International Politics

Can Indonesia live up to its promise? When the World Trade Center was attacked by terrorists in New York City on Sept. 11, 2001, there was fear that Indonesia – the largest democratic, but predominantly Muslim nation – would be a similar target for the Al Qaeda network. "We were largely fearful that the events of Sept. 11 would be repeated in Indonesia, since Indonesia has largely condemned the attack on the U.S. and has (visited) the U.S., expressing its support for the bombing of the Taliban in Afghanistan," said Major General R. Soemadi of the Ministry of Defense. There were several short-lived demonstrations in the streets of Jakarta, followed by a bomb scare in a local shopping complex. This was nothing significant. However, on a greater scale, Indonesia was fast losing its competitiveness as an Asian E&P haven. Despite the country’s long-time producer status, little was done to shore up foreign investors’ confidence. According to recent governmental data, foreign investment approvals (as of October 2001) fell to U.S.$6.5 billion, down nearly 50% from 2000.

So, why is investment in Indonesia’s oil & gas sector declining? One major reason is a lack of governmental incentives to allow more exploration, plus the unattractive pattern of production sharing contracts (PSCs). The president / director of PT Medco Energi Internasional, John S. Karamoy, said that to lure more investors into E&P, the PSC model needs modification. "In the last 15 years," said Karamoy, "Indonesian crude oil production was down to 1.3 million bpd from 1.5 million bpd. In the early 1990s, on average, PSC exploration could reach 150 oil wells, but in the last five years, the numbers declined to 80 oil wells annually," he said. Given the lack of incentives, said Karamoy, investors prefer to eye other countries rather than take a tax holiday during the first three years of production.

Minister of Energy and Mineral Resources Purnomo Yusgiantoro

State oil company, Pertamina, is trying to address a need for reforms. An internal audit conducted by Price Waterhouse Coopers found that since the days of (former President) Suharto, there was widespread corruption, wastage and inefficiencies, totaling nearly U.S.$2 billion. Minister of Energy and Mineral Resources Purnomo Yusgiantoro called this move by Pertamina a positive step, taken to rebuild investor confidence. "The lack of political and social stability, violence against production locations and the uncertainty over implementation of the Regional Autonomy Law (passed last year) has left Indonesia with doubts about its ability to manage its vast reserves," he revealed.

Andi Mallarangeng is a former staff member for the state minister for regional autonomy and a political scientist at the Institute of Government Studies. Mallarangeng contends that a lack of openness and transparency at all governmental levels – from legislative chambers to executive departments – much less Pertamina’s problems, is a major deterrent to foreign investor participation. Deutsche Bank Asia Chairman and former IMF executive Hubert Neiss listed three conditions needed for Indonesia’s quick recovery, regardless of the world economy. "(Indonesia) must provide a good track record in economic policy-making, have improvement in the security situation and have a minimal degree of political stability." He emphasized that these conditions are attainable.

Nevertheless, Indonesia is burdened by a turbulent past. Worse yet, the Regional Autonomy Law is shrouded in mystery. An example is how the large coal mining concern, Kaltim Prima Coal (KPC), would divest a majority of its shares to the East Kalimantan (E.K.) government. Currently, there is a dispute about the actual value of KPC’s shares, as well as what percentage should be divested from KPC to the E.K. government. Settlement of this case would set a precedent for foreign investors.

How could these factors affect Pertamina and other major operators? First, Pertamina would be realigned from a state-run enterprise to a purely commercial operator. With passage of the amended Oil and Gas Bill on Nov. 23, 2001, Pertamina would also lose its dual role as a state player in the E&P sector, and as a state regulator. Subsidiaries classified as "ailing" companies (close to 35%) would be closed down, while those classified as "good" companies would be sold via IPOs. As regards the oil majors, this would create opportunities in both the upstream and downstream markets.

Although the central bank predicts that Indonesia’s economy will grow by 3.5% to 4% during 2002, there is still much room for improvement. This is true not just in the oil and gas sectors, but also in how the government tries to function without any "thrombosis" for the next 365 days.

Finally, will (and can) Indonesia live up to its promise as an Asian haven for explorers and producers? One answer came from Agung Wicaksono, a former explorer / geologist at Pertamina, who is now with PT Multi Harapan Utama. He was skeptical that foreign investors will rush to Indonesia, because of the lack of protection guidelines, and incentives. "The blurred vision of the central government and the impact of regional autonomy would make foreign mining explorers think twice," said Wicaksono.

Nonetheless, Pertamina’s senior vice president for upstream, Iin Arifin Takhyan, painted a rosy picture of how the firm’s internal restructuring resembles the Megawati regime’s revamping of the country. "Once Pertamina has restructured itself to a competitive company run professionally, there will be new measures of accountability and transparency implemented in all the different levels of the company, similar to how the country is organized under the leadership of (President) Megawati (Sukarnoputri)," he said. However, one must worry whether Pertamina and Megawati can convince the rest of the world and deliver on promises to overhaul Indonesia’s sagging image.

Tony Sitathan is a Singapore-based journalist, who covers several Southeast Asian countries. He is a regular contributor to this column.