Indonesia's energy nationalism will turn off investors?

JAKARTA (The Jakarta Post/ANN) - Indonesia government's policy in trying to gain more control in the energy sector may deter foreign investors to put their money here.

As the nation prepares for the upcoming elections, issues relating to energy nationalism will spark debate among its supporters and detractors, especially after the government’s move to take control of copper miner Freeport Indonesia and the Rokan oil and gas block.

A recent statement from a high-ranking government official has confirmed the view that the government is trying to gain more control of the country’s energy sector, to the dismay of private investors.

Energy and Mineral Resources Ministry Oil and Gas Director General Djoko Siswanto clearly said the state needed to have greater control of oil and gas resources through increased shares in particular blocks.

“It [the right to hold participating interests] is needed to step up state control [over oil and gas blocks]. [….] By having PI [participating interests], we would know the cost required to ensure the blocks operate efficiently,” he said, referring to the Oil and Gas Regulatory Task Force (SKKMigas), the oil and gas regulator that replaced the Upstream Oil and Gas Executive Agency(BP Migas) after its disbandment in 2012 following a Constitutional Court ruling.

“For example, if SKKMigas had PI, they could offer the best drilling expert or technology for an oil and gas block project,” Djoko said, adding that the funds needed to obtain PI and the percentage of SKKMigas’s participation would be discussed later with the House of Representatives (DPR).

The idea is different from the proposal by the House of Representative for SKKMigas to be replaced by state energy holding company Pertamina as the sole special business entity (BUK) for the oil and gas sector.

In response, Fabby Tumiwa, the executive director of local energy watchdog the Institute for Essential Services Reform (IESR), said the difference lay in the perspective of each side over the phrase “state authority over the oil and gas sector”.

“The key issue for me is the meaning of state control. And I think it isn’t right that SKKMigas, which is the arm of the government that oversees the sector, is able to have shares in an oil and gas block,” he told The Jakarta Post recently.

When asked about the trend toward energy nationalism, Fabby believed it was still acceptable if the government wanted to tighten its control over Indonesia’s resources, as long as it could ensure good management practices and uphold transparency with the private firms.

“It [energy nationalism] isn’t that bad as long as the policies lead to efficiency, cost-effectiveness and transparency. I think it wouldn’t be a problem for investors if the rules of the game are clear,” he said.

“[Negative] nationalist sentiment could emerge when there is excessive state control [of the energy sector] and the presence of stateism through the role of state-owned enterprises in businesses.”

Meanwhile, Jakarta-based energy think tank ReforMiner Institute researcher Pri Agung Rakhmanto believed strengthening SKKMigas’s role by giving it the power to hold shares in oil and gas blocks would not increase concerns about nationalism among investors.

“Instead, it will give SKKMigas a clearer position, making transactions with the regulator inline with Constitutional Court’s ruling, which stipulates that transactions in the sector are to be done under a business-to-business scheme,” he told the Post recently.

Policy certainty is what the industry has always expected, especially after a tumultuous last two years when the global oil price slumped from its golden era of US$100 per barrel to around $40 per barrel.

The situation has forced giant oil and gas companies to put the brakes on their exploration activities, which require massive investment, throughout the world, including in Indonesia, and to take various efficiency measures.

In its latest report for 2018’s fiscal year, global energy think-tank Wood Mackenzie underlined that there was limited interest among oil and gas giants in the latest oil and gas block offerings.

“[Instead] the majority of new blocks [are] being awarded to existing players in Indonesia or new start-up companies with limited experience,” Wood Mackenzie research director Andrew Harwood said in an email recently.

However, for a country like Indonesia, which is a net importer of oil, slowing down exploration activities threatens its energy resilience, and will lead to higher imports.

Therefore, Pertamina has become the most active player in the industry by taking over 12 oil and gas blocks, including the lucrative Rokan Block from US-based Chevron, which has expressed its disappointment over the government’s decision.

Separately, Mahendra Siregar, the former deputy finance minister and Indonesian ambassador to the US, said nationalization was not specific to Indonesia but was increasingly common throughout the world.

“We have seen a lot of governments become more populist or nationalist, which was taboo previously if we wanted to develop the country’s economy,” he said.

Mahendra said one of the best examples of the change was the global acceptance of the government’s success in the Freeport divestment deal, which made the country the majority shareholder for $3.85 billion.

“There were two reasons why the global audience reacted positively to the Freeport deal, namely the transaction was purely business-to-business and it was done without excessive political complications,” he added.

When asked about energy nationalism, the European Business Chamber of Commerce in Indonesia (EuroCham) said it was perfectly acceptable for a country to independently decide its energy and natural resources policy but that any policy would trigger long-term decisions that were not easily reversed to either expand activities or to look for opportunities elsewhere.

“We are happy to provide input on policy and how it might be received by European investors. But we totally respect the national sovereignty of Indonesia to make independent decisions. The key message is that investors are looking for predictability and long-term involvement. Therefore, once a decision is made to leave the country, it will be much harder to convince a company to come back later. Of course, it also works the other way. We hope that future policy will welcome our members’ involvement and contributions with capital, expertise and job creation and trigger long term decisions to expand operations in Indonesia,” EuroCham’s energy working group head Thomas Wagner told the Post on Sunday.

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