Shifting sands: Improved regulatory bodies are needed to reach full sector potential

Over decades of partnership between the government and the private oil and gas companies contracted to bring hydrocarbon resources to the surface, the two parties have cooperated in the name of common interest. But while Indonesia still possesses plenty of reserves ripe for commercial exploration, continued uncertainty in the state’s oil and gas regulatory framework has boosted risk perception of the industry to the point that many investors have expressed reservations about committing to new large-scale development projects.

SURVEY SAYS: According to a PricewaterhouseCoopers 2012 survey of oil and gas executives in the country, the five most critical challenges that have hindered the achievement of Indonesia’s full investment potential in the upstream oil and gas industry all lay within legal and bureaucratic scope. These included interference from government agencies, such as the tax authorities; uncertainty over cost recovery and BP Migas/BPKP audit findings; contract sanctity; corruption, collusion and nepotism; and confusion over the implementation of Oil and Gas Law No. 22/2001. Also worrying is that the first three of these issues ranked in the top five concerns of similar polls in 2008 and 2010, indicating that the situation has not been improving.

MOVING ON: A number of circumstances arose in 2012 that appear to lend merit to these claims, some of which occurred after the results of the survey were released. The incident with the most wide-ranging implications occurred in November 2012 when the country’s oil and gas regulator, BP Migas (created under Law No. 22), was unceremoniously disbanded after the Constitutional Court of Indonesia declared it unconstitutional. According to the court’s decision, BP Migas was not operating in compliance with article 33 of the state constitution, which declares that the government is solely responsible for the exploitation of natural resources to be utilised for its citizens’ welfare.

The former duties of the regulator, which include the issuing and oversight of all oil and gas production sharing contracts, were subsequently handed over to the Ministry of Energy and Mineral Resources (MEMR) until a more compliant regulatory body can be established. Immediately following the court’s decision, the government did its best to reassure jittery investors that all current contracts would continue to be honoured, with MEMR publicly acknowledging the need for companies to be able to operate comfortably, although authorities publicly stated that any future authority would not favour foreign investors. The full impact of these decisions will take some time to evaluate as the dust settles and firms gauge potential changes to contractual terms and procedures.

BROUGHT TO COURT: The dissolution follows an incident earlier in 2012, which saw the government break with tradition when the Attorney General’s Office (AGO) pursued criminal charges against four employees of Chevron Pacific Indonesia relating to the bioremediation project, a government approved environmental programme. the workers were jailed in September 2012 and eventually released in November 2012 after the South Jakarta District Court found they had been charged without legal grounds. The AGO later disregarded the district court’s ruling and indicated it would continue to pursue the case, and the matter had yet to be resolved as of December 2012. The largest oil producer in the country for the better part of nine decades, Chevron said it was greatly disappointed that the AGO has decided to bring this matter to the court as a criminal case. It requested that the legally binding civil dispute mechanism described under the terms of the production-sharing contract which governs its operations be applied in this matter. Despite the reprieve granted to the employees, the willingness to apply criminal rather than civil law over contractual obligations could set a dangerous precedent for the sector, putting already uneasy investors further on edge.

Given that Indonesia ranks in the top 10 globally in terms of mineral wealth, but consistently gets low marks for governmental regulatory frameworks, the sector continues to have significant untapped potential.