The fate of oil and gas industries after the passage of oil and gas bill

The pros and cons of over the need to replace Law No. 1/1971 on Pertamina with a new oil and gas bill had started since five years ago, when the Ministry of Mines and Energy was still held by I.B. Sudjana under former President Soeharto. Finally, in 2001, the new oil and gas bill is passed.

But still the pros and cons remained. And this phenomena raised questions about the future of the oil and gas industries in the country.

Those who opposed the oil and gas bill contended that the bill at the first place already violated the 1945 Constitution, especially article 33.

The bill has also been charged as a means by foreign investors to control Indonesia's oil and gas resources as the bill liberalizes the upstream level of the oil and gas industries by allowing foreign companies compete directly with state oil and gas company (Pertamina) in bidding for oil and gas fields..

They also contended that the danger of the oil and gas bill especially lies with its drive to liberalize the downstream level of the oil and gas industries.

First of all, it would endanger the security in the supplies of fuels as the bill let private companies compete in the distribution of fuels and let market mechanism set fuel prices.

The bill has also the potentials to create chaos in the marketing and sale of Indonesia's liquefied natural gas (LNG). Thus far, the marketing of sale of LNG has been conducted by Pertamina.

Most of all, according to oil and gas expert RO Hutapea, the current crisis situation does not pose any necessity for Indonesia to replace Law No. 8/1971. The new oil and gas bill itself gives a two-year transitional period to liberalize the upstream industries and four years for the downstream industries. It means there is no pressing need to replace Law No. 8/1971.

The issues that the new oil and gas bill benefit foreign investors more were challenged by Conoco vice president for government and public relations Dudung Natanegara. He contended that the oil and gas bill burdens foreign investors even more, especially from taxation side and from the requirement to ensure enough supplies of gas in the domestic market.

Articles at the new oil and gas bill that require oil and gas companies to pay taxes according to the prevailing taxation regulations would open doors for the government to impose any kind of taxes outside those stipulated in the contract. This will surely create uncertainty for oil and gas investors.

In addition, oil and gas companies are required to pay various levies, such as fixed retribution, exploration and exploitation retributions. In their operation, they are also obliged to pay taxes, retribution, duties and other bonuses to local administrations.

Another concern is regarding with the so-called the domestic market obligation, which according to Dudung burdens investors even more. The requirement to set aside gas totaling 25 percent of the contract value to domestic market at a set-price would discourage investors to invest in the gas sector.

With the pros and cons of the new oil and gas bill, what are really new at the bill?

The basic change in the oil and gas industry with the new bill is that the roles of state oil and gas firm Pertamina in licensing both in the upstream and downstream level would be taken over by the government.

The government would then establish a managing agency (Badan Pelaksana) to take over Pertamina's roles in the upstream level, holding the authority over the exploration and exploitation of the oil and gas industry in the upstream level.

Unlike Pertamina, this managing agency would be an independent and non-profit institution.

Then the government would establish a governing agency (Badan Pengatur) that would govern oil and gas industries at the downstream level, ranging from licensing, distribution, storage and other downstream businesses.

Both agencies would be answerable directly to the President. Their members would be appointed by the President after getting approval from the House of Representatives.

Foreign companies, those incorporated overseas, will be allowed to operate only in the upstream level, while domestic companies, those incorporated in Indonesia, will be given freedom to enter both upstream and downstream oil and gas industries.

Pertamina would then become a limited liability company and is prepared to be able to compete freely with private companies.

The new oil and gas bill also governs many more aspects of oil and gas industries in relation to the community, that are not governed by Law No. 8/1971. The new bill, for instance, required oil and gas companies to provide community development programs, sets rules for oil and gas smuggling, the roles of local administrations in the managing agency, and the roles of cooperatives and small enterprises.

Minister of Energy and Mineral Resources Purnomo Yusgiantoro said the new bill is expected to create more legal certainty for investors, conducive business climate, and protect the interests of the people.

Therefore, Purnomo said, with the new bill, investment in the oil and gas industry is expected to be flourishing, while at the same time, Pertamina is prepared to become an international oil and gas company and ready to compete with global private oil and gas companies. If those expectations could be materialized, it would dispel all concerns about the new oil and gas bill. (*)