The confusion over whether the Mahakam block’s contract with Total E&P Indonesia in partnership with Inpex Corporation will be extended or be given to PT. Pertamina is clarified. The government has announced to the public that PT. Pertamina will control 70 percent of its participating interest and 30 percent will be controlled by TOTAL E&P Indonesia and Inpex Corporation. Mahakam block’s contract was signed in 1967 and later extended in 1997 for 20 years. The contract therefore will expire by the end of 2017.
PT. Pertamina and the central government will further discuss with the local government of East Kalimantan about the share of the participating interest to ensure greater benefit to the localities. This in my opinion is a balanced approach taken by the government to respond to nationalistic demand from Indonesian public, demand for greater involvement of local governments in the management of the block and also ensure proper transition from the contractors to PT. Pertamina.
Some experts believe that Mahakam block will still profitable at least until 2023 with total value around US$ 129.5 billion.
The Rise of Resource Nationalism?
Some argue that increasing demand from the Indonesian public and government to increase state control over the Mahakam block is another symptom of resource nationalism. Indonesia has been implementing these sorts of policies not only in petroleum sector but also in mining sector especially through the ban of mineral ore export and impose strict policies to demand companies building smelters in the country. In the petroleum sector governments normally demand higher profits during the time of high prices. A study by a UK Think Tank, Chatham House, in 2013 shows that when the oil prices were rising between 2002 – 2008 at least 30 governments revised their taxation systems to increase profits. International arbitration cases in these period were also increasing.
However as Halina Ward argued that today’s resource nationalism is much more complex than that of 1970s and cannot be solely attributed to the rise of commodity prices or a backlash to former colonial masters. This needs to be understood in the context of global concern for resource security, climate change, sustainable development and poverty reduction. All are inter‐related. Indonesia’s push toward more control on its resources especially in the time of low commodity prices can only be understood from these complex relations.
As in the case of Indonesia although there is existing rhetoric of anti-resource privatism within Indonesian public and government however from the policy making point of view it seeks toward securing greater benefits to the people through greater state control of resources. Indonesia is facing energy scarcity with increasing imports of fuels to supply its energy demands thus further enlarging its current account deficit. With steadily decreasing oil production, Indonesia is looking into further development of its gas sector and development of other sources of energy to supply domestic demand.
As for Mahakam block official estimate from the petroleum regulator, SKK Migas, states that by the end of 2017 Mahakam block still has proven and potential oil reserve at 131 million barrel and 3,8 TCF for gas. Geologist Rovicky Dwi Putrohari however believes that there are still deeper and larger reserves that are still untapped. In short Indonesian government moves toward imposing greater control on Mahakam block can be understood in the context of supplying domestic demand for energy and serving national development agenda. Mahakam gas block is both enormous and critical to the national gas supply, as its output alone contributes between 25 to 30 percent of the national gas production.
PT. Pertamina in the Time of Low Prices
As many other SOEs in the world in the context of low oil prices PT. Pertamina is facing hard time with reduce access to credit and on less attractive terms. PT. Pertamina therefore plans to cut capital expenditure by almost 50 percent as a result of the low oil prices. By taking over 70 percent of the Mahakam participating interest PT. Pertamina will need at least US$ 2.5 billion a year simply to keep Mahakam run. This amount is half of PT. Pertamina’s total budget for upstream exploration and development.
PT. Pertamina also only has capacity to drill less than 50 wells per year compared to total 10,000 well interventions annually in Mahakam block. This is a huge undertaking for PT. Pertamina. Therefore PT. Pertamina is facing financial, human resources and technological constraints simply to operate Mahakam block as it is now. Encountering these challenges PT. Pertamina and the government will need to come up with smart plans by accommodating other companies to run Mahakam block.
For a long time since the signing of contract in 1967 with Total E&P Indonesia in partnership with Inpex Corporation given the centralistic governance of the petroleum sector, East Kalimantan received minimum benefit of the petroleum production. It is only after the start of decentralization policies in early 2000 especially through fiscal balancing law no. 33 / 2004 that East Kalimantan increasingly receives revenues from petroleum sector through revenue sharing mechanism (Dana Bagi Hasil). As of today East Kalimantan derives more than 50 percent of its budget from the petroleum sector. The economy is also dominated by the petroleum, coal and mineral sectors. Poverty in East Kalimantan has been decreasing from 12.55 percent in 2006 to 6 percent in 2014. However in rural areas poverty level is still relatively high. This shows that the growth in East Kalimantan has been dominated by the extractive industry sector and stagnates agricultural sector where most populations in rural areas rely on for living.
East Kalimantan has expressed interest to take part in the management of Mahakam block demanding 19 percent of participating interest. However the central government has been reluctant to provide such amount of share drawing from experience in other participating interest arrangement. The fact is that they have benefited more private investors rather than the local government and populations in general. As stated in the government regulation no. 35 / 2004 on Upstream Petroleum Business Activities the maximum participating interest for the local SOEs should not exceed 10 percent. This has been further made explicit in the ministry of energy and mineral resources regulation no. 15 / 2015 that the participating interest for local SOEs will be at the maximum of 10 percent especially for expiring contracts.
It is important to note, however, that producing regions should get more benefits from the resources located in their areas. However the government also needs to ensure that problems associated with the participating interest mechanism in the past such as higher share of private investors are addressed especially through proper financing support to the local SOEs. The revision of oil and gas law that is currently being prepared by the national parliament should also take this into account to ensure that the good will does not turn into disasters through bad policies.
Beyond participating interest debates subnational governments will need to strategically plan for the bust given the domination of extractive sector in the economy and shrinking other sector growth such as agriculture. Economic diversification is the key message here to ensure sustainable development of East Kalimantan province. The time of resource boom at local level is the right time to plan for the bust through improved management of the revenues and investment in productive sectors such as health, education, infrastructure and agriculture.