a decline in production which is a direct result of underinvestment over the last 5+ years. The uncertainty which has emerged during the country’s transition to democracy has a lot to do with this situation.
In 2007 the government has stepped up its efforts to attract foreign investment, with a new Investment Law passed and announcements about rolling out the red carpet for investors instead of red tape. How effective do you believe this will be?
W.D.: Unfortunately, the writing and words don’t match the action. Of course, we are not going to hear from a government official that contract sanctity will not be upheld, but in the daily actions bureaucrats keep raising questions about how to handle those agreements. Over the last 30 years there were always discussions among ministries, but in the end Pertamina (in their former regulatory role) would make decisions and an investor would have more certainty that those decisions would be honored. Now that is not always the case.
In your view, how has the decentralization process impacted companies doing business in the O&G sector?
W.D.: The central government has maintained control over the O&G sector’s policy, but certain related aspects such as land acquisition rights are now handled by the regional governments. A new revenue sharing scheme has been established, but often the regional government misinterprets the law and this often generates confusion. A big effort needs to be made in order to educate local authorities so that they fully understand the business and legal framework in place.
Pertamina has been undergoing a deep transformation towards a more business oriented company over the last several years. In what ways has PWC offered its services to Pertamina and where do you see most potential with this key client in Indonesia?
W.D.: PWC has worked with Pertamina in the past, for example a special audit in 1999 which was focusing on operational efficiency in processes and control. That audit was actually sanctioned by the Parliament, but of course the current management is a completely different team. We have also recently undertaken an engagement evaluating their non-core assets and how best to enhance value through divestment or increasing efficiencies, etc.
J.W.: I myself was part of Pertamina for many years, and can say that PWC has done an excellent job in giving advice and recommendations on operational efficiency. However, the time horizon in state-owned enterprises is usually very short and I am not sure how much of those recommendations were finally implemented.
Everyone seems to agree that the difficulty is to take the decisions made at the management level down to the implementation phase, which has to be carried out by people at all levels of the organization. Do you think that the difficulty to go through with these changes is cultural?
J.W.: I consider that it has more to do with the particular situation of state owned enterprises (SOE) and not necessarily with the culture of a whole country. With the SOEs there are always a lot of political and economic interests at stake, and therefore they often do not follow the usual business framework.
W.D.: I personally believe that now there is a real interest to clean the corruption, which is a typical problem of any SOE, in Indonesia and outside. But this is a very difficult thing to tackle, and changes are not going to happen overnight. It is a multi year process and you have to start with baby steps, and I believe the country is making progress.
When the financial crisis hit Southeast Asia, its effects on Indonesia were particularly severe and the road to recovery was considerably longer. The whole economic and political foundations of the country seem to have been shaken…
J.W.: Indeed, Indonesia has had a more difficult time dealing wit the crisis than countries like Malaysia and Thailand, and this is due to the fact that we suddenly went from a dictatorship to an open democracy. This has implied greater freedom and the right for everyone to speak up, which is an important progress for society, but this does not always translate into the best policies.
W.D.: You can decide to look at the glass half empty or half full, but considering all that Indonesia has been through the last decade, it is quite amazing that it did not splinter. The regional autonomy reforms explain this to a large extent, taking into account the complexity and diversity of Indonesia’s geography and peoples. Hence, all things considered, the transition was relatively smooth and at least on a macroeconomic level the indicators are positive.
W.D.: I fully agree that the country has all the elements to make it a part of that select group of emerging giants. The country’s growth rate between 6% and 7% is already helping to give it more presence in the global economy. Even so, I strongly believe that with the right policies and leadership there is no reason why Indonesia should not grow at a rate of 9% or 10% annually.
Getting back to the O&G industry in Indonesia and PricewaterhouseCoopers, what would you say are the main milestones of the company in providing services to the industry over the last several years?
W.D.: PWC has three main lines of services – advisory, taxation, and assurance – for the Energy and Mining sector, which is one of our major industry groups. We have 150 professionals in this group in Indonesia spending practically 100% of their time servicing clients in the energy/mining sector, which is a considerable concentration of technical and human resources. This gives us a real competitive advantage because, unlike others who improvise jumping in and out of the energy sector, PWC is truly specialized and focused on understanding the industries’ issues and offering solutions.
Moreover, PWC is an active member of the Indonesian Petroleum Association (IPA) and contributes to development and growth of the industry. As I stated earlier, one of the biggest issues we point out is the need for harmonization of the PSC system, the tax code and other regulations impacting the industry. PWC is working with IPA on a white paper in order to identify and analyze these areas of concern. In this context, we have cataloged over 300 regulations that somehow touch on the regulatory oversight of the O&G industry at different levels of authority, often times contradictory. The regulatory framework must provide clear rules of the game for all parties and help overcome the communication problems between different government bodies. At the end of the day, less uncertainty means less risk, which equals more investments.
PWC’s sectorial analysis of O&G in Indonesia seems to be a point of reference in the country in terms of understanding the current state of the main issues affecting the sector. How has the company assumed this important role it plays on the local scene?
W.D.: When PWC issued the survey in late 2005 and presented it at the 2006 IPA Convention we made some fairly broad and critical observations based on our interpretation of the results. Clearly this was not well received by some people in the government, but we believe that it is a balanced report that also gave credit where it was due. PWC is currently working on an update of the report, but this time we are doing it by ourselves in order to avoid pressures and produce an unbiased result. It is not a quantitative analysis but rather a more qualitative approach, in order to gather peoples views and perceptions regarding different issues relevant to the O&G sector in Indonesia. Hopefully it will be completed by April 2008 so that we can present it in the IPA Convention in May of that year.
There is a growing interest from both the government and private players regarding renewable and alternative energy sources for the domestic market. What is your assessment of Indonesia’s potential in areas such as geothermal and biofuels, and how prepared is PWC to advise companies on these topics?
W.D.: PWC’s tax advisors are in line with the new changes in regulations and are therefore ready to meet clients’ requirements in these new areas. Regarding carbon credits, we are on the learning curve locally and drawing on PWC’s global resources which have expertise in this activity. I am personally quite optimistic about geothermal opportunities and believe that much more should be done to develop this energy source, taking into account Indonesia’s massive proven reserves.
What gives PWC a competitive edge in Indonesia over other international and Indonesian consulting companies?
W.D.: Our primary competitive advantage is definitely our industry focused team which is truly specialized in the O&G and mining sector. Additionally, PWC has a global presence and high level of industry expertise which is attained through close interaction between the teams all over the world. We are not just a number of offices spread out over many countries, PWC is an integrated group. Another key factor is having the right mix of Indonesian and international employees.
J.W.: We do have a great team composed of locals and foreigners that makes us stronger than the rest. For example, a company like Pertamina will choose to discuss business with PWC due not only to our excellent standards, but also to the fact that they are familiar with me and can therefore feel comfortable in dealing with us. This environment of mutual trust and respect makes me confident that we will have many opportunities with Pertamina and other companies in the future. Furthermore, we can count on the full support of our overseas partners.
What final message would you like to send OGFJ’s readers?
W.D.: Despite all of the challenges the O&G sector in Indonesia is facing, it remains a country full of opportunities and untapped potential. At PWC we foresee robust growth over the coming years, at around 15% CAGR.