|
Vol. 225 No. 1 |
|
|
| TONY SITATHAN, CONTRIBUTING EDITOR, SOUTHEAST ASIA |
Asian business practices differ from US, European norms. After spending more than 25 years in the global hydrocarbon market, traveling around the world, working on project management, and construction and commissioning of topsides and fixed installations, FPSOs, TLPs, semisubmersibles and integrated modules, 53-year-old Jim Hargreaves finally decided to settle down in Asia and call it home.
He founded EPIC Asia in Singapore last year, with an emphasis on being a leading provider of project management and operations support services in Asia by 2005. He quickly formed joint ventures in Malaysia and Indonesia, and forked out nearly S$500,000 in business development costs, to be recognized as an integrated solutions provider that can handle all aspects of outsourcing work. EPIC Asia's central theme, said Jim, is the use of commissioning and technical service contracts (CTS) as a driving force to propel the company into Asia.
“Our performance in 2003 is punctuated with the commencement of CTS contracts with Ranger Oil and the start of CTS alliances with Kingsar (Malaysia), Makro Cipta (Malaysia) and Bumigas (Indonesia),” he said. “But the real challenge to being in Asia and doing business here is to realize that it is unlike Europe or the US. Things happen at a different pace here and are ruled by different cultural norms (that are) considered standard operating procedures.”
Jim was referring to the art of negotiations between contractors and governments, where up-front fees are sometimes needed to facilitate business contracts. Such up-front fees are commissions payable to agents of large government contractors in Asia, to ensure smooth business continuity, as well as contract completion with third parties. Working in Indonesia with such practices was, at first, a mild cultural shock for Jim. However, he has decided against utilizing practices that he feels are burdensome and unnecessary.
“Kickbacks and up-front commissions are common in most business cultures in Asia, but there is a way to go around it and present yourself as professionally as you can without offending your business partners. Once you do that, there is a certain amount of respect for you,” he said. Also, for start-up companies like EPIC Asia, the lack of venture capital funding or seed funding is another obstacle to overcome.
According to Jonathan Chan, a private investment banker who manages high net worth individuals and their investment funds, finding the right equity partner or investor for new service companies can be daunting. “There is a need for a clear business plan, as well as a track record for the company and how tightly they manage their outsourcing contracts,” said Chan. “The profit margins for those in the service industry are approximately 20% to, at most, 30%. So, you need a strong partner that understands the industry, and has the ability to stomach high risks in a politically unstable region, such as Indonesia.”
Indonesian practices. High-risk environments, however, often translate into higher turnover than low-risk areas. That may be why Indonesian officials recently announced eight winners in the tender of new oil and gas blocks, signaling a recovery of the investment climate. Iin Arifin Takhyan, director general of Oil and Gas at the Ministry of Energy and Mineral Resources, said results were better than expected, because officials had offered investors a better production split. “The tender gave equal treatment and opportunity to all companies participating,” said Takhyan. We want to get the best companies to run the upstream business.”
The exploration contracts will rake US$170 million into Indonesia, while the government will gain signature bonuses exceeding US$19.9 million. Of 11 blocks tendered, eight were snapped up, while three, Rembang, East Kangean, and North Bali II, failed to attract bids.
To induce foreign participation, the general production sharing contract (PSC) between contractors and the government was revised. The previous share split was 85%/15% for oil and 70%/30% for gas, with the larger portion going to the government. Under the new PSCs, investors' share is raised to 25% for oil and between 25% and 30% for gas. One should note that when Indonesia tried to auction off dozens of blocks last year, there was virtually no interest. At the peak of the country's investment climate in 1997, Indonesia signed 29 E&P contracts.
Several reasons were cited for declining interest, including uncertain regional autonomy laws that resulted in overlapping regulations and authorities between different administration levels. Another factor was confusion over state firm Pertamina's role (it no longer regulates oil and gas fields). Also, there were endemic levels of corruption, high political risks with the impending 2004 elections, and uncertain taxation laws. All factors were considered too unstable for foreign investors to stomach.
In addition, a recent Indonesian governmental move to implement stiff penalties for income tax evaders has frightened expatriate workers, who feel that they may be unfairly targeted. Under new regulations, Indonesia's tax directorate can send tax evaders to jail without a standard trial. British national, Mark Michael Greenwood, worked as a consultant for a foreign operator and is a poster boy for concerns with governmental practices. Greenwood was arrested and is now serving an indefinite prison term in the Cipinang penitentiary for failure to pay 45.8 billion rupiah (US$5.38 million) in taxes.
While Indonesia grapples with such endemic problems, its neighbors, Malaysia and Thailand, are thriving. Unocal Thailand and its partners plan to invest nearly US$300 million on gas development in the Gulf of Thailand and drill about 140 wells, while also raising oil production. Unocal's gas output represents more than 30% of Thailand's total gas supply.
Nearby, Malaysia's Petronas Carigali has interests in E&P blocks in more than a dozen countries. The firm operates more than 20 fields in Malaysia, accounting for one-third of crude oil capacity.
Seen from Jim Hargreaves' perspective, Asia is a welcome retreat, especially after spending years in areas of civil unrest like Angola, Ghana and Ivory Coast. “It's just taking a longer time than required to strike business deals,” he noted. “And you must have patience, and loads of it, if you want to succeed. Asia's not an overnight success story.” 
Tony Sitathan is a Singapore-based journalist, who covers several Southeast Asian countries. He is a regular contributor to this column.
|
