Roots of Oil and Gas Problems
At present, the oil and gas sector is no longer the prima donna of the State Budget (APBN).
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At present, the oil and gas sector is no longer the prima donna of the State Budget (APBN). Its direct contribution to state revenues has tumbled to only 4-5 percent, in contrast to the 1970-1980 period when it contributed more than 60 percent.
The fall is caused by two reasons. First, the steady increase in the development of other sectors – with the oil and gas sector as the main driver – thereby moving the entire national economy and in the end, produce state revenues through taxes. More than 85 percent of state revenues is currently targeted in taxes.
Second, the oil and gas sector’s performance has continued to fall over nearly two decades, as reflected in the steadily falling production of oil and gas. With the falling production trend, oil and gas revenues in the State Budget practically depend on the movement of oil prices.
The root of the problem of the oil and gas sector’s falling performance lies in the legal uncertainty, or uncertainty in the rules of the game, originating from Law No. 22/2001 on Oil and Gas. The Constitutional Court (MK) has twice issued decisions to revoke the law’s articles, namely MK Verdict No. 002/PPU-I/2003and MK Verdict No. 36/PUU.X/2012.
Upstream Sector
MK Verdict No. 36/PUU-X/2012 revokes Article 1, Figure 23; Article 4, Paragraph 3; Article 41, Paragraph 2; Article 44; Article 45; Article 48 (1); Article 59, Letter a; Article 61; and Article 63 of the Oil and Gas Law. In addition, the MK revokes the phrase “with the Implementing Agency” in Article 11, Paragraph 1; “through the Implementing Agency” in Article 20, Paragraph 3; “based on consideration of the Implementing Agency” in Article 21, Paragraph 1; and “Implementing Agency” in Article 49 of the Oil and Gas Law.
The upstream oil and gas regulatory body BP Migas was deemed to be in violation of the Constitution, because its existence constructs or prevents the state from directly managing the upstream oil and gas sector, and even prevents the state from directly appointing state enterprises to manage the oil and gas sector.
The MK verdict also considers the sector’s management through BP Migas’s joint contracts of work (KKS) as contradicting the Constitution, because it places the state and contractors in the same position/at the same level. The state becomes bound to civil contracts, and thus loses its sovereignty to create regulations that may be different/contrary to the content of the civil contracts.
With regard to this ruling, the government responded merely by naming a new body, the Special Work Unit of Oil and Gas (SKK Migas), and placed it under the Energy and Mineral Resources Ministry to implement joint oil and gas cooperation. BP Migas/SKK Migas has established a contract-based upstream oil and gas business scheme so that it is no longer business to business (B2B), but government to business (G2B).
The G2B scheme, which still employs the contract system, means that the contractors are directly subject to taxes, so that the tax principles of assume and discharge that must be applied to the KKS – the production sharing contract (PSC) – cannot be implemented. Contractors have to bear and pay taxes, import duties, and other levies in advance, even when they are still in the exploration stage.
The uncertainty in the rules of the game related to taxation continues and is never settled. even though the government has tried to settle it. The “assume and discharge” principle and lex specialis in taxation can no longer be implemented on upstream oil and gas activities.
Various government efforts, such as exempting import duties or freeing imports through a number of regulations, for example Government Regulation (PP) No. 79/2010 on Operational Cost Recovery and Implementation of Income Tax for upstream oil and gas businesses (PP No. 79/2010), have only complicated the problem. PP No. 79/2010, for example, only further emphasizes the assume and discharge principle, which cannot be applied to upstream oil and gas activities.
PP No. 79/2010 also creates a situation where the cost recovery has to be decided through the mechanism of the State Budget, because the PP implicitly considers cost recovery as part of state finances.
Therefore, the upstream investment climate as a whole becomes highly unconducive and unattractive for exploration activities. Exploration investment within the last 15 years has averaged below 10 percent of total investment. Based on SKK Migas’s data, upstream investment realization was only US$6.74 billion (US$6.18 billion for exploitation and $560 million for exploration) as of October 2017.
This is the lowest in the last five years. The uncertainty and failure to abide by the rules of the game form the root of the problems that are unconducive to investment, and of the fall in production in the last 15 years.
Downstream sector
In Verdict No. 002/PPU-I/2003, the MK revokes Article 28, Paragraphs 2 and 3, which determines oil and gas prices within the business competition mechanism. The MK was of the opinion that government “involvedment” must be incorporated in determining the oil and gas prices in the country. The MK also obliged the government to revise two other articles, including Article 12, Paragraph 3, which regulates the authority of the Energy and Mineral Resources Ministry in deciding whether a business entity is authorized for exploration and exploitation. So far, there has been no follow-up to this issue. There are no articles to replace those that have been revoked, and neither has a revision been mandated.
The absence of clarity in following up MK Verdict No. 002/PPU-I/2003 on the revocation of Article 28, Paragraphs 2 and 3 of Oil and Gal Law No. 22/2001 causes inconsistency in determining and applying the country’s oil and gas policies. The oil and gas pricing policy remains a problem that has not been settled thus far.
Indonesia is not free of the basic problems of oil and LPG (price) subsidies or inefficiencies in gas price regulations. Prices cannot act as a good instrument to create a healthy and efficient domestic downstream market. Prices of oil and gas products in the country also cannot provide good signals to attract investments for downstream infrastructure development, such as fuel refineries, storage terminals and fuel-LPG depots, regasification terminals, transmission networks, and gas distribution.
Limited oil and gas infrastructure causes us to import 50 percent of our fuel needs and nearly 70 percent of LPG needs. This weakens foreign exchange and has caused a balance of trade deficit of $5.81 billion-$14.16 billion in 2012-2016.
In order to settle the various problems in the oil and gas sector, what the government do for the first time and immediately is to revoke or revise the Oil and Gas Law No. 22/2001. The revision process, which the House of Representatives has been working out since 2009 and has yet to be completed, must be settled through political lobbies. The government, in the face of a compelling crunch, can issue a government regulation in lieu of law.
PRI AGUNG RAKHMANTO
Lecturer of FTKE at Trisakti University; member of the Indonesian Association of Oil Technical Experts
