"On 2 April 2012, government officials indicated that the Ministry of Energy and Mineral Resources intends to issue a ministerial regulation relating to procedures and rules for PSC extensions. BP Migas spokesman Gde Pradnyana noted in media comments that there were no clear rules for PSC extensions. Meanwhile, Director General of Oil and Gas Evita Legowo indicated in a press release that a regulation drafted during the tenure of previous Minister of Energy Darwin Saleh, has not been implemented “due to several problems”, and would likely be released during 2012. In our view, the pair’s comments are related and indicate consensus among key decision-makers in the oil and gas bureaucracy.
Consensus was elusive during Saleh’s tumultuous ministerial tenure. That a regulation was drafted but left unimplemented during his time as minister reflects the fundamental weakness of his leadership. Saleh’s tenure was marked by public infighting among regulatory stakeholders, a relatively rare occurrence in Indonesia’s corporatist approach to energy sector politics.
One of the most public disputes was related to the issue of PSC extensions when Kodeco’s 30-year West Madura PSC reached its expiration date in May 2011. PSCs under the 2001 Oil and Gas Law are only valid for 30 years, at which point the contractor can request a maximum 20-year extension. However, as noted by Pradnyana, the Law and prevailing regulations lack conditions or thresholds for the government to extend or terminate a PSC. In the case of West Madura, Pertamina initially demanded 100% ownership of the project and subsequently insisted on the operatorship as a precursor for an extension. These demands led to a public dispute between Pertamina and BP Migas. Notably, Pertamina sought to undermine and portray the upstream supervisor as an instrument of IOCs.
The political wrangling surrounding the West Madura project also precluded the issuance of an explicit regulation on PSC extensions during 2011: in addition to Pertamina there were a host of domestic companies—including ones rumored to be owned by politically-connected financier Patrick Walujo as well as Saleh himself—actively seeking stakes in the project. However, with no PSCs set to expire during 2012 the government may seek to clarify the rules and provide certainty to investors. Beginning in 2013 there are 26 PSCs set to expire before the end of 2020, including a number controlled by major producers.
In our view, the regulation will almost certainly involve special provisions for Pertamina, which has continued to demand the right of first refusal for expiring PSCs. Legowo openly stated that “[the regulation] will set special measures for Pertamina as a national oil and gas company.” However, BP Migas continues to point to the West Madura incident (which involved the abrupt resignation of CNOOC, a 25% owner of the pre-extension PSC) as worth “studying” in order to inform the new regulation."
EWC Price at posting:
45.0¢ Sentiment: LT Buy Disclosure: Held
