A note on policies for the oil and gas sector

Abstract

Production of oil and gas in Indonesia has fallen steadily during the last decade, owing to a combination of reduced exploration efforts and natural decline in currently producing fields. To counter-balance declining reserves in mature oil fields and a lack of expansion of known natural gas reserves, policy makers are now pursuing exploration initiatives more energetically. However, producers have expressed deep concern about the prospects for fair cost-recovery rules, and about the legal and regulatory environment more generally. Three issues are particularly relevant to the investment climate: resource nationalism; the anti-corruption drive; and decentralisation. Steps that the government could take include stemming the erosion of fiscal terms in contracts and ensuring contract sanctity. And although economic nationalists will find it hard to accept, maximising the benefits to the Indonesian people of exploiting the nation's hydrocarbon resources will require the presence of the world's most efficient operators.

Acknowledgements

This research was undertaken as part of a graduate program at the Johns Hopkins University School of Advanced International Studies. The authors would like to thank Professor Karl D. Jackson, Professor James Castle and Max Boon for enabling and supporting their research efforts.

Notes

¹Mining company Rio Tinto received the first mining permit granted under the new law in March 2010, after having applied (before the law's passage) for a contract of work (Ali 2010b; Carder and Sudrajat 2010).

²Raslan (2009) discusses the idea that it can be safer for a civil servant in Indonesia to do nothing than to act and possibly make the wrong decision.

³Shifts of this kind are not a new phenomenon; see, for example, Sadli (1993: 45–8).

⁴Through its ‘company members’, the IPA represents about 90% of oil and gas exploration and production in Indonesia (IPA 2010).