FOCUS - Independent body to replace Pertamina in managing oil and gas industry

The government is proposing to set up an independent body to replace state oil and gas company Pertamina in managing the development of the country's oil and gas resources.

The establishment of the so-called Executive Body is one of the main points proposed by the government in the oil and gas bill, which was submitted to the House of Representatives on September 29.

The bill is designed to replace the Pertamina Law No. 8/197, which grants the state company monopoly rights on the country's oil and gas industry.

The bill, whose copy was made available to Petromindo.Com, says the Executive Body will take over Pertamina's current right to sign contracts with oil and gas companies for the development of the country's hydrocarbon resources.

It will also hold the rights to evaluate the contractors' plans for the maiden development of oil and gas fields before submitting them to the oil and gas minister for approval; to approve the development plan presented by contractors, except for the maiden development of oil and gas fields; to approve the contractors' budget plans and to monitor the implementation of contracts and report it to the minister handling oil and gas affairs.

The bill says the plans for the first development of oil and gas fields needs the approval of the minister because the government has to decide whether one oil and gas field, that has been explored, could be developed or relinquished to the government. The further stages of the development plan of the contractors need only the approval of the Executive Body.

The Executive Body will also be entitled to appoint parties to handle the sale of the government's oil and gas share in contractors' output.

Most of these jobs are currently being executed by Pertamina's special division called Foreign Contractors Management Body (BPPKA).

The bill says the Executive Body, which will be established based on a presidential decree, comprises oil and gas experts with its head to be appointed and discharged by the President.

The Body's chairman will be accountable to the President but he or she will coordinate with the oil and gas minister in performing his or her job.

Upstream sector

Aside from the Executive Body, the government is also proposing the establishment of the so-called Regulating Body, which is only handling the downstream sector.

The Regulating Body include a Committee of five professionals, headed by a person, who will be appointed and discharged by the President with the approval of the House of Representatives. It will be formed by the President and be accountable to the President.

The Regulating Body's main job is to ensure the availability of fuel supplies across the country, according to the bill.

The Body will decide on the fee for natural gas transportation, the price for natural gas for household and small consumers. It will also regulate gas transportation and transmission business and decide on national fuel stocks, the use of fuel transportation and storage facilities across the country.

Pertamina's fuel provision and marketing department is currently performing all these jobs.

The bill indicates that the government will liberalize the country's downstream sector to allow private sectors to set up their refinery business, sell fuel on the domestic market and engage in gas transportation business.

The fuel prices on the domestic market will be determined by the market's sound competition but the government can provide "compensation" for certain group of consumers for the purchase of certain kinds of fuel, according to the bill.

With regards gas transportation business, the bill says the government will form the so-called National Gas Distribution and Transmission Network Grand Design and will divide the country into a number of business areas.

Each company, which wants to engage in gas pipeline transportation, can only obtain o license for one business area, the bill says, adding the restriction is aimed at "promoting sound competition, efficient infrastructure utilization and service quality."

At present, the gas distribution business is being controlled by state owned gas distribution company PT PGN but some Pertamina's production sharing contractors have also built pipelines to deliver their gas to industries under the licenses issued by Pertamina.

Downstream sector

The bill says oil and gas companies need to obtain "cooperation contract" to develop the country's oil and gas resources.

The bill says it deliberately uses the term of "cooperation contract" rather than "production sharing contracts" to enable the use of other types of contracts in the future.

The production sharing contract, which is commonly use in the country's oil and gas industry, and other prevailing types of contracts will be maintained as long as "they are still acceptable and beneficial to the nation taking account of the geographic location, geological condition, oil and gas reserve volume, technological application, and the participation of small and medium-scale business and cooperatives," the bill says.

The bill further says the cooperation contracts must be "reported" to the House of Representatives after being signed by the Executive Body.

The minister holds the right of deciding which contract areas to be offered to oil and gas companies and the government or the companies licensed by the government will help prepare the contract areas by conducting general survey on the areas before they are offered to contractors.

One company may only get one contract area and it must set up another company to develop another contract area, the bill says.

One contract is effective for 30 years, including the exploration years, and can be extended for another 20 years.

In order to attract foreign investment, the bill allows foreign investors to receive contracts without setting up a company incorporated in the country.

Under the contracts, contractors have to pay taxes (including corporate tax, import tax, excise, regional tax) and non-tax obligations (including the government's share, fixed fee, exploration and exploitation fee, and bonuses) to the government as the holder of mining right. The central government will share the non-tax revenues with the regional administrations in line with the laws on autonomy and intergovernmental fiscal balance.

The bill says contractors may choose either paying their taxes in accordance with the tax regulations implemented at the signing of their contracts or the current tax regulations.

The bill also emphasizes the contractors' obligation with regards environment, community development, community land rights and local companies.

It says the contractors have to protect and rehabilitate the environment during and after operations.

They are also responsible for the development of the welfare of the local communities and must acknowledge the existence of community land rights. With regards the community land, the contractors have to appropriate or settle dispute over the land through deliberations "in accordance with the local community laws."

The contractors must also prioritize the use of local goods, service, engineering and construction capabilities "in a transparent and competitive way."

Transition

The bill says the Executive Body must have been established within one year after the passing of the bill into the law, while the Regulating Body in two years.

Within two years after the passing of the bill into the law, Pertamina will be changed into a limited liability company, but the state company should continue its job of supervising and managing oil and gas contractors until the Executive Body is established, the bill says.

After Pertamina is changed into a limited liability company, it must sign contracts with the Executive Body to continue the development of its current oil and gas fields. But, it does not need to apply for a license to continue its oil refining, fuel transportation, storage and trading businesses because "it will be considered to have obtained such a license," the bill says.

After being established, the Executive Body will take over all Pertamina's rights and obligations towards contractors as far as production sharing contracts and contracts related to the production sharing contracts are concerned.

"All the contracts remain effective until they expire," the bill says.

The bill notes however that all contracts entered into by Pertamina, which are not related to the production sharing contracts (for instance the liquefied natural gas (LNG) contract), will not be transferred to the new entity of Pertamina. (bodega and godang)