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Interview

with Luluk Sumiarso, Director General, Indonesian Ministry of Energy and Mineral Resources (KESDM)

21.09.2007 / Energyboardroom

Please tell OGFJ’s readers about the place Migas has within the Ministry of Energy and how you arrived to the top position for oil and gas.

Energy matters were a part of the Ministry of Public Works until 1978, when the Ministry of Mining and Energy Resources was created. The oil crisis of 1974 had made the government realize the importance of the sector and of having a Ministry more focused on dealing with energy issues. I joined the Ministry shortly after its creation, and worked on several studies like the “Energy Planning for Development” which was financed by USAID. Although my academic background is in electrical engineering, throughout my professional experience in the Ministry I learned about the energy sector and gained expertise on areas like energy balance and modelling.

My career evolved in the Ministry, and one of my first important positions was Director of Planning in the Ministry in 1994. Later I was also assigned as Commissioner for PGN. That was until 2002 when I was named Director General of Electricity, and also went from being Commissioner of PGN to PLN. However, I soon left this position because it was not well seen to be regulator and commissioner in a company of the same sector simultaneously. So I went on to be Commissioner within Pertamina, until July 2006 when I was assigned Director General of Oil & Gas (Migas in Indonesian) in the Ministry. Since I am now regulator for oil and gas, I resigned to my commissioner position in Pertamina so that there is no conflict of interests and my work in the Ministry is fully independent.

Coming from an electricity background, my appointment to this office was somewhat controversial but I have been working hard in order to show all the players in the Oil & Gas sector that I understand the issues and am prepared to propose solutions. Over the last year I have been very proactive in meeting with all stakeholders in order to explain my plans and vision, and I think they appreciate this and are more confident about the direction I want to take with Migas. As someone with a slightly different background, I believe that I can have a more global and objective understanding of Indonesia’s oil and gas sector. One of my main initiatives is the preparation of a very detailed and updated guide for investors in the O&G industry. It is nearly completed, we are only waiting to have the inputs from Kadin for the final version. Another thing we have done is a compilation book on all the PSCs in Indonesia, with complete and updated information and maps. Nothing similar had been done before.

The Minister of Energy and Mineral Resources has three primary functions: to represent the President in all energy-related matters, to make policy, and to regulate the sector. The policy statements lay the groundwork for the sector and express the government’s intentions. But in order to make it official and legally binding, there must be laws and regulations that follow. For the oil and gas sector, all functions not specifically attributed to another government agencies fall under the duties of this office (Migas). This is where all of the decisions on the business and technical regulations are made for the upstream sector, while BP Migas acts as a representative of the government in singing the contracts with the PSCs. They monitor and enforce the correct implementation of the agreements. There was some confusion at first between us and BP Migas on overlapping roles, but I met with them shortly after my appointment and our respective responsibilities are much clearer now.

In upstream, all companies interested in signing a contract with the government must go through the official bidding process with BP Migas. The most common type of contract is PSC, but both the government and the oil companies are free to propose another option. However, by law all contracts should comply with three requirements: ownership of oil and gas is in the government’s hand until the point of sale, all contracts must be signed with BP Migas, and the company has to assume all capital expenditure and risk.

The cost recovery mechanism is one of the pillars of the Indonesian PSC model, yet many public officials have openly criticized it and are demanding a revision of the terms. What is Migas’ position on this hot topic?

Cost recovery in the PSC system has become an issue of concern because we realize that the regulations are not completely clear, and there are many references to external documents that are too open to different interpretations. For this reason, we believe that before signing any new contracts these ‘grey areas’ should be cleared up. It is essential that the contracts ensure proper expenditure and cost-efficiency, in order to protect the government. Once these regulations have been established, everyone will be informed and the bidding process can start again. For existing contracts, these new regulations cannot apply but we are ready to provide assistance on clarifying the grey areas. Although, as I said, BP Migas is responsible for overseeing the execution of the contract, at the Minstry of Energy it is our job to ensure compliancy with laws and regulations.

What is the government doing in terms of harmonization and synchronization between the different Ministries that are directly or indirectly involved in the oil and gas industry?

In our Ministry we enforce compliancy to all the oil and gas related laws and regulations. Then of course, the Ministries of Environment, Forestry, Finance, etc. make sure that the regulations under their domains are also being followed by the PSCs. Early this year, we invited the government and had a one-on-one with all the major PSCs in order to hear directly from theme their main problems and concerns. We are doing our best to help them overcome the difficulties they have signalled out.

What was the main mission the Minister gave you when you took upon this position?

First of all, he asked me to simply put everything in order in terms of the organization, which is what I have been doing. Second, I am focused on analyzing the oil and gas related laws and making sure that the regulations are aligned with them. Wherever we see that there are contradictions or grey areas, we are taking the necessary measures in order to make everything clear and coherent.

Upon taking this office, I invited all of the main stakeholders in the O&G industry in order to listen to them and facilitate solutions to their problems. When I arrived to Migas, I found out that each group within the oil and gas sector has been going in its own direction, like meteors in the sky or ‘broken pearls’ like the famous Indonesian drama series. It resembles an orchestra made up of good musicians, but each one playing at their own rhythm. They need a director general to facilitate and help coordinate the music. In this sense, late last year I was involved in the creation of the Indonesian Oil and Gas Society, which is looking to bring together all stakeholders in the sector. When I was Director of Electricity in the Ministry, we were successful in creating such an organization for that sector. The person putting together the association is Anton Wahjosoedibjo, who was also involved with me in the foundation of the Electricity Association.

During my first days in this office I read a report on the oil and gas sector which was prepared by IPA and PriceWaterhouseCoopers. This report gave a good picture of the current status of the industry, and consequently I invited the stakeholders to help come up with the main policy priorities. Based on this, we have created a kind of ‘ten commandments’ for the Indonesian oil and gas sector, which we call the ‘ten agendas’:

I. Increasing exploration and production
II. Securing supply for the domestic requirements
III. Reducing government subsidies
IV. Improving state revenue
V. Making oil and gas data open and available to public access
VI. Defining the role of the different organizations in the sector
VII. Promoting safety
VIII.Increasing national capacity
IX. Protecting consumers
X. Improving regulations

For oil and gas we need a law similar to the Electricity Law, which created a national plan for the sector. In O&G, there are many scattered documents but no unified policy plan. So we are preparing a general plan on oil and gas in Indonesia, we are working on it and it has yet to be formalized. The idea is to create a bridge between the companies and the government’s needs.

We are also serious about applying good governance to Indonesia’s oil and gas sector. This means getting public organizations and private companies aligned with good governance practices, but it also requires the involvement of civil society. Consumers are key stakeholders in the sector, and their interests need to be reflected in policy decisions as well.

Public governance, corporate governance and civil society involvement must work together to make up the ‘trilogy of good governance’, which I believe is essential to a sustained success in the energy sector. For example, we have been holding public hearings where we bring together energy companies like PGN and the consumers, in order to find common satisfactory solutions for all parties on pricing and other issues.

What role does Migas play with regards to downstream contracts, and how does it interact with BPH Migas?

Regarding BPH Migas, by law they are given some of the regulatory functions for downstream operations. Additionally they have been in charge of the whole tendering process, but we are looking at giving this attribution back to Migas. We consider that in the spirit of the laws on BPH Migas it should act as a referee for all downstream contracts concerning transmission and distribution of gas through pipelines. It therefore needs to be totally independent of the tendering process. This should not be seen as government intervention, we are just interpreting the laws and ensuring that the regulations are aligned.

Due to worldwide energy demand and supply dynamics, many countries have adopted international energy policies. How international would you grade Indonesia’s energy policy?

Energy is an area of vital strategic importance for any country, and for this reason the main priority we have is to secure the domestic market’s needs and protect the national interest in this sector. Indonesia is a country which exports different kinds of energy sources, and although we hope to be able to continue doing so in the future, our focus will always be on fulfilling Indonesia’s own energy requirements first.

Interesting split incentives have been announced for companies investing in exploration in frontier areas. To what extent will these incentives overcome the regulatory uncertainty that makes investors to still work on mature fields as opposed to investing in new exploration fields?

Indonesia is looking into boosting exploration and production in very prospective remote areas and deep sea, which is why the government is creating special incentives for companies wishing to invest that also possess experience and expertise in these kinds of areas. This does not exclude, however, other companies’ participation in the processes to award these blocks.

What final message would you like to send OGFJ’s readers about your vision for Indonesia’s oil and gas sector over the next 5 to 10 years?

This country still offers enormous opportunities and a great potential in the O&G sector, the prospective areas are definitely there waiting to be developed. Migas as a part of the government is doing its part by ‘putting the broken pearl back together’ in order to establish a more consistent and efficient framework for the sector. There is a clear vision of what Indonesia’s O&G sector needs and is capable of, all that we need now is partners who will come invest and develop the many business opportunities here.

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