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Court abolishes Indonesian energy regulator

Investments said to be at risk as judges rule BPMigas is unconstitutional

Current contracts and future investments in Indonesia are at risk after the nation’s upstream regulator, BPMigas, was abolished in an unexpected court ruling.

Indonesia’s Constitutional Court ruled that the functions of the industry watchdog - responsible for awarding and overseeing production sharing contracts (PSCs) - were unconstitutional following a judicial review. But suspicions that the decision was politically motivated have started to gain traction.

The resulting regulatory uncertainty jeopardises the nation’s ongoing attempts to lift its crude production, will likely deter new investment and negatively affect expiring concessions, ratings agency Moody’s said.

Initially the industry was shocked as the ruling looked like an attack on the PSC principle by nationalist groups but the government has moved fast enough to neutralise that threat, Tony Regan, principal consultant at Tri-Zen told Petroleum Economist.

Jakarta quickly formed a new transitional unit under the Ministry of Energy and Mineral Resources to help allay investor concerns until new regulations are drafted. All former BPMigas deputies and employees will resume their previous duties under the new unit with the exception of former chairman, R Priyono.

Immediately after the ruling, President Susilo Bambang Yudhoyono publicly assured contractors - which include BP, Total, Chevron, Shell and ExxonMobil – that operations would continue as usual and that the investment climate would not be shaken up.

But while existing contracts entered into by BPMigas are to be respected until they expire, an increased role for national oil company Pertamina – a possibility raised in the court decision – is not seen as a positive by many analysts or industry proponents.

A hiatus is expected while the new agency finds its feet and it is not clear how BPMigas’ operating regulations will be adopted or adapted, Ashley Wright, head of Asian oil and gas at law firm Norton Rose, told Petroleum Economist.

In the longer run, Wright added, it could be a good thing for Indonesia but in the short-term it does nothing for Indonesia’s credibility.

The oil and gas sector is crucial to Indonesia’s economy with investment in the industry hitting $12.8 billion in 2011 and contributing $34.4bn to state coffers in the same year.

But the temporary void left by BPMigas’ demise will inevitably lead to a slowdown in proposed project developments.

At risk is the Inpex-operated Abadi liquefied natural gas (LNG) project in the Timor Sea, due online around 2016. The 2.5m tonne per year (t/y) development, in which Shell has a 30% stake, is currently at the front-end engineering and design (FEED) phase. BPMigas would have needed to sign off on any development of the Japanese-led project – or any other schemes at a similar stage – which could possibly hinder progress.

Other projects that would have needed BPMigas’ input are BP’s planned 3.8m t/y expansion of its Tangguh LNG export plant, which would take total capacity to 11.4m t/y; Total’s Offshore Mahakam block; and ExxonMobil’s plan to boost output at its Cepu project.

BP, however, might be relatively happy with the decision as the UK supermajor was reportedly facing issues with BPMigas over its $12bn Tangguh expansion. “BP might welcome a new department looking at the way cost recovery is dealt with, so they might find that in the longer term it’s a better thing for Tangguh’s third train,”said Wright.

A number of reasons have been offered for the sudden dismantling of BPMigas, including rising resource nationalism. There is a belief that foreign contractors have been operating under extremely generous terms and that Indonesian hydrocarbons should be produced by Indonesian companies for Indonesians. And some analysts say the court’s decision plays to this rise in populist sentiment, adding it should be seen in the context of the 2014 presidential election.

The judicial review came at the request of 42 organisations and individuals, including Islamic organisations and politicians, who voiced concerns that Indonesia’s gas resources were being exported rather than being reserved for domestic use. It is a delicate balancing act to reconcile the need for export earnings with local energy demand, particularly in the run-up to an election, said Wright.

Some observers suggest that Priyono was becoming too powerful. They argue that BPMigas’ cost recovery decisions were not in the long-term best interest of the country and that the government was unable to take down BPMigas directly. The judicial review simply provided the perfect opportunity to do just that.

But there is still a possibility that the plaintiffs could question the transfer. The court’s ruling suggested that contractual authority should be business to business, not government to business, meaning regulatory control may eventually revert back to state-run oil and gas company Pertamina.

Prior to the creation of BPMigas in 2002, Pertamina also acted as the country’s energy regulator.

However, a bigger role for Pertamina is seen as a negative for the industry given its lack of resources and technical capabilities, coupled with its notoriety for falling victim to political pressures.

Despite the initial shock of BPMigas’s sudden demise, this is not the beginning of a complete overhaul of the Indonesian energy sector. Foreign companies will stay because their investments are long-term propositions. As for the government, it realises the energy sector is vital to Indonesia’s economic health – indeed, it is so important that whatever reform is implemented, the country’s attractiveness to foreign investment will be safeguarded. 

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