Illustration. Mahakam Block oil and gas refinery rig in Handil Field, East Kalimantan, Friday (14/11). GA Photo/Mohammad Defrizal

Today, various problems that afflict the oil and gas sector in Indonesia seem to stem from a polemic surrounding the governance of the national oil and gas industry. The polemic which is also reflected in the dynamics of the formulation of the revision of Law Number 22 Year 2001 concerning Oil and Gas is basically questioning whether or not a drastic change in oil and gas regulations and institutions are needed.

The factor of depleting oil and gas reserves and decreasing production makes efforts to resolve this polemic even more important and urgent. The main question that then arises is how the state should interpret and carry out its role in the governance of the oil and gas industry.

Departing from the principle of benefit and prosperity with the Indonesian people, is it really necessary to have a regulatory tool to lay a new foundation for oil and gas management? This includes provisions for cooperation and exploration for foreign investors as well as strengthening the role of the State-owned Enterprises (BUMN) in the management of this capital and technology-intensive industry.

To answer the above questions, it is important to first conduct a flashback of the development of the oil and gas sector and its governance in Indonesia. For decades, the wealth of oil and gas resources has been the driving force for the national economy.

Since the operation of Telaga Said’s first oil well in Langkat Regency, North Sumatra in 1885, the oil and gas industry in Indonesia has grown considerably, to the point of becoming an oil exporter, OPEC member, and the largest producer of liquefied natural gas LNG in the world in the 90s.

Since the oil governance legislation in the Dutch colonial era in 1875, the oil and gas regulatory system has continued to develop in line with the changing political and economic climate, investment regulations that follow the times, participation of related institutions, as well as the roles, duties and obligations of national oil companies.

These various interests and political and economic orientations continue to influence and determine the dynamics of oil and gas problems, starting from the issue of oil and gas reserves, to the continuity between the management of the upstream oil and gas industry and the downstream oil and gas industry amid the lack of distribution infrastructure.

A critical assessment of the dynamics of the problem and the various interests that loom over it, then provides answers that are not always acceptable to all parties. There is nothing wrong with the laws on oil and gas governance so far. The problem lies in the implementation order, which needs to be improved together.

Therefore, in order to get to the management of oil and gas based on the people’s prosperity as stated in the mandate of Article 33 of the 1945 Constitution, there must be a complete and accurate understanding of the stakeholders.

We must have a comprehensive development plan and a long-term road map such as a long-term development plan in the 70s that utilizes human resources, natural resources, scientific and technological resources as the engines of economic growth.

All Indonesian people must be able to see this problem globally. We recommend that all aspects of the oil and gas distribution chain be well studied and managed. All stakeholders in the chain need to be examined from a macro perspective. Therefore, before making a decision, it is necessary to clearly analyze part or all of the distribution chain involving various interests in the upstream sector (upstream), the downstream sector (downstream) and the distribution infrastructure network (midstream).

Oil and gas governance must also ensure that the management of oil and gas resources provides prosperity and does not turn into a curse on the people (resource curse), as has happened in several countries in Africa or South America.

For example, don’t let the abundant income from the oil and gas and mining sectors be used to finance the sustainability of a government regime so that it oppresses the people themselves, as illustrated in the film Blood Diamonds.

The main capital needed by the Indonesian oil and gas industry today is strong leadership with jurisdictions recognized by its authority. It may be in the form of an institution or a figure who has a broad view of the production and distribution chain of oil and gas.

The “easy oil and gas” period has passed in Indonesia and realistically we must be able to see that domestic reserves are running low and the State needs new sources to turn the wheels of the economy. In this case, there is nothing wrong with oil and gas raw materials imported from other countries on the condition that the import management must be transparent and accountable.

One of the important issues that can arise in stakeholder studies in the governance of the oil and gas distribution chain is the involvement, role and influence of the government, agencies and communities in production areas. The Regional Autonomy Law allocates profit sharing, which is sometimes not small in number. However, this management must be well coordinated by an agency whose authority must be mutually agreed upon by all stakeholders.

Revenue from the oil and gas industry should be reinvested in the oil and gas industry to find new reserves, to finance the application of enhanced oil recovery (EOR) technology to boost production from old fields, to finance oil and gas distribution infrastructure, and to optimize the management of the chain from upstream to downstream. Here it can be proposed to establish an oil fund like in Norway by setting aside a portion of the income from the oil and gas industry for new investment in oil and gas.

The institutional governance of the national oil and gas industry also needs attention to maintain the continuity of the chain from upstream to downstream. The upstream management model, for example, must distinguish three state functions, namely policy makers, regulation and supervision, and business functions. These three functions can be carried out by three different agencies as now or two agencies considering that the policy function must still be carried out by the government.

In the current global situation, the mandate of Article 33 of the 1945 Constitution does require new thinking in oil and gas governance. Moreover, currently oil and gas reserves are running low and we are starting to depend on imported raw materials. Control and utilization of remaining natural resources must be managed properly.

The government and all stakeholders are required to provide the remaining oil and gas reserves as a source of energy for national needs, manage them in a sustainable and environmentally friendly manner, impose affordable prices for industry and society at large, and increase community participation to be beneficial in reducing poverty in accordance with the mandate of the Sustainable Development Goals.

We must have the courage to make this breakthrough. We must also have the courage to take long-term decisions while respecting the previous government’s program. Do not let our natural resources become a curse and bring havoc to the community, environment and social order in the production area.

For this reason, an understanding of all stakeholders, effective communication between related institutions, and clean and transparent management are absolutely necessary in realizing the implementation of oil and gas governance that truly sides with the prosperity of the people.


Ananda Idris is an Independent Oil and Gas Consultant, and has served as the Proxy of the Board of Directors of PT Komunikasi Kerja (Kiroyan Partners).

Source: Investor Daily, May 8, 2017, page 4.

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