Answers to Upstream Oil and Gas Regulation Problems
Pri Agung Rakhmanto
On Jan. 23, President Joko “Jokowi” Widodo led a limited cabinet meeting and discussed the revision of Law No. 22/2001 on oil and gas. It was a positive signal that renewed hope that the problems related to the revision of the Oil and Gas Law could be resolved. Since it was recommended by the special committee on petroleum fuel in 2008, the revision has never been discussed by the House of Representatives (DPR).
The completion of the revision of the Oil and Gas Law is very important because under the1945 Constitution, the Oil and Gas Law is the highest legal umbrella for the administration and supervision of the oil and gas sector.
The Oil and Gas Law is the foundation of all regulations related to the policy, regulation, management and supervision of the oil and gas sector in the country. As such, the regulations in the upstream oil and gas sector cannot be excluded.
Uncertainties
Over the years, the main problems in Indonesia\'s upstream oil and gas sector are uncertainties related to three main aspects: (1) legal (regulation) uncertainty; (2) fiscal (economic) uncertainty; and (3) complicated administrative, bureaucratic and licensing procedures.
Uncertainties are related to the implementation of the rules of the game and uncertainties in the fiscal aspects, such as breaches of cooperation contracts. This situation is something that investors, including those in upstream oil and gas sector, always try to avoid.
The issuance of new regulations and the deregulation and debureaucratization measures that have been carried out by the government with good intentions, have not been able to effectively answer or resolve the uncertainties related to the three main aspects.
In various cases and at a certain level, some of these efforts have even added to the complexity of the problems. For an example, Energy and Mineral Resources Ministerial Regulation No. 15/2018 concerning post-operation in upstream oil and gas activities. Articles 20 and 21 of the regulation stipulate that the old contracts should adopt the new regulation. This means that there should be a change and an adjustment in the implementation of the contracts.
Article 11 of the regulation stipulates that there is an obligation for contractors to allocate and deposit funds. This has an implication on cash flows and the economic calculation of an oil and gas investment.
Article 6 stipulates that the implementation of the regulation will not only involve contractors and the Upstream Oil and Gas Regulatory Special Task Force (SKK Migas) but also the Oil and Gas Directorate General and other related parties and agencies. The involvement of these institutions has consequences on administrative and bureaucratic aspects and licensing.
At the presidential regulation level, for an example, Presidential Regulation No. 40/2016 concerning the determination of natural gas prices has implications for the economic aspects in the development of gas fields.
Meanwhile, at the level of government regulation, the two regulations that are expected to provide business certainty and provide fiscal incentives for the upstream oil and gas sector, namely PP No 53/2017 concerning tax treatment in the upstream oil and gas sector related to Gross Split Production Sharing Contracts and PP No 27 / 2017 (revision of PP No. 79/2010), have also not been effective in addressing the existing issues of uncertainty.
They cannot be fully implemented because the related offices both at the ministerial and director general level have to wait for the issuance of implementing regulations to fully enforce them.
Basic principles
The continued uncertainties in the upstream oil and gas sector are basically due to the absence of three basic principles in the Oil and Gas Law. They are (1) the implementation of the lex specialis and assume and discharge principles in taxation; (2) the administration of the business and financial aspects of oil and gas concession contracts (cost recovery issues, for example) and that government administration and the state financial system are not separated and (3) the principle of a single door bureaucracy, which takes care of administration, bureaucracy and licensing of oil and gas concession contracts, is not applied.
As we all know, our upstream oil and gas exploitation system uses a production sharing system, both net split and gross split. To be able to make it more effective, the contract system requires these three basic principles. Law No. 8/1971 concerning Pertamina as the basis for oil and gas management in the past had adopted these three basic principles, while Law No. 22/2001 on oil and gas has yet to implement them. As a result, the regulatory framework and governance of the national upstream oil and gas sector, which are still based on the Oil and Gas Law, tend to be "in conflict" or out of sync with the existing oil and gas concession contracts, which leads to the emergence of the three main problems.
Uncertainties from the existing upstream oil and gas regulations cannot be resolved partially, such as only through the issuance of implementing regulations of the law. The problems arising after 2001 taught us very clearly that such approaches and fractional methods were not able to answer and resolve existing problems.
More fundamental measures and approaches are needed, namely through the revision of the Oil and Gas Law in order to be able to reinstate these three basic principles above. The answer to uncertainty arising from regulation of the upstream oil and gas sector thus lies in the extent to which the revision of the Oil and Gas Law can be realized.
A new Oil and Gas Law that is more firm and reliable will be able to create certainty, which is one of the main prerequisites to attract investment in the oil and gas sector. On the contrary, the new oil and gas law, which fails to adopt these basic principles, will continue to create a variety of uncertainties, which will hinder investment and business activities in the oil and gas sector.
The completion of the revision of the Oil and Gas Law and the implementation of a new Oil and Gas Law that is solid and reliable will directly or indirectly resolve the problems related to uncertainties over existing oil and gas regulations. It will also be a concrete step toward attracting investment.
President Jokowi has begun this step. It is now in the hands of his ministers to follow it up and make it happen.
Pri Agung Rakhmanto, The Founder of ReforMiner Institute, Lecturer at FTKE Trisakti University
