Identifying the root causes of indonesia’s oil & gas problems, and islam’s way of solving them
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Transcript of Identifying the root causes of indonesia’s oil & gas problems, and islam’s way of solving them
Idries de Vries
Management Advisor, Oil & Gas
First Plenary Session
Sharia Economics Conference 2013
Hannover, Germany – February 9, 2013
Identifying the root causes of Indonesia’s oil & gas problems
And Islam’s way of solving them
بسم الرحمن الرحيم
• Section 1: The history of Oil & Gas Resource Management in
Indonesia
• Section 2: Managing Oil & Gas resources according to Islam
• Section 3: Can the Islamic Oil & Gas Resource Management
policy help Indonesia?
09/02/2013 2First Plenary Session: Idries de Vries
Contents
Colonial concession era: 1899 – 1945
• Indonesia one of the birthplaces of modern Oil & Gas Industry
– International supermajor Royal Dutch/SHELL began in Indonesia, 1890
• During colonialism Indonesia’s Oil & Gas resources manager under “East-
Indies Mining law” of 1899
• Concession-based legislation
– Companies buy from the state all rights to a natural resource in a particular area
• “Concession”
– “Concession holder” then has free and total control over this natural resource
• Can produce however much he wants, whenever he wants
• Can sell it to whomever he wants, at whatever price he wants
09/02/2013 3First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
Independent concession era: 1945 – 1960
• 1945 independence effectively left concession regime in place
• Article 33 of the 1945 Constitution– “The economy shall be organized as cooperative based on the concept of family”
– “Branches of production which are of importance to the State and which affect the majority of the people shall be controlled by the State”
– “Earth, water and natural resources contained within the earth shall be under the control of the State and shall be used for the maximum welfare of the people”
• Government did not know how to make this reality
• Government was afraid to make this reality– Export of oil & gas only source of foreign currency for the country
– State budget reliant on revenues from oil & gas
• SHELL, Stanvac (now ExxonMobil) and Caltex (now Chevron) left free to operate as during colonialism
09/02/2013 4First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
Contract of Work era: 1960 – 1966
• Oil and Gas Mining law of 1960 first real attempt at change
– “All oil and gas found within the territory of Indonesia is national property and controlled by
the state”
– “Oil and gas mining shall only be carried out by the state and be implemented only by state
enterprises”
– “The Minister of Mines may appoint other parties as contractors of the state enterprise if
necessary”
• Development of Contract of Work (COW) agreements
– COW limits role of foreign oil company to that of contractor
• Foreign oil companies refused
• SHELL, Stanvac (now ExxonMobil) and Caltex (now Chevron) left free to
operate as during colonialism
09/02/2013 5First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
The attempt at nationalization: 1965
• Sukarno instructed minister Chaerul Saleh to organize “management
takeover” of foreign players in Indonesia Oil & Gas
– Indonesian government to appoint managers for SHELL, Stanvac and Caltex operations in
Indonesia
• US government intervened to block the move
– Ambassador Green worked with general Suharto and minister Adam Malik
– Deputy Ambassador Frank Galbraith worked with general Nasution
• 15th of December 1965: general Suharto flies to secret government meeting
and threatens coup if government proceeds with plan
09/02/2013 6First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
New Order Production Sharing era: 1967 – 1998
• Due to political instability SHELL exited Indonesia, while Stanvac and Caltex refused to invest
• General Sukarno promoted lieutenant-general Ibnu Sutowo from head of Permina to minister of Oil & Gas
• 1957 Permina contract for Pangkalan Berandan oil fields, North-Sumatra, becomes model for future
– American/Canadian partners put up the capital, executed the works and received a share of production in return
• 1966 first Production Sharing Contract (PSC) agreed between Indonesia and Independent Indonesian American Petroleum Company (IIAPC)
09/02/2013 7First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
New Order Production Sharing era: 1967 – 1998
• Objectives of the Production Sharing Contract (PSC)1. Increase Indonesian control over oil & gas production
• Permina overall supervisor, to review and approve operator plans
2. Enable Permina to learn how to manage oil & gas operations efficiently
• Permina to learn from operator management processes
• Objectives were never achieved1. Pertamina was made “cash cow” for corrupt government
• Company not managed to ensure efficient oil & gas operations, but to enable corruption
2. Pertamina was reorganized to destroy it as a company
• 1975 Pertamina Crisis
3. Under PSC Pertamina did not / could not develop the necessary practical experience
• Pertamina becomes weakest oil company in the world– 2000: “Pertamina waists US$1 billion annually through inefficient procurement and resource
allocation procedures, and another US$1.3 to 2 billion annually through inefficiencies in its exploration and production operations”
09/02/2013 8First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
2001 Oil & Gas law era: 2001 - present
• New Order PSC regime left Indonesian Oil & Gas in hands of foreign
companies
• 2001 Oil & Gas law “cemented” control of foreign companies over Indonesia’s
Oil & Gas
– Pertamina loses “first right” to new oil field development
– Establishment of BPMIGAS so Pertamina loses ability to learn from foreign companies
• 2005: Pertamina manages 59,000 b/d of Indonesia’s 1,062,000 b/d oil
production
09/02/2013 9First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
“Achievements” of the Concession and PSC policies
• Indonesia remains completely dependent on foreign companies
• Foreign companies take home billions of dollars on Indonesian Oil & Gas
• Large part of Indonesian Oil & Gas production out of government control
– Foreign companies export while local demand has not been met
– Indonesia imports foreign Oil & Gas to enable exports of Indonesian Oil & Gas
– Oil & Gas in Indonesia more expensive than Indonesian Oil & Gas abroad!
• PSC policy “locks in” Indonesia in current situation
– State owned / domestic companies can not compete with foreign companies, outbid in PSC’s
– State owned / domestic companies can not develop competencies
• Kept out of practical experience needed to develop
• Kept out of cash flows to facilitate development
• Indonesia will pay foreigners ever more for new exploration and development
09/02/2013 10First Plenary Session: Idries de Vries
The history of Oil & Gas Resource
Management in Indonesia
The policy foundation
• “The Muslims share in three things, water, pasture lands and fire” (Abu
Dawud)
• Oil & Gas is “public property”
– Owned by all people together
– For all to benefit from
– None has right to increase his benefit at the detriment of the benefit to others
• State responsible to manage Oil & Gas is “public property” to maximize
benefit for the people
09/02/2013 11First Plenary Session: Idries de Vries
Managing Oil & Gas resources
according to Islam
The policy of “maximizing the benefit in Oil & Gas for the people”
• State to manage Oil & Gas production itself
– All produced hydrocarbons under state control
– No “take home” profits for foreign companies
• State to use hydrocarbons for development of local industrial base
– Refining, petrochemical, steel, aluminum, et cetera
– Indonesian Oil & Gas would give Indonesian companies competitive edge on world markets
• Benefits
– Jobs!
– Current Account (Import vs Export) Balance Improvement
• Export high price finished goods, rather than low price raw materials
– Enable practical R&D
• Develop ability to produce industrial machines
• Become “innovator” rather than “follower”
09/02/2013 12First Plenary Session: Idries de Vries
Managing Oil & Gas resources
according to Islam
The common arguments against the Islamic vision
• Indonesia is just not able to apply such a policy because 1. Indonesia does not possess the skills and technology needed to manage Oil & Gas
2. Indonesia does not produce sufficient amounts of Oil & Gas
3. Indonesia can not finance Oil & Gas investment
• Indonesia needs Oil & Gas policy that enables the country to overcome these challenges
– PSC policy guarantees this situation will remain as it is
• Islamic Oil & Gas Resource Management policy can deal with these challenges
• Islamic Oil & Gas Resource Management policy ensures Indonesia gradually overcomes these challenges
– Skills and technology
– Production levels
– Financial resources
09/02/2013 13First Plenary Session: Idries de Vries
Can the Islamic Oil & Gas Resource
Management policy help Indonesia?
Managing Indonesia’s current challenges using Islam: “Wave 1”
• Step 1: state oil company (Pertamina) takes control of all onshore fields– Most of Indonesia’s current production is onshore
– Pertamina been doing onshore production since the 1960’s
� Increase in funds available to Indonesia
� Increase in state control over produced hydrocarbons
• Step 2: ensure application of modern performance management processes throughout state oil company (Pertamina)
– Increased responsibility transformed into “increased learning” and “increased performance”
– Utilize (part of) increased available funds for R&D
• Enhanced Oil Recovery techniques, Exploration and Development techniques
– Corporate Culture of Excellence invites Indonesian experts abroad to return home
� Increase in capacities and capabilities of Indonesia
• Step 3: Other operations contracted out with active engagement of state oil company (Pertamina) engineers, operators and managers� Increase in capacities and capabilities of Indonesia
09/02/2013 14First Plenary Session: Idries de Vries
Can the Islamic Oil & Gas Resource
Management policy help Indonesia?
Managing Indonesia’s current challenges using Islam: “Wave 2”
• Step 4: Apply increased funds, capacities and capabilities in production– State oil company (Pertamina) takes control of all on- and offshore fields
– Invest increased funds available to Indonesia in application of Enhanced Oil Recovery techniques across country
� Increase in production of Oil & Gas in Indonesia
� Further increase in funds available to Indonesia
� Further increase in capacities and capabilities of Indonesia
� Increase in state control over produced hydrocarbons
• Step 5: Apply increased funds, capacities and capabilities in exploration– Invest increased funds available to Indonesia in exploration
– Of Indonesia’s 60 basins, 24 remain under- or unexplored
– Most under- or unexplored basins are offshore in east, and are “geologic continuations of the onshore producing areas displaying many of the same reservoirs and trap configurations”
� Increase Oil & Gas reserves of Indonesia
� Further increase in capacities and capabilities of Indonesia
09/02/2013 15First Plenary Session: Idries de Vries
Can the Islamic Oil & Gas Resource
Management policy help Indonesia?
Managing Indonesia’s current challenges using Islam: “Wave 3”
• Step 6: Optimize Oil & Gas production
– Invest increased funds, capacities and capabilities in Oil & Gas development
� Increase in production of Oil & Gas in Indonesia
� Further increase in capacities and capabilities of Indonesia
• Step 7: Optimize Oil & Gas utilization
– Utilize increase in funds, capacities and capabilities and Oil & Gas production to develop local
industrial base
� Comprehensive economic development of Indonesia
09/02/2013 16First Plenary Session: Idries de Vries
Can the Islamic Oil & Gas Resource
Management policy help Indonesia?
• The Islamic Oil & Gas resource management policy can manage Indonesia’s
current Oil & Gas situation
• The Islamic Oil & Gas resource management policy can improve Indonesia’s Oil
& Gas situation
• The Islamic Oil & Gas resource management policy would ensure Indonesia
fully develops its Oil & Gas potential
• The Islamic Oil & Gas resource management policy would develop Indonesia’s
Oil & Gas potential for the benefit of none but the people of Indonesia
09/02/2013 17First Plenary Session: Idries de Vries
Conclusions