with Satya Yudha, Member of Hous of Representatives Commission 7, Parliament of Indonesia
Article 33. of the Indonesian constitution declares that energy must be used for the maximum benefit of the Indonesian people. The ministry of energy has stated that it seeks energy independence by 2025. What is your perspective on achieving these goals?
There are 3 factors necessary for securing Indonesia’s energy independence: having security of supply, having the infrastructure in place to supply the domestic market and having affordable pricing for consumers. Out of these three factors, infrastructure is currently the one which is the least developed and therefore constitutes the priority in 2012. At the same time, although affordable pricing has already been created through subsidies, these pricing mechanisms are due for readjustment in 2012 to lessen the burden on the state’s budget.
The entire philosophy of the Indonesian energy industry is realigning to be more in focus with the goals of energy security and independence. In the past, the emphasis of oil and gas policy was on generating a strong revenue base and consequently it did not matter where the molecule ended up, in Indonesia or overseas, provided that the government secured maximum revenues. The idea was that by generating these revenues the government would then have sufficient funds to build Indonesia’s infrastructure and economy.
After a decade of reformation and democratization in Indonesia, the philosophy behind the energy industry has evolved considerably and is now chiefly concerned with securing energy supply to drive Indonesia’s economic base. Through the process of Indonesia’s democratization new stakeholders have entered the fray, and they are demanding their fair share of resources, benefits and investments. There is currently insufficient energy infrastructure to supply the energy demands of the local population and the government is now pushing to develop infrastructure to supply these local markets.
The initial rationale behind using Indonesia’s resources to build its revenue base was good because Indonesia needed funds. However in many cases the money generated was not flowing to the right places. For example, in the East of Kalimantan, which has huge gas production, there are still to this day shortages of electricity. There are other examples of local populations being surrounded by huge natural resources and yet not reaping any benefit. In today’s democratic system the authority stems from the people and government is held more accountable. As such, the local authorities wish to have energy supplying their energy needs rather than going to the central government with the local authorities then having to request the allocation of state revenues to them. Personally, I joined parliament to represent the people in order to see the people’s voices are heard in parliament. Our ultimate goal is to minimize the gap between the center and the regions.
Regional governments have created inconsistencies and tensions such as the delays on the Cepu Block. How do you propose to find a win-win solution for regional and central government?
The idea of democracy entails equality of opportunity and rights. The problem which has developed between the local and central government is because the local government was denied the capacity to develop. Now that local government has more power there is automatically a reassessment of the responsibilities for national development. The rebalancing of control is a process which needs to be worked out over time, however it must be resolved faster in the case of large, nationally significant projects. Overall oil and gas policy is highly centralized, however, when companies invest in oil and gas they have to deal with local permit issues and everything related to the land they are using. It is this type of issue which we need to address first.
In my view the resolution will stem from better communication between the center and the regions in order to generate understanding about nationally significant projects. In the case of Cepu it should be communicated to the regional authorities that because of the significance of this project, any delay will impact heavily on national production. Once these national priorities are conveyed then there will automatically be better harmony in the operational environment for oil and gas investors.
Dr. Subroto mentioned to us the necessity for more long-term thinking in oil and gas governance. Is this evident in the approach being taken today?
The overall shift in philosophy towards harnessing energy for the domestic market is already a long-term vision based on creating a sustainable energy supply for the Indonesian people. However, this vision has not yet been translated into a full set of regulations. Commission 7 is now pushing to have parliament enact laws and regulations which can transform this policy into reality.
One of the elements of the philosophy is transferring energy use from the global value chain to the local value chain. All the while that Indonesia is exporting energy to Japan and Korea, these consumer countries are growing their industry and their GDP. One of the mechanisms through which we could strengthen the local value chain is inviting foreign energy consumers to transfer some of their industry to Indonesia, making use of energy closer to the source. For example, if Japan asks for an extension of gas contracts, Indonesia may accept on the condition that Japan relocates part of its industry to Indonesia. This step would end the paradigm of energy following industry, creating one where industry follows energy. There is already precedent for this if we consider America’s industry transferring its production to China to then have it shipped back to America. It is simply a question of locating production closer to where resources lie.
If producers have to reorient their production around supplying the Indonesian market, how attractive is the local market in terms of gas pricing?
Gas pricing across the ASEAN region is starting to harmonize. One of the steps that the Indonesian government is pushing for is to construct the trans-Asia gas system connecting Indonesia with Malaysia and other Southeast Asian countries. This level of connectivity has already happened in Europe, empowering the industry in these countries. This step would necessitate a fixed regional gas price which would create stability for oil and gas investors.
However, the essence of article 33 of the constitution demands that the energy price is made optimal for the benefit of the Indonesian people. I have no problem with international companies wishing to sell gas at their own prices if the gas is produced overseas. However, article 33 gives just cause for the government to step in to ensure an appropriate gas price for the Indonesian people when the resources come from Indonesia itself. This must be where Indonesia’s priorities lie when determining the domestic pricing. Indeed, liberalizing the energy market would require a complete change to the constitution meaning that imposing global market prices for gas is not a realistic option. Companies already understand that investing in Indonesia requires respect for our constitution.
Even though there is a focus on the needs of the Indonesian people, there are many win-win solutions which can be found for industry. Ultimately, Indonesia’s production projects need to be commercially viable. Indonesia requires private investment to develop its resources in remote areas and offshore in deep-water as these are high cost, high-risk projects. One of the approaches that the government could take is to sacrifice some of its profits to provide better paybacks to investors. The government currently has a 70:30 split of profits which could be taken to 60:40 for more challenging projects.
Of course, finding the right balance between ensuring supply to the Indonesian consumer and making Indonesia an attractive place for investment is challenging. It is a learning process and Indonesia is keen to collaborate and understand the requirements of industry. It is also the case that we are discussing not one but a range of pricing mechanisms, because taking the pure market price would kill Indonesia’s LNG industry given that shale gas is now collapsing global prices at $3 per MBtu. Indonesia has CBM, conventional gas, LNG and now we are promoting shale gas. We need to understand what pricing mechanism would allow for the development of all of these areas simultaneously.
The question of gas pricing and the import and export of gas will no longer be an issue once we fix the price. Producers are of course inclined to chase global spot prices and we cannot deny that increased revenues come from exports. The balance between import and export and the DMOs need to be clever and Indonesia will need help from global institutions such as the World Bank in order to calculate this balance. We can use their experience and apply it to the Indonesian situation.
You mention reconfiguring gas pricing, what do you see as some of the major changes which will occur in 2012?
The 2001 oil and gas law is currently under revision and this process will no doubt be completed within the year. The parliamentary fuel enquiry committee made this revision mandatory after a series of hearings from all the relevant experts from across the Indonesian archipelago. One of the criticisms that was made of the previous law was that it was not made having taken into account academic studies. In 2012 we are therefore starting with the academic scripts for oil and gas, mining and electricity.
Part of this process of revision will attempt to remove the inconsistencies between pieces of oil and gas legislation. Many additional laws were created after the first oil and gas law of 2001 and some of these proved to be inconsistent with the original law. For example, the original law established equality among the upstream players whether they were state-owned or private, local or international. However, subsequently there was a ministerial decree issued by Minister Purnomo, on the back of demands from Pertamina, stating that the company would receive rights to 25% of all new blocks. This created an inconsistency in the legal environment which in one respect grants a level playing field and in another grants special privileges to Pertamina. The revision process will attempt to clarify the inconsistencies regarding issues such as contract extensions.
New legislation will usher in a new philosophy according greater privileges to local companies. Pertamina will likely receive first right of refusal on expired contracts, meaning that if Pertamina can match the best offer made in an open tender then Pertamina will automatically win the block. However, Pertamina will have to prove that it can match the best offer in the tender because nationalizing resources without this competition would be inefficient. The goal is to encourage Pertamina to develop whilst at the same time not shutting the door on companies who can bring new technologies and resources to Indonesia. The country needs to acquire this experience, especially when we consider the transition towards deep-water.
On a personal note, how moved from the private sector and into government. How do you view your role on the other side of the fence?
As an Indonesian and given my background and experience, I was compelled to do something for the benefit of my country. I am familiar with what investors are thinking and their principal concerns; at the same time I respect the Indonesian constitution and I understand the point of view of the Indonesian people. This places me in privileged position of understanding the necessary solutions from three sides. That said, finding these solutions is still a challenging process and I have had to learn a lot since becoming a member of parliament.
For example Freeport, a coal mining company, has been in Indonesia for 40 years and enjoys 1% royalty payments (probably the lowest rate anywhere in the world). I advised them recently to start paying more as a sign of good will. I had colleagues working for the company advised them that as a long-term friend of Indonesia, they should increase their royalty payment to 3.5%. The situation is not like it was 40 years ago when Indonesians were incapable of developing these assets on their own. I therefore suggested that it would be prudent to make an effort in pleasing the government. At the same time I have been explaining to Indonesian representatives the necessity of letting Freeport enjoy such low royalties because Freeport played a vital role in developing the country’s resources when Indonesia lacked the requisite technology and experience. Managing the investor relationship with the country is all about this kind of dialogue.
What would be your final message to the readers of Oil and Gas Financial Journal?
Indonesia has huge natural resources which need to be explored. Oil is just one part of this equation; we could also mention geothermal, CBM and shale gas. Indonesia understands the nature of investment and will be able to provide the rate of returns that investors look for. Ultimately, Indonesia only has a small budget for infrastructure investments and therefore we rely on investors to help us fulfill our national ambitions.