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sharing in governance of extractive industries

As the Opportunity Arises, the Local Government in Indonesia are Encouraged to Take the Participating Interest

Recently, the Minister of Energy and Mineral Resource of Indonesia issued Ministerial Regulation Number 37 Year 2016 concerning the Provision Deals of Participating Interest (PI) 10% on the Oil and Gas Block. Publish What You Pay (PWYP) Indonesia assesses that the regulation has big potential to reduce rent seeking in the PI management in the oil and gas industry by prioritizing Region Owned Enterprise (BUMD) which’s fully owned by the local government or other companies whose at least 99% of their share owned by the local government and the remaining shares are fully affiliated with the local government.

Rizky Ananda, researcher of PWYP Indonesia said, “Typical problem found is that the local government don’t have adequate capital to take PI 10% which has been allocated for the region. Consequently, it’s managed by the third party through certain scheme which’s less beneficial for the region. Therefore, it’s important for the local government to be given flexibility to take their share of PI as suggested by their financial capacity.”

“Scheme regulated in the Ministerial Regulation is in line with the recommendation of PWYP Indonesia Coalition in the Revision of Oil and Gas Law Number 22 Year 2001, which is to prioritize direct ownership of local government”, explained Rizky, Thursday (26/1) in Jakarta. Rizky added, this regulation also enable the contractor to finance in advance, then recalculate in the dividend sharing later. “At least, this regulation may reduce the potential for rent seeking which put the local government at loss”, affirmed Rizky.

Maryati Abdullah, National Coordinator of PWYP Indonesia, reminded that PI is the right of local government to play a role in oil and gas management for people welfare, especially living in the producing region. PI shall not be interpreted as an unconditional distribution of shares for local government, without any obligation and profit-sharing oriented only. “Managing PI means that the local government have to pay their obligations of PI 10%, tied with the clauses of the contract which’s also prepared to bear the risk if the project suffered losses,” stated Maryati.

The aim of giving PI to local government through BUMD, continued Maryati, is for the local government to actually participate in the upstream industry of oil and gas, including to promote transparent and accountable governance, transfer of technology, also direct monitoring of the industry in the sub-national, starting from planning to evaluation. To do so, adequate human resource and strong management of BUMD in understanding the business process of industry are needed. 

“As the end of the contract of oil and gas blocks are getting closer, how far the oil and gas producing regions prepare their BUMD which will manage PI? It’s not only related to its institutional aspect, but also regarding the human resource, local regulation, transparency and accountability mechanism as well as monitoring system. Central government along with the local government shall strengthen their coordination, so that PI management can work appropriately”, added Rizky.

Carolus Tuah, Director of Pokja-30, local NGO based in East Kalimantan, reminded that BUMD managing the PI shall implement the principle of transparency and accountability in managing PI. BUMD shall disclose PI management and business plan, as well as publish audited annual report. By doing so, public can also monitor and oversee PI management. Because the ultimate goal of PI is to bring optimum benefit for local citizen.

“The next challenge is to prove that BUMD is local government’s instrument to boost local economy growth and local income as well. Up till now, BUMD is perceived as non-transparent and accountable entity with ill performance. It’s also prone to corruption, and only being used by the corrupt government officials and politicians. Don’t let PI keep continuing the ugly phenomenon for oil and gas rich region, which is the resource curse,” affirmed Tuah.

As a notes, there are 10 oil and gas blocks whose contracts will be ended up to 2018, where the government has appointed Pertamna to manage the blocks, including block of Offshore Northwest Java (ONWJ),  block of Mahakam (Total E&P Indonesia), block of Attaka (Inpex Corporation), block of South East Sumatera (CNOOC), block of East Kalimantan (Chevron Indonesia Company), block of Tengah (Total E&P Indonesia), block of North Sumatera Offshore (Pertamina), block of Tuban, block of Ogan Komering and block of Sanga-Sanga.

 

Editorial Notes:

  • Participating interest is defined as the proportion of exploration and production costs each party will bear and the proportion of production each party will receive, as set out in an operating agreement.
  • Ministerial Regulation No 37/2016, as the following regulation Government Regulation (PP) Number 55 Year 2009 concerning the Change of PP Number 35 Year 2004 concerning the Activity of Upstream Oil and Gas which affirms the contractor’s obligation to offer PI (maximum) 10% to the BUMD or other companies in managing oil and gas block. It also regulates the provision of BUMD who’s allowed to take PI, which are 1) BUMD shall be owned 100% by the local government; 2) other companies shall be owned minimum 99% by the local government and the remaining shares are fully affiliated with the local government; 3) any companies took PI shall be legalized through local regulation; and 4) the companies shall not have other works, except managing PI.
  • For instance, in PI management in the Block of Cepu, the Government of Bojonegoro District through PT Asri Dharma Sejahtera (ADS) own 4.4847% shares of the block which is equivalent to 2.7 trillion rupiah at that time (200). However, as the financing involves huge amount of capital, the government cooperated with PT Surya Energi Raya (SER) to meet financing demand with distribution of shares between those two are 75% for SER and 25% for ADS. ADS obtained small portion, because all the financing for block of Cepu is conducted by SER whose funding obtained through third party loan, China Sonangol International Holding Ltd. Consequently, the dividend is used to pay the loan and the local government will enjoy the profit after the loan is fully paid.

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