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Commercialization of Natural gas in downstream business in Indonesia related to ethical business and Good corporate governance implementation
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Natural Gas Business in Indonesia
Introduction
Gas is an energy future of Indonesia. It is a fact that cannot be denied anymore. Based on
existing data, throughout 2010 there were new discoveries of gas reserves are significant
enough to achieve 2.09 trillion cubic feet, while the discovery of oil only amounted to 140
million barrels only. On January 1, 2011, proved reserves position and potential of gas in
Indonesia reached 153.72 trillion cubic feet of proven and potential reserves and crude oil for
7.41 billion Barrels. (BPMIGAS Bulletin Issue, 2011)
If the reserves are produced with current production levels then the Indonesia's oil reserves will
run out for 12 years, while Indonesia's natural gas reserves are still able to survive to meet the
needs of up to 46 years. (BPMIGAS Bulletin issue 73: August 2011)
Figure below showed Natural Gas Reserve in Indonesia (Eddy Hermantoro, 2010)
Figure 1. Indonesia Gas Reserves
Natural gas is usually found deep below the earth’s surface and is made up of hydrocarbon gas
primarily methane (CH4). It is found in oil and gas field and coal mining area (Annual Report
PGN, 2010). Natural gas can be used as fuel either fuel for industry, vehicles, housing, power
plants and even as raw material for petrochemical products.
Figure 2. Natural Gas Composition
Compared to oil-based fuels and coal, natural gas has several advantages, namely:
1. Environmental Friendly
Natural gas burns more cleanly, releasing fewer (CO2) emissions into the atmosphere. Using
natural gas can therefore help to reduce greenhouse gases and global warming
Figure 3. Fossil Fuel Emission
2. Economically efficient energy
Natural gas has excellent economic value. Apart from being an environmentally friendly fuel
source, it is cheaper and has greater price stability than oil-based fuels. Comparison of
natural gas price and petroleum products can be shown at figure below based on crude oil
price of USD 106.72/barrel. (Annual Report PGN, 2010)
Figure 4. Fuel Price Comparison
Indonesian Natural Gas Business in 2001 - 2008
In order to give legal base to the renewal and reconstruction of the agency for upstream oil and
gas activity, the government has determined Act No.22/2001 in relation to oil and gas on 23
November 2001 (BPMIGAS Profile Website, 2012)
Since Act No.22/2001 on 23 November 2001 concerning oil and gas and Government
Regulation No.42/2002 on 16 July 2002 concerning BP MIGAS have been determined, the
matter of supervising and establishing Cooperation Contract or Productions Sharing Contract
(PSC / KKKS) activity which previously done by PERTAMINA is now done by BPMIGAS. (BPMIGAS
Profile Website, 2012)
PSC/KKKS is the Business Entity or Permanent Establishment that have right to perform on the
Exploration and Exploitation in a Work Area and have a Cooperation Contract with the Agency
executive (BPMIGAS). (PERMEN ESDM, 2010). Pertamina, Total E & P, Santos, Petrochina,
Conoco Phillips are a few examples KKKS natural gas producer in Indonesia.
Business Entity is a legal entity that runs the type of business permanently, continuously and in
accordance with established laws and regulations applicable as well as work and domiciled in
the territory of the Republic of Indonesia (Pedoman Tata Kerja BPMIGAS No :
029/PTK/VII/2009)
Prior to 2001, PGN was the only natural gas distribution companies in Indonesia. Since Act 22 in
2001 was published, private business entity (Private Natural Gas Distribution Company) can
participate in this natural gas distribution business.
Direktorat Jendral Migas have a role in determining the permission of KKKS, held a working area
tenders, issuing permits of Natural Gas Distribution Company.
Since Act 22 in 2001 was published, private natural gas distribution companies emerging. The
company buys and sells natural gas for industrial needs by using pipeline, CNG (Compressed
Natural Gas) and LNG Technology. The scheme of gas business flows from gas production to
end user can describe as figure below (Amrullah Hakim, 2005)
Figure 5. Natural Gas Business Scheme
In 2001 to 2008, sales of natural gas from KKKS have never been done in an open tender,
natural gas can be sold directly to natural gas distribution companies without any tender, in
other words, KKKS never announced to the media (newspapers, websites etc.) regarding the
potential for natural gas that will be commercialized. Hence, Natural Gas Distribution
companies who have network to KKKS will benefit from this kind of process. The process of
selling gas without open tender as mentioned above can lead to unethical business behavior,
because KKKS is the only one who gained full authorization from BPMIGAS to control the
commercialization process but KKKS did not doing a transparent business process.
What KKKS doing is not in accordance with the principles of good corporate governance that
includes Transparency, accountability, responsibility, independency, and fairness to attain a
company's sustainability by also considering the interests of stakeholders. (Binhaldi, 2006)
To avoid unethical business behavior, commercialization of natural gas process by KKKS must be
done transparently. KKKS must Provide timely, Appropriate, clear, accurate and comparable
information accessible to stakeholders that their rights commensurate with (Binhaldi , 2006).
Indonesian Natural Gas Business in 2009 – 2011
In 2009, BPMIGAS issued Guideline (PTK) No. 029/PTK/VII/2009 Working Procedures governing
the process of commercialization of natural gas. In the PTK 029/PTK/VII/2009, BPMIGAS
explains that the sales gas process can be done by direct appointment (without tender) to the
four priorities, namely:
1. Increased production of oil and gas
2. Fertilizer Industry
3. Electricity Supply
4. Local Region Government
Figure 6. BPMIGAS Natural Gas Direct Appointment Procedure (PTK No. 029/PTK/VII/2009)
EvaluationNot
Approve
Approval
Procedures
Evaluation &
Approval from
IP
Evaluation of Purpose & Proposal
OK
Purpose & Proposal
Direct Appointment
Purpose and Proposal
Direct Appointment
Revision
procedures for other buyers
selection
Approval of Purpose & Proposal
Direct Appointment
Preparation and discussion
of SAA
MoU, MoA, HoA, GSA Approval
Application for Price Approval
to Minister
Approval and SAA Signed
MoU, MoA, HoA, GSA
Preparation
MoU, MoA, HoA, GSA
Signed
Direct Appointment Buyer
BPMIGAS KKKS BUYER BPMIGAS KKKS BUYER
1
2
3
4
5
6
78
9
10
11
1213
1415
16
Guidelines for Working Procedure No. 029/PTK/VII/2009 BPMIGAS are reinforced by the
issuance of Ministerial Regulation No. 3 of 2010 regarding the allocation and utilization of
natural gas to meet domestic needs. Determination of Allocation Policies and Utilization of
Natural Gas Utilization implemented with priority for Natural Gas (Peraturan Menteri ESDM No
3, 2010):
a. increased production of the National Oil and Gas;
b. fertilizer industry;
c. electricity supply;
d. other industries.
In the period after the issuance of Working Procedure No. 029/PTK/VII/2009 BPMIGAS, many
natural gas distribution companies are approaching producing region governments (Regent or
Governor) and regional-owned enterprises (BUMD) because the region government through
BUMD can purchase natural gas from KKKS with direct appointment process or without any
tender process.
Regional-Owned Enterprises (BUMD / Perusahaan Daerah (Perusda)) are companies established
under Law No. 5 Year 1962 concerning Regional Companies and Minister of the Interior Law No.
3 Year 1998 concerning Form Regional Owned Enterprises
BUMD is a company established pursuant to the Region to conduct business activities. BUMD
have the privilege to get gas with direct appointment process but usually BUMD do not have
business experience and have no funds for investment, because of that issues BUMD usually
have a partner to do this business.
Selection of Regional Owned Enterprise (BUMD) partner in the utilization of natural gas in this
case done without an open tender, because it is not regulated in the Act in the area. The
chosen BUMD’s partners usually are those who have a network and proximity, and which can
bring benefits to both the benefits for the region and for personal gain.
Even though, a new working procedure (No. 029/PTK/VII/2009) has been made by BPMIGAS,
the conduct of unethical business still exists, because the shareholders and stakeholders do not
implement a good of governance in their business. There are two approaches in driving the
implementation of good corporate governance (GCG), ethics-based approach and regulatory-
based approach. Ethics-based approach is predominantly driven by the consciousness of
business practitioners in doing their business not only for short-term profit orientation but also
for more on a healthy longer-term relationship with their stakeholders. On the other hand,
regulatory approach is driven by the initiative to enforce company to comply with certain
designated regulations. Since each approach has its own strengths and weaknesses, they are
supposed to be complimentary each other in creating sound business environment. (Binhaldi,
2006)
Governance will not prevent misconduct of misdeeds, but it can actually improve the way a
corporation is run in Indonesia and for that matter other Asian countries. Corporate governance
can be perceived as the collection of control mechanisms that an organization adopts to
prevent or dissuade potentially self-interested managers from engaging in activities detrimental
to the welfare of shareholders and stakeholders. Corporate governance is a necessary to create
a more sustainable environment for competitive Indonesian businesses in a global economy
(Verhezen, 2011)
Conclusion
Natural Gas is a future energy in Indonesia, because Indonesia has a large reserve of Natural
Gas and Natural Gas is an environmental friendly and economically efficient energy compare
with other fossil fuel.
To create a sustainable environment and competitive natural gas business in Indonesia, it is
necessary for business practitioners to implement a Good Corporate Governance. There are
two approaches in driving the implementation of good corporate governance (GCG), ethics-
based approach and regulatory-based approach. They are supposed to be complimentary each
other in creating ethical business in Indonesia
Reference List
Amrullah Hakim, Irawan Sumardi, 2005, An Introduction of Gas Business and Its
Competitiveness for Electricity Sector in Indonesia, 20th World Energy Congress, Rome, Italy
Binhaldi, Yunus Husen, Irwan Habjah etc, 2006, Indonesia‘s Code of Good Corporate
Governance, National Committee on Governance
BPMIGAS Bulletin issue 73: August 2011
BPMIGAS Profile Website, accessed on 04 Feb 2012 at 05.00 pm
Eddy Hermantoro, 2010, POLICY AND OPPORTUNITIES IN INDONESIA OIL & GAS INDUSTRY
Pedoman Tata Kerja No : 029/PTK/VII/2009 Tentang Penunjukan Penjual dan Penjualan Gas
Bumi/LNG/LPG Bagian Negara
Peraturan Menteri Energi dan Sumber Daya Mineral No 03 Tahun 2010
Peter Verhezen, Erry Riyana Hardjapamekas, Pri Notowidigdo, 2011, Is Corporate Governance
Relevant? How corporate Governance practice can affect Indonesian organization
PGN Annual Report, 2010