The Constitutional Court decision last month to disband upstream oil and gas regulator BPMigas caught many observers by surprise, but some saw it coming and others argue it was a good thing. But this seems certain; no one is entirely sure what will happen to regulation of the industry in the longer term.

The case brought by several prominent organizations, including Muhammadiyah, the nation’s second largest Muslim association, and several nationalist academics, argued that BPMigas had failed to control the oil and gas industry for the benefit of the people, in other words, it did not generate sufficient wealth for the nation, and so did not comply with Article 33 of the Constitution.

Article 33 has become a political football in recent years, its ambiguous wording being cited by nationalists to argue that foreign companies need to have less influence in the resource sector. It states, “The land, the waters and the natural resources within shall be under the powers of the State and shall be used to the greatest benefit of the people.”

So, what happens next? A revision of the 2001 Oil and Gas law is expected to be completed by mid-2013, with Rudi Rubiandini, the deputy energy and mineral resources minister, saying the revision process predated the BPMigas decision.

The government has so far been silent on who will take on the role of regulating the billion-dollar industry.

One train of thought put forward by those who brought the suit suggests the mandate should be given back to Pertamina, the state-owned oil giant that used to control the industry. But there are those, including Pertamina CEO Karen Agustiawan and two cabinet ministers, Energy and Mineral Resources Minister Jero Wacik and State Enterprises Minister Dahlan Iskan, who disagree, at least publicly.

Umar Said, a retired Pertamina commissioner, says going backwards in time is not a good idea.

“Professional people are now managing the company and Pertamina is on the path to becoming a world-class company. Such hard work should not be distracted by being the regulator once more,” he said.

But Umar does believe the regulatory powers should be in the hands of state owned company, just not Pertamina.

“The government should establish a new state owned company to oversee the industry,” he said.

Oil company executives were privately concerned about the decision and the resulting confusion, but they are keeping their heads down, saying that they leave the decision to the government.

“We welcome any future institution that will regulate the industry. Whether it is going to be a B to B [business to business] or a G to B [government to business] does not really matter to us. What is important to us is the sanctity of the contracts,” said Yanto Sianipar, Chevron’s Vice President for Policy, Government and Public Affairs.

Lukman Mahfoedz, a board member of the Indonesian Petroleum Association (IPA), and President Director and CEO of private Indonesian oil company PT Medco Energi, sees the dissolution of BPMigas as a positive move.

“This is a momentum that should be used by the government to improve the oil and gas industry in Indonesia,” he said.

In the 1980s, Indonesia was an important global source of crude oil, with production peaking at 1.6 million barrels per day. But there are many who say the good old days are over, with production steady at around 850,000 barrels a day, and Indonesia no longer part of OPEC.

Government sources say pumping more oil from the ground or discovering new reserves is difficult because the oil fields are “old and mature.” But there are those who would disagree, and this is what prompted the case brought before the Constitutional Court which ultimately saw the dissolution of BPMigas.

BPMigas was established in 2002 following the 2001 Oil and Gas Law. Previously Pertamina had been both company and regulator. But allegations of widespread corruption saw the government step in with the new law, which was seen at the time as a liberalization of the country’s oil and gas business that would also free up Pertamina to become a world class company.

Despite the shockwaves sent out by the decision, existing investors are in no rush to move elsewhere, at least not for now.

“[IPA] members are keeping their commitment unchanged, so far,” said Lukman.

And Chevron, whose target remains unchanged for this year, is also taking a wait and see approach.

“We live by the year and we are mitigating our projects. We do not want our projects to cause us problems and we certainly don’t want our projects to be uneconomical,” said Yanto, adding that any postponement of a project might cause million-dollar losses to the company.

But there are those who feel the real reason behind the dissolution of BPMigas had nothing to do with the Constitution, believing it had more to do with politics and furthering private interests rather than being for the benefit of the nation.

“It is a big political agenda. Everybody played their role accordingly to their interests” said Umar Said. And it must not be forgotten that Indonesia is building up to a Presidential Election in 2014. In this context, there are those who argue that the future regulator should be armed with special laws to protect it from political intervention and the furthering of personal interests. But Umar says further legislation is not the answer. “We have enough good laws and regulations. What we lack is law enforcement. It is obvious what Indonesia needs is strong leadership that will solve all the problems facing this nation,” he said.

AmCham - 2012

Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)

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