Bureaucracy Slows Indonesia Oil & Gas Development

Indonesian oil and gas development is expected to stall in 2010, with state revenue from the sector falling US$6.36 billion, down 25 percent on 2009, and direct investment falling to $12.18 billion from $13.77 targeted, down from $13.52 billion in 2008, with the blame squarely at the government's door.

Waryono Karno, secretary-general at the Indonesian Energy and Mineral Resources Ministry, told reporters on Jan. 4 that the failure to find new investors for most of the 40 oil and gas blocks offered government in 2008 was the major factor.

Investors usually pay signing bonuses to government when development contracts are agreed and can later make cost recovery payments for allowable items under the provisions of oil and gas production sharing contracts (PSCs). But amidst unfavorable global conditions, Indonesian parliamentarians and the government made a mistake in pushing the PSC system into the regulatory framework of the state budget. The result was that government put a state budget cap on cost recovery. The law on the state budget capped the total cost recovery for the industry at US$12 billion for 2010, up from US$11.05 billion in 2009.

For oil and gas developers facing a multiplicity of risks from unstable geology to the erratic behavior of Indonesian local governments, an upstream regulator alleged by parliament to be falling down on the job, lack of positive sentiment or technical capacity from the national bureaucracy, plus a moody parliament, the cap fit he who wore it, conveying anything but a welcome door wide open to investors.

Imposing the cap was a very odd thing to do for a government facing an energy crisis (and power cuts) which knows that its oil lifting capacity is falling like an injured bird and facing a gas shortage both for LNG exports and a gas-starved downstream industry.

Not surprisingly newly installed Coordinating Economic Minister Hatta Rajasa promptly concluded on Jan. 5 that, "The policy of capping cost recovery is not appropriate. This is not supposed to be capped. We will fix this matter."

However, as Suwito Anggoro, president director of PT Chevron Pacific recently hinted, this might not be the end of the story. "If Indonesia's oil and gas industry is a restaurant, maybe this is the right time to offer menus other than the PSC," he said.

Despite Hatta Rajasa's admirable speed of reaction, the spat over the cost recovery cap may be missing the main point. Between December 2008 and November 2009 the government offered 40 oil and gas blocks for development but only found eight firms as takers, and an astounding 75 percent of the blocks on offer attracted no qualifying bidders, to the disappointment of new-generation efficient and effective top civil servant Dr. Evita Legowo, director general of the directorate general, who said she would look into the reasons why.

The big reasons are that Indonesia faces the sunset of its oil and gas age, that cherry picking leaves the hardest blocks to the last, that the state bureaucracy still has a genius for producing more obstacles or disincentives and that the poor quality of data on offer with the blocks may have tipped the balance, according to Andang Bachtiar, head of the advisory board at the Indonesian Geologists Association.

This time it may not have been the money stopping people getting to the honey, but the tide of history for the Indonesian oil and gas industry facing sunset, but with no autumn sunshine in sight. And swimming against the tide needs hotter salesmanship of better prepared portfolios, instead of caps and complications.

The oil and gas companies may need a new economic and social contract with the Indonesian government, to wrap up central and local government political risks in a neater package and ensure local community support, backed a more informed national democratic debate on who contributes what and gets what, instead of a political competition to squeeze more out of the companies in a declining market.

This Indonesian case-study may contain lessons for other countries with similar problems. More realism is the name of the game as Indonesian oil and gas reserves run down and getting to them costs more and more, with higher and higher risks. Fair shares for Indonesia and Indonesians by all means, but the companies are the horse that pulls the cart and it does no good flogging a horse to death.

Terry Lacey is a development economist who writes from Jakarta.