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with Suyitno Patmosukismo, Executive Director, Indonesia Petroleum Association(IPA)

05.11.2007 / Energyboardroom

First of all, can you give us some background and history of yourself in the Industry?

I was born in Bandung, a beautiful town the capital city of West Java, 70 years ago. I graduated from the Institute Technology Bandung (ITB) in 1963. I was actually planning on being a teacher there, but the conditions were not supporting and I decided to leave Bandung for Jakarta. In July 1963 I joined Pertamina and worked there until 1988, for a total of 25 years. I started my career as a junior geologist working in the field, and later had some additional education in France in exploration geophysics. After achieving more training and practical expertise, I became a chief geologist with Pertamina, and then head of exploration for one of their operating units, covering an area from Java all the way to East Timor. In 1977 I was then moved to Pangkalan Brandan in North Sumatra as the Head of Exploration of North Sumatra Operation. In 1984, Pertamina sent me to the Institute of National Defense to attend a 9-month Regular Course. After completing my course in this Institute, Pertamina sent me back to Pangkalan Brandan and this time I was appointed as General Manager of Pertamina Northen Part of Sumatra covering all activities (Exploration & Production, Refining and Distribution) in 4 Provinces: Aceh, North Sumatra, West Sumatra and Riau).

In April 1986 I was called back to Jakarta to take the position of Director of Exploration and Production in the Pertamina Head Office. I held this position for only two years when the government appointed me as the Director General of Oil & Gas in the Ministry of Mines and Energy as soon as Bapak Professor Ginandjar Kartasasmita was appointed as Minister of Mines and Energy by the former President Suharto. In the beginning, I was told that my service as Director General of Oil & Gas was only for temporary time, but in fact it lasted 5 years. Even when Bapak Sudjana was appointed as Minister of Mines & Energy, I had to hold my position for another 3 years. Bapak Ginandjar Kartasasmita was then appointed as the Chairman of the National Planning Board (BAPPENAS) for 5 years. He is now a leading politician as the Chairman of the House of Regional Representatives of the country.

In early 1996 I retired as government official and left my position as Director General of Oil & Gas after holding this position for about 8 years. Upon my retirement, I then reported to Bapak Aburizal Bakrie (who is now Coordinating Minister for Welfare) who sent me to supervise PT. Energi Timur Jauh, a private oil company under the patronage of one of his brothers, Bapak Indra Bakrie. I stayed there for a very short time (6 months) when I was called by the Government asking to serve as one of the assistants to Dr. Hartarto, the Coordinating Minister for Production and Distribution. (Dr. Hartarto was the Minister of Industry for over 10 years prior to his assignment as Coordinating Minister). I held this position only for less than 2 years when I finally had to retire as Government official in April 1998, just one month before the former president Suharto stepped down. Then, I rejoined PT. Energi Timur Jauh, which then became PT. Energi Mega Persada Tbk. one of the leading national oil companies in the country and in 2004 I was appointed as their first President Commissioner.

Surprisingly, in April 2000, I was invited by the President of IPA for an interview. After reporting to Board of Directors they decided to hire me as their Executive Director, a position they did not have previously. I was expected to be able to “bridge” between the industry and the government, as well as with the parliament, since the political situation was completely different than before. IPA is the leading petroleum association established over 35 years ago. Most of the Board of Directors are the CEOs of the multi-national oil companies operating in Indonesia and some national companies. So it is understood that their presence in Indonesia is for temporary time and they could be at anytime assigned internationally by their head offices. The association needs to have somebody who can be guarding their activities without interruption. However, my service is based on a one year contract, in line with the election of the Board of Directors which is convened in the Annual General Meting in every end of the year. To date, my service had been extended 6 times.

Gas is becoming more and more important in Indonesia. Since national production of gas started in early 1970’s almost all of it was exported. Following the boost of national oil production, the production of gas has been tremendously increasing. As early as mid 1970’s Indonesia became the world’s largest LNG exporter. During the last 15 years, along with the fast growing national industry, the domestic needs of natural gas have been significantly increasing! IGA (Indonesian Gas Association) which was established in 1980 has been increasing its role. Different than IPA (whom the members are more in the “upstream” activities), IGA’s members are more in the “downstream”, they are producers, transporters, distributors and buyers as well. IPA and IGA are hand-in-hand in bridging the Oil & Gas business in Indonesia. Some of the members of IPA are also members of IGA.

Did you do your Masters in Law because of the position you have in the IPA? Serving as a bridge between the Parliament (Commission VII), the government and the private companies…

That’s only one of the reasons. But actually the main reason is that my experience taught me that in any business, the legal aspect is very important, its role is very strategic! Then I decided to study law seriously by attending courses, writing papers and a thesis. I got my Masters in Law last year and now I am preparing my dissertation to get my Doctor’s degree.

Now would you tell me all about the IPA, your role as their Executive Director and your position at Energi Mega Persada?

IPA was established over 35 years ago when the oil companies (mostly multi-nationals) were in the first years of activities in Indonesia. The idea of having this association came from the late General Ibnu Sutowo who was the President of Pertamina. IPA is an organization where all “oil men” could meet to discuss their problems, technical as well as non-technical. As soon as this Association was established (Nov 1971) they held the 1st IPA Convention in 1972. And since then, IPA convened Annual Convention regularly until today (with the exception of 2 conventions during the economic crisis 1997 – 1999). This year 2007, the 31st IPA Convention was attended by over 1700 people.

Contributions are coming from all the companies operating in Indonesia. We discuss technical issues originating not only in Indonesia but also from various countries where the multinational companies have their operations, as well as the studies coming from their international head offices. By doing this, we exchange information on different techniques and experiences in oil & gas exploration and developments world-wide. Recently, the other main issues that keep coming up are related to Government laws and regulations and their implication to the Production Sharing Contracts. However, the Association is bringing-up only matters classified as “common issues”. The specific company matters are left to their own business.

The Board of Directors consists of 15 members: a President, two Vice Presidents, Secretary, Treasurer, and 10 Directors. To assist the BoD, this Association has a Secretariat office under my coordination, and its daily operations are under the supervision Ibu Sita, the Executive Secretary. In regard with my position at EMP, as Commissionner and my position as Executive Director of IPA is more complimentary rather than conflicting since EMP is one of company members of IPA. As the facilities of IPA’s Secretariat office is now still limited, my IPA coordination job is being conducted from my EMP’s office.

For IPA to be able to do its mission and dealing with so many issues (technical as well as non-technical), at present IPA has 15 Committees holding responsibility in various activities (including supporting / assisting education in oil & gas sector) :
1. Communications
2. Convention
3. Downstream
4. Data Management
5. Environment & Safety
6. Finance & Tax
7. Human Resources
8. ICP (Indonesian Crude Price)
9. KRIS (Cost Reduction Indonesia Style)
10. LNG & Gas Sales
11. Professional Division
12. Regulatory Affairs
13. Security & Local Relations
14. Service Companies
15. University Assistance

Let’s talk about the geopolitical aspect of Indonesia’s O&G sector. What would you say were the 5 key milestones of the industry since it began?

These are the 5 key milestones of the Indonesian oil & gas industry you are referring to :
1. Concessions system changed into Contract of Work (After Indonesia proclaimed its Independence from the Colonial Dutch Administration on 17 August 1945, where the mining rights were in the hands of the Government and the foreign Oil Companies (Shell, Caltex and Stanvac) acted as Contractors.
2. The establishment of National Oil Companies (NOC) : Permina, Pertamin, and Permigan which was then merged into Pertamina, the only NOC having monopoly in upstream and downstream activities. (Law No. 8/1971).
3. The establishment of Production Sharing Contract (PSC) where Pertamina has the Mining Rights and signs the PSCs on behalf of the Government.
4. The establishment of Law No. 22 / 2001, :
BP Migas (Executive Body for Oil & Gas Upstream Activities). BP Migas signs the PSCs on behalf of the Government, the Mining Rights are in the hands of Government.
– BPH Migas (Regulatory Body for Oil & Gas Downstream Activities). The marketing on domestic fuels and natural gas open to any PT Companies.
5. Pertamina became a PT Company (Limited Liability Company) :
– Upstream : signs PSC as a Contractor to BP Migas
– Downstream : has no more monopoly (Liberalized, open to any PT Companies).

What is your assessment of the effects of the O&G Law of 2001?

For me, the establishment of this law is “the last scene of our oil & gas evolution”. The Government took the “mining rights” from Pertamina, changed their status into a limited liability company; their function and role both in upstream and downstream activities had been taken over by the new Government’s Agents (BP Migas and BPH Migas).

So, what should I say? “Everything is now in the hands of the Government”. Now Indonesia has no more National Oil Company (NOC). Pertamina which used to be the only NOC and acted on behalf of the Government to sign the PSC with the third parties (foreign as well as nationals), now Pertamina is considered only as a “Contractor” to BP Migas. The consequences of all this PSC (and/or other systems to be established in the future) will have permanent consequences in Indonesia. So, this law is more dedicated to regulate the PSCs (and/or other Contract systems in the future). However, from this point of view, it seems to me that this Law “stands alone”: on one hand, this law does not regulate the existing (“old”) PSCs and on the other hand this Law does not fully regulate the “new” PSCs which were signed after its enactment. It sounds rather strange, but it is a matter of fact, especially when it is seen from the taxation point of view. This matter is not easy to understand without more in-depth study with some real cases.

Do you think that the lack of exploration and investment is due to the inefficient regulatory environment, or to a lack of companies that have money to invest here?

For sure, the reason is not because of the companies do not have funds to invest. With the high price of oil (and followed by the high price of gas), companies are more than eager and able to invest. The lack of clarity of the oil & gas law, and other laws (mainly tax law and forestry law) and the lack of harmonization between these Laws are the main factors hampering the investment in exploration of oil & gas for at least the last 6 – 7 years. Again, to understand this matter you should do a thorough study with several cases of what happened to the PSCs (both old and new).

30% of Indonesia’s budget depends on the oil and gas revenues. Can the country afford this decline?

Oil & gas had been contributing very significantly to the development of our country for more than 3 decades! In the early stage of our national development (the first 10 -15 years) the oil and gas revenue were focused on building infrastructures and developing basic industries (steel, fertilizer, etc.). But, as you know, oil & gas are non-renewable resources. As early as in late 1980’s the Government had the energy policy which directed that oil is to be used only for “noble uses” (oil is to be used only where it cannot be replaced by other energy sources). The policy was known as “diversification policy”.

However, this policy could not be implemented successfully. The only well implemented was to use more gas and coal in the power generations replacing around 15 – 20% of oil power generation. The other sources of energy, especially the renewable resources (geothermal and other sources including biofuel) were very slowly developed. The main obstacle was the price of these alternative energy which were not competitive to the (subsidized) domestic fuel price. Hopefully in the future this policy could be more successful along with the increasing of the buying power of our people where they are able to buy fuel at its commercial price (without subsidy). With this condition, the oil & gas could be efficiently used by the industry which could drive the national economic development to accelerate the development of our people’s welfare as mandated by our 1945 Constitutions.

Will the future changes in Indonesia be more politically or economically driven?

Future changes? So far, the changes we have experienced had been politically rather than economically. The last “reformation” was political. Theoretically, this reformation should and will be followed by other aspects in the nation’s life, including economy. Even though it has never been formally declared, the economy moves to the direction of liberalization (an easy example is seen from the Oil & Gas Law regarding the marketing of domestic fuels and gas).

Do you think that the main thing affecting Indonesia is its internal development, or is it that the rest of the world is moving faster that the country can catch up?

I tend to say that the first is the main reason. A real example is what you have seen in the sector of oil and gas. It is a pity that Indonesia is not able to increase its national oil production while the oil price is high. The government is not quickly responding to the oil & gas industry’s concern as the impact of the new oil and gas Law as I have already described previously.

Is there a dynamic between the several ministries involved?

The lack of clarity of the new Oil & Gas Law, and not harmonized with other regulations (tax & forestry laws) had been reported to various ministry offices. So far, there are no concrete actions to overcome the problems. The industry’s concerns remain unresolved. Coordination among those offices is expected to find solutions.

Just imagine that the government actually gives a break on taxation as an incentive for private companies to invest… where would they find this money for the budget?

I will limit my comments only to what is happening in the oil and gas industry. The companies do not need to be exempted from paying the tax! What they need is for the Government to honor what is agreed in the contract. A very clear example is the issue of import duty on any equipments and materials used for oil & gas operations which was to be assumed and discharged by BP Migas (which was formerly by Pertamina). With this new Law, the companies have to pay this duty including the re-exported equipments. Importing drilling rigs (land, jack-up, ship) and seismic vessels to conduct their operation, the companies must pay the import duty tax, which in the past importing these equipments were exempted from paying this duty / tax.

Talking further on tax matters in PSC’s arrangement, the basic principle of the Production Sharing Contract is on a net basis (including all kinds of taxes) for both the Government and the Contractor. The 85 : 15 is the general split between the GoI and the Investor (PSC Contractor), the Government’s split is including all taxes (except the personal income tax of the personnel). I have a strong belief that when the Government is able to establish a good investment climate (among others by clarifying the rules of the game, including the clarity of regulations, harmonizing among various Laws, and honoring the contracts), the investors will come to invest and the economy will grow. The Government could get more revenue from the multiplier effects of oil & gas industry activities. And with this, the Government will be able to fund the development of the country. Insya Allah!

What is your final message to Oil & Gas Financial Journal’s Readers?

I think I have talked much on the Indonesia’s oil and gas industry. I must say that since the last 7 years my presence in the Indonesian Petroleum Association (IPA) I have been trying my best to communicate the industry’s concern with various Governments’ institution. We all know that the national oil production has been declining since the last 10 years. It is our all concern how to increase production while the domestic consumption keeps increasing. We believe that we will be success only if we could hand-in-hand with the Government to overcome all problems and the industry’s concern. That is why IPA’s 2007 Convention had a theme of “Promoting Investment Through Partnership”. Partnership in this context is not limited only among the companies but the important one is between the companies (investors) and the Government. And for the next year’s Convention, IPA will have a more specific theme, “Meeting Energy Challenges Through Cooperation”.

Having known all the problems, my only call to the investors is “come to Indonesia and do invest in oil & gas sector”. The business is promising. In the upstream, the potential reserves are still undiscovered in more than 10 geological basins including in the deepwater. Hopefully the existing industry’s concern I have described could be resolved in relatively short time. And in the downstream, the business is also promising. The liberalization has just started. The opportunity is widely open. The new players besides Pertamina are still very few. The ever increasing population (now Indonesia’s over 225 millions) needs more energy. Oil and gas is still expected to play a major role up to the year 2025 and beyond!



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