Developing the Role of Region-Owned Oil and Gas Companies

The government’s seriousness in developing region-owned companies (BUMD) in the oil and gas sector, especially in upstream businesses, must be appreciated.

The government has officially issued a regulation allowing 10-percent participating interest offers in Energy and Mineral Resources Ministerial Regulation No. 37/2016. The policy has long been awaited by resource-producing regions.

The ministerial regulation provides a foundation for the fair and proportional involvement of region-owned oil and gas companies. Strategic issues involving the participation of resource-producing regions in upstream activities, including ownership limitations, bidding procedures and funding, are comprehensively accommodated. Doors have also been opened to the possibility of further regulations, as needed, in the future.

Providing regional participating interest is the state’s constitutional duty, as natural wealth sourced from Indonesian soil affects the livelihoods of a considerable part of the population is controlled by the state and should be exploited for the greatest benefit of the people. Understanding of the phrase “controlled by the state” thus far has always been highly centralized and narrowed to “controlled by the central government”, involving state-owned companies such as Pertamina and state bodies such as BP Migas, SKK Migas and BPH Migas. In short, everything is located at the central government level. As such, the question arises regarding the position of resource-producing regions in this scheme. Should they just be a passive audience who wait for their share of the profit through general-purpose grants (DAU), specific-purpose grants (DAK) and other allocations?

Understanding of the phrase “for the greatest benefit of the people” mandated by the Constitution should not be centralized. Efforts toward “the benefit of the people” should not be monopolized by the central government. Rather, efforts must be made to ensure that this benefit reaches all of the population in a fair, equitable and proportional way – with “proportionality” being the keyword. Therefore, it is neither a mistake nor discrimination for the government to give larger roles to oil and gas companies owned by resource-producing regions. Satisfying the participating interest of resource-producing regions is a must as it is these regions that are directly affected by all exploration and exploitation activities.

Resource-producing regions bear all the direct risks of all the excesses of oil and gas activities, including environmental pollution, declining natural quality and continuous exploitation of their natural resources. As upstream oil and gas activities are basically business activities to obtain oil and gas commodities, then region-owned companies, as businesses established for the interests of regions, are formed by these regions and hopefully the results will directly affect the local people in these regions.

Ensuring mission accomplishment

The conception of the Oil and Gas Law stipulates oil and gas are commodities directly controlled by the state to be exploited for the greatest benefit of the people. The state in this case is represented by central and regional governments. Therefore, state-owned (SOE) and region-owned (BUMD) companies are the most relevant business entities.

Despite SOE and BUMD being business entities established to seek the greatest possible profit, they are owned either by the state (SOE) or regional governments (BUMD) and, therefore, their profit will ultimately end up in either the state or regional coffers to be used for the greatest benefit of the people. Therefore, the provision of a larger role for region-owned oil and gas companies must be supervised and monitored so that they achieve the intended objective.

Therefore, what is important to note in this regulation is that one region-owned oil and gas company must only hold one participating right. This new regulation seems to be more focused and firm in ensuring that the mission of equal distribution of welfare involves only oil and gas companies established by resource-producing regions and has decisively ruled out any possibility of private companies being involved in share ownership.

Participating rights are given only to region-owned companies whose shares are 100 percent owned by regions or at least 99 percent owned by regions and 1 percent owned by parties affiliated to regional governments. Thus far, due to a lack of funds to take participating interest, regional governments have often collaborated with private businesses who serve as financiers and this therefore defeats the purpose of participating interest provision, as the businesses often end up being managed by private entities.

With this new regulation, regional heads are forced to become more serious about involving relevant experts to run regional oil and gas companies, instead of haphazardly appointing people with no oil and gas expertise. Thus far, region-owned companies are usually run by unqualified and incompetent cronies of regional heads. If regional heads cannot adapt to this new paradigm promoted by the new energy and mineral resource regulation, they will inevitably fail to utilize this golden opportunity, the results of which will admittedly only be felt a long time from today.

What regions can do now is first join forces with existing relevant organizations, such as the Association of Oil and Gas Producing Regions (ADPM). The association is important as a medium of communication and information exchange between resource-producing regions. Beyond that, the association can hire experts and initiate the training needed by region-owned oil and gas companies, regional heads and regional administration working units (SKPD) to continue updating their knowledge and information. The large volume of information flowing from region-owned oil and gas companies and resource-producing regional governments to ADPM enables it to run surveys to evaluate the progress and success of this policy.

Second, they should improve their human resource quality. Oil and gas businesses are lex specialis businesses. Therefore, they need a specific law, similar to banking. In comparison, all provinces in Indonesia are today equipped with their own regional development banks, such as Bank Jatim, Bank Sumsel Babel and Bank Papua. These banks are run by region-owned companies established by provincial governments with regency and city administrations as shareholders.

Agents of equitable development

Thus far, provinces across the nation have successfully prepared professional human resources for banking who are capable of implementing good corporate governance. With this comparison, considering the specific needs of the upstream oil and gas business with its requirements for high technology, special expertise, huge funding and a long period to achieve the intended results, then oil and gas businesses need a special law and should be run similarly to banking businesses – namely by region-owned companies.

To avoid instability and exploitation of region-owned oil and gas companies by regional elites, as is the current political trend, strict criteria are needed for individuals to serve in region-owned oil and gas companies. This needs to be regulated so that the appointment of people to top management positions in region-owned companies is not be within the exclusive authority of regional heads. Fit and proper tests must be conducted on individuals nominated to fill these top management positions. Such tests should be conducted by the Energy and Mineral Resources Ministry and SKK Migas to prevent unprofessional people from running region-owned oil and gas companies. This mechanism is already in place for region-owned banks, for which the top management must pass a fit and proper test held by the Financial Services Authority (OJK).

If necessary, regulations can be put in place for the dismissal and replacement of top managers before the end of their term of office, with consultation from the Energy and Mineral Resources Ministry and SKK Migas. Management competence must also be periodically assessed to monitor progress and evaluate performance.

The confusing relation between region-owned oil and gas companies and the Home Ministry must also be limited to a relationship based on consultation and not coordination. The Home Ministry’s involvement should be more about ensuring synchronization between regions, ensuring regional autonomy and determining profit sharing for the participating rights in working areas that overlap two or more regions.

Doors have now been opened by the central government and trust has been given to region-owned oil and gas companies. The essence of development is equitable development for all people. Here, region-owned oil and gas companies have been given the role of agents of equitable development. Successful region-owned companies will turn resource-producing regions into new growth centers.

Now, the ball is in the hands of the resource-producing regions; can they can utilize this opportunity that has been given to them so they can be directly involved in upstream oil and gas businesses in their own regions. Such opportunities are fully aimed at sharing profits with the people in resource-producing regions through region-owned companies.

Such opportunities can only be meaningful if resource-producing regions are willing to learn and develop, prepare professional human resources and are capable of brushing off their elites’ political and power-grabbing egos for the greater long-term benefits of their people. If not, then these resource-producing regions will continue to be passive watchers who merely receive orders as they will be seen as nothing more than objects of development.

JUNAIDI ALBAB SETIAWAN

Advocate, Oil and Gas Law Observer