By J R Ruaya
Energy and Chemistry Consultant
In a recent post ("Indonesia poised to overtake RP in geothermal production by 2010", April 11, 2008) it was pointed out that Indonesia is likely to overtake RP in geothermal production mainly because of structural changes that has taken place in recent years which create an atmosphere conducive to fresh investments from both foreign and local interests. The renewed interest is not only happening in the geothermal subsector but apparently encompasses the whole energy sector.
In the latest April 2008 issue of the Oil and Gas Financial Journal, the banner article is "Shaping a competitive Indonesia", which chronicles the rapid strides the country is taking in making it a preferred investment destination in energy. Watching our neighbor's progress in this area could enable us to pick up some lessons applicable to our own efforts at aiming for similar objectives.
Indonesia is a major oil and gas producer and the only Asian member of the Organization of Oil Producing Countries (OPEC), the de facto international oil cartel. Yet in 2004, the country has become a net importer of oil for the first time in history as domestic production failed to keep up with rising consumption. The milestone event set alarm bells which compelled the present government to initiate a motion to change the country's energy basket, "with the objective of re-balancing the share of its oil and gas sectors, and to allow for new sources of power from biofuels to geothermal through to possibly nuclear energy to find their places in the country's energy future," acccording to the article.
Production of oil and condensate has been in decline for years, but according to Purnomo Yusgiantoro, Indonesia's Minister of Energy and Mineral Resources, investment in exploration and production (E & P) activities has picked up over the last several years which he attributes to the passing of new laws and regulations for the sector.
Briefly, the strategy is to alter the current energy mix, which is dominated by oil and gas, occupying 52% and 29% respectively, of the total mix. The governement targets an energy basket by 2025 in which oil contribution falls to 20% of the blend, coal to double to account for 33%, gas to edge slightly to 30%but still a substantial increase in absolute terms), geothermal and biofuels contributing 5% each, and the remaining 7% would be accounted for by a combination of biomass, hydro, solar, coal liquefaction and possibly, nuclear energy.
All these plans are embodied in the New Energy Law passed in 2007 which constitutes Indonesia's first attempt to provide a general framework for managing the country's energy resource, the article pointed out. The new law also creates a National Energy Council to oversee the creation of a concerted energy policy among the government instrumentalities.
The move was lauded by William Deertz, leader of intrernational auditor PriceWaterhouseCoopers (PwC) Indonesia's Energy, Utilities and Mining (EU & M) practice, who regards this development " a positive step for the country's resource sector as it will put into place a structure for ensuring appropriate optimization of its natural resources".
Production Sharing Contract (PSC), currently the standard practice of oil and gas development, originated in Indonesia in the '60s. In late 2001, a "New Oil and Gas Law No 22/2001" was promulgated which maintained the PSC as the basis of oil and gas development, but more importantly, it mandated the deregulation of the upstream and downstream sectors, including Pertamina's (the state oil and gas behemoth) monopoly over oil distribution and marketing of oil products. The law also mandated the establishment of an implementing agency called BP Migas for upstream activities and a regulatory agency called BHP Migas for downstream activities to assume Pertamina's regulatory roles.
Making sure that the rhetorics of the law translates into concrete results falls into the hands of Luluk Sumiarso, head of the Directorate General of Oil and Gas (Migas). All indicators point to Luluk in sharp focus on the job at hand, putting things in order and seeing to it that the recent activities in the oil and gas sector comply with the laws.
An active partner in the whole enterprise is the Indonesian Petroleum Association (IPA), which is preparing its annual concention for May 2008. For this year, this association's flagship event is not merely an exhbition of the prowess of the association members but rather " a public forum and debate on the main issues that affect the industry in Indonesia, from business environment to corporate social responsibility, " pointed out Roberto Lorato, the President of IPA and a Managing Director of Eni Indonesia LTD, the local unit of Italy's energy giant.
Rising from the ashes
Over the last ten years, Indonesia has been buffeted by a slew of transformational events. It has undergone from an authoritarian regime to a presidential democracy, rocked by a festering secessionist movement in Aceh and political intramurals in its eastern provinces, hit hard by the Asian financial crisis starting in 1997, became the eye of the bird flu and SARS epidemic storms, faced natural disasters such as earthquakes which hit at almost regular intervals, floored by a devastating tsunami in December 2004, and a litany of other natural and man-made disasters.
But recent economic indicators point to a resilient economy which is confidently bouncing back under the current reform government of President Susilo Bambang Yudhoyono, which has focused on improving the economic fundamentals and creating a better environment for business. The country's estimated economic growth for 2007 and 2008 are at well above 6%, inflation has been tamed and interest rates seem to be under control. Both foreigh direct investment and consumer spending - signs of economic confidence - are on the rise.
Some credit has to be given to BKPM, the government's investment service agency responsible for foreign investment promotion, which operates six international offices around the world. It was instrumental in writing a new investment law in April 2007 that eliminates many of the barriers that prreviously hindered foreign investment in the country. The law drastically reduces bureaucratic processes for investors, increases anti-corruption measures, gurantees equal treatment for overseas and local investors, and decentralizes investment through regional onew-door integrated services.
Training a combative national champion
In reponse to the anticipated fierce competitive environment, Indonesia's National Oil Company (NOC) Pertamina, is not given a protective blanket by the government, but fangs and claws to fight on even terms regional giants like Shell Petroleum and Malaysia's Petronas.
Pertamina's challenge is to "modify the culture, mindset and management style that are all inheritance of the past," says Ari Soemamo, president and CEO, whose condition to take the job in 2006 was that he would have a free hand to truly transform the Company, whose previous reputation was more like a spoiled, lumbering giant, unable to take against opposition without government protection. In 2003, Pertamina was officially transformed from being a state oil and gas enterprise to a state-owned limited liability company - very much like a private corporation. This was the statutory framework aimed to establish a truly competitive and efficient NOC.
Elephant hunters on the prowl
The gauge the efffects of this cultural transformation, one needs to examine the conditions at the trenches. Already, the guerilla oil outfits and the elephant hunters (elephant is a term in the oil industry which refers to a major oil find) are combing the hinterlands and the backwaters of the country for the black gold. The cast of characters is a diverse lot: from Santos of Australia, Statoil of Norway, ConocoPhillips, Eni of Italy, giant CNOOC of China - as well as local players like Star Energy.
For sure, challenges lie ahead, for decades-old problems of corruption, red tape and protectionism are difficult to brush aside. But industry players generally share the optimism that changes are on the way - and for real - by putting their money where their mouths are.
Lessons from a neighbor
Our policymakers should take notice.
Here, the mindset is still of protectionism and grandstanding. Petron's majority stake sale to Ashmore, a hedge fund, quickly becomes a national security problem, and protectionists are on the offensive to have the company "re-nationaized".
A suggestion to open the debate on the nuclear option (see previous post, "Is nuclear the way to go? - re-opening the debate", April 16) could very well lead to resumption of old animosities and charges of corruption.
A mere joint seismic study on the oil potential of the country metamorphosed into a question of national sovereignity, when scientific collaboration is the norm to attain significant progress in a ny economic endeavor.
Our mine sites are languishing at a time of near $1000 an-ounce-gold with developments stymied by bureaucratic processes, parochial oppposition and political noise.
For sure, developing natural resources has its attendant challenges, but these are not insurmountable.
In the very important energy sector, our once lowly neighbor is showing the way. Let us not be surprised if we eat our neighbor's dust on the racetrack of economic progress.
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