Indonesia eyes changes in oil law to keep more crude at home

Jakarta (Platts)--12Jan2006

The Indonesian government has proposed an amendment in the Oil and Gas
Law No 22 enacted in 2001 that will require production sharing contractors
operating in the country to sell 25% of their share of the output locally, oil
minister Purnomo Yusgiantoro said Wednesday.
     The current wording in the legislation calls for PSCs to sell "a maximum
of 25%" from their share within the country, which effectively frees them to
export as much they like.
     State refiner Pertamina is the only buyer of crude in Indonesia, so the
producers with export facilities prefer to maximize profits by selling their
barrels overseas, if they fetch a better price there. 
     However, with a steady decline in Indonesia's crude output, the
government's equity barrels received under the PSC profit sharing scheme,
which go to Pertamina, have been dwindling. At the same time, Pertamina has
been chasing more domestic crude in an attempt to cut back on its
transportation costs on imported cargoes, especially since oil prices rose to
record highs in late 2004 and again in 2005.
     The government figured it could send more domestic crude Pertamina's way
by making it obligatory for the production sharing contractors to sell at
least a fourth of their share of the output at home. Under Indonesia's PSC
system, the operator first takes the barrels that would pay for its production
costs. The remaining "profit oil" is typically split 85:15 or 80:20 between
the government and the contractor. 
     The price of the oil and gas sold under the "domestic obligation" should
be determined through negotiations between the seller and Pertamina, and
approved by the government, Purnomo said. 

     CONSTITUTIONAL COURT PROMPTS CHANGES IN THREE ARTICLES
     In December 2004, Indonesia's constitutional court revoked three
Articles--12, 22 and 28--of the Oil and Gas Law No. 22. The court said the
wording of these articles could undercut the role of the government in the
country's oil and gas exploration and production activities.
    Article 22 laid down that a business entity had an obligation to give "a
maximum of 25%" from its share of oil and gas production to meet domestic
needs. Going by the court's recommendations, the word "maximum" will be
removed from this article, to say the business entity has an obligation to
sell 25% of its share of production to meet domestic needs, the head of the
law division at the oil ministry, Sutisna Prawira, told reporters. 
     Article 28 revoked by the constitutional court said oil and gas prices in
Indonesia should be determined by market mechanism, through fair competition.
The court ruled that oil and gas prices should be determined by the government
without ignoring the market mechanism, so as to protect the poorer sections of
the population. 
     Indonesia has so far had mixed success in its intentions to deregulate
and liberalize the oil and gas sector with the law No 22, especially in the
downstream sector. Pertamina continues to be the only refiner in the country,
and there are only a handful of new entrants eying the retail market, because
Pertamina continues to sell gasoil and lower octane gasoline at heavily
subsidized prices, with compensation from the central government.
--Anita Nugraha, newsdesk@platts.com

Please visit: www.platts.com

Their coverage of energy matters is extensive!!.