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


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




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




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




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)




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”




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




“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




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


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”


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


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





• 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






• Step 6: Optimize Oil & Gas production

– Invest increased funds, capacities and capabilities in Oil & Gas development

� Increase in production of Oil & Gas in 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




• 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


Conclusions

Education

Identifying the root causes of indonesia’s oil & gas problems, and islam’s way of solving them