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Natural Gas Business in Indonesia

Introduction
Gas is an energy future of Indonesia. It is a fact that cannot be denied anymore. Based on existing data, throughout 2010 there were new discoveries of gas reserves are significant enough to achieve 2.09 trillion cubic feet, while the discovery of oil only amounted to 140 million barrels only. On January 1, 2011, proved reserves position and potential of gas in Indonesia reached 153.72 trillion cubic feet of proven and potential reserves and crude oil for 7.41 billion Barrels. (BPMIGAS Bulletin Issue, 2011)

If the reserves are produced with current production levels then the Indonesia's oil reserves will run out for 12 years, while Indonesia's natural gas reserves are still able to survive to meet the needs of up to 46 years. (BPMIGAS Bulletin issue 73: August 2011) Figure below showed Natural Gas Reserve in Indonesia (Eddy Hermantoro, 2010)

Figure 1. Indonesia Gas Reserves

Natural gas is usually found deep below the earths surface and is made up of hydrocarbon gas primarily methane (CH4). It is found in oil and gas field and coal mining area (Annual Report PGN, 2010). Natural gas can be used as fuel either fuel for industry, vehicles, housing, power plants and even as raw material for petrochemical products.

Figure 2. Natural Gas Composition Compared to oil-based fuels and coal, natural gas has several advantages, namely: 1. Environmental Friendly Natural gas burns more cleanly, releasing fewer (CO2) emissions into the atmosphere. Using natural gas can therefore help to reduce greenhouse gases and global warming

Figure 3. Fossil Fuel Emission

2. Economically efficient energy Natural gas has excellent economic value. Apart from being an environmentally friendly fuel source, it is cheaper and has greater price stability than oil-based fuels. Comparison of natural gas price and petroleum products can be shown at figure below based on crude oil price of USD 106.72/barrel. (Annual Report PGN, 2010)

Figure 4. Fuel Price Comparison

Indonesian Natural Gas Business in 2001 - 2008


In order to give legal base to the renewal and reconstruction of the agency for upstream oil and gas activity, the government has determined Act No.22/2001 in relation to oil and gas on 23 November 2001 (BPMIGAS Profile Website, 2012) Since Act No.22/2001 on 23 November 2001 concerning oil and gas and Government Regulation No.42/2002 on 16 July 2002 concerning BP MIGAS have been determined, the matter of supervising and establishing Cooperation Contract or Productions Sharing Contract

(PSC / KKKS) activity which previously done by PERTAMINA is now done by BPMIGAS. (BPMIGAS Profile Website, 2012) PSC/KKKS is the Business Entity or Permanent Establishment that have right to perform on the Exploration and Exploitation in a Work Area and have a Cooperation Contract with the Agency executive (BPMIGAS). (PERMEN ESDM, 2010). Pertamina, Total E & P, Santos, Petrochina, Conoco Phillips are a few examples KKKS natural gas producer in Indonesia.

Business Entity is a legal entity that runs the type of business permanently, continuously and in accordance with established laws and regulations applicable as well as work and domiciled in the territory of the Republic of Indonesia (Pedoman Tata Kerja BPMIGAS No : 029/PTK/VII/2009) Prior to 2001, PGN was the only natural gas distribution companies in Indonesia. Since Act 22 in 2001 was published, private business entity (Private Natural Gas Distribution Company) can participate in this natural gas distribution business. Direktorat Jendral Migas have a role in determining the permission of KKKS, held a working area tenders, issuing permits of Natural Gas Distribution Company.

Since Act 22 in 2001 was published, private natural gas distribution companies emerging. The company buys and sells natural gas for industrial needs by using pipeline, CNG (Compressed Natural Gas) and LNG Technology. The scheme of gas business flows from gas production to end user can describe as figure below (Amrullah Hakim, 2005)

Figure 5. Natural Gas Business Scheme

In 2001 to 2008, sales of natural gas from KKKS have never been done in an open tender, natural gas can be sold directly to natural gas distribution companies without any tender, in other words, KKKS never announced to the media (newspapers, websites etc.) regarding the potential for natural gas that will be commercialized. Hence, Natural Gas Distribution companies who have network to KKKS will benefit from this kind of process. The process of selling gas without open tender as mentioned above can lead to unethical business behavior, because KKKS is the only one who gained full authorization from BPMIGAS to control the commercialization process but KKKS did not doing a transparent business process.

What KKKS doing is not in accordance with the principles of good corporate governance that includes Transparency, accountability, responsibility, independency, and fairness to attain a company's sustainability by also considering the interests of stakeholders. (Binhaldi, 2006)

To avoid unethical business behavior, commercialization of natural gas process by KKKS must be done transparently. KKKS must Provide timely, Appropriate, clear, accurate and comparable information accessible to stakeholders that their rights commensurate with (Binhaldi , 2006).

Indonesian Natural Gas Business in 2009 2011


In 2009, BPMIGAS issued Guideline (PTK) No. 029/PTK/VII/2009 Working Procedures governing the process of commercialization of natural gas. In the PTK 029/PTK/VII/2009, BPMIGAS explains that the sales gas process can be done by direct appointment (without tender) to the four priorities, namely: 1. Increased production of oil and gas 2. Fertilizer Industry 3. Electricity Supply 4. Local Region Government

Figure 6. BPMIGAS Natural Gas Direct Appointment Procedure (PTK No. 029/PTK/VII/2009)

Guidelines for Working Procedure No. 029/PTK/VII/2009 BPMIGAS are reinforced by the issuance of Ministerial Regulation No. 3 of 2010 regarding the allocation and utilization of natural gas to meet domestic needs. Determination of Allocation Policies and Utilization of Natural Gas Utilization implemented with priority for Natural Gas (Peraturan Menteri ESDM No 3, 2010): a. increased production of the National Oil and Gas; b. fertilizer industry; c. electricity supply; d. other industries.

In the period after the issuance of Working Procedure No. 029/PTK/VII/2009 BPMIGAS, many natural gas distribution companies are approaching producing region governments (Regent or Governor) and regional-owned enterprises (BUMD) because the region government through BUMD can purchase natural gas from KKKS with direct appointment process or without any tender process.

Regional-Owned Enterprises (BUMD / Perusahaan Daerah (Perusda)) are companies established under Law No. 5 Year 1962 concerning Regional Companies and Minister of the Interior Law No. 3 Year 1998 concerning Form Regional Owned Enterprises

BUMD is a company established pursuant to the Region to conduct business activities. BUMD have the privilege to get gas with direct appointment process but usually BUMD do not have business experience and have no funds for investment, because of that issues BUMD usually have a partner to do this business.

Selection of Regional Owned Enterprise (BUMD) partner in the utilization of natural gas in this case done without an open tender, because it is not regulated in the Act in the area. The chosen BUMDs partners usually are those who have a network and proximity, and which can bring benefits to both the benefits for the region and for personal gain.

Even though, a new working procedure (No. 029/PTK/VII/2009) has been made by BPMIGAS, the conduct of unethical business still exists, because the shareholders and stakeholders do not implement a good of governance in their business. There are two approaches in driving the implementation of good corporate governance (GCG), ethics-based approach and regulatorybased approach. Ethics-based approach is predominantly driven by the consciousness of business practitioners in doing their business not only for short-term profit orientation but also for more on a healthy longer-term relationship with their stakeholders. On the other hand, regulatory approach is driven by the initiative to enforce company to comply with certain designated regulations. Since each approach has its own strengths and weaknesses, they are supposed to be complimentary each other in creating sound business environment. (Binhaldi, 2006)

Governance will not prevent misconduct of misdeeds, but it can actually improve the way a corporation is run in Indonesia and for that matter other Asian countries. Corporate governance can be perceived as the collection of control mechanisms that an organization adopts to prevent or dissuade potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders. Corporate governance is a necessary to create a more sustainable environment for competitive Indonesian businesses in a global economy (Verhezen, 2011)

Conclusion

Natural Gas is a future energy in Indonesia, because Indonesia has a large reserve of Natural Gas and Natural Gas is an environmental friendly and economically efficient energy compare with other fossil fuel.

To create a sustainable environment and competitive natural gas business in Indonesia, it is necessary for business practitioners to implement a Good Corporate Governance. There are two approaches in driving the implementation of good corporate governance (GCG), ethics-

based approach and regulatory-based approach. They are supposed to be complimentary each other in creating ethical business in Indonesia

Reference List Amrullah Hakim, Irawan Sumardi, 2005, An Introduction of Gas Business and Its Competitiveness for Electricity Sector in Indonesia, 20th World Energy Congress, Rome, Italy

Binhaldi, Yunus Husen, Irwan Habjah etc, 2006, Indonesias Code of Good Corporate Governance, National Committee on Governance

BPMIGAS Bulletin issue 73: August 2011

BPMIGAS Profile Website, accessed on 04 Feb 2012 at 05.00 pm

Eddy Hermantoro, 2010, POLICY AND OPPORTUNITIES IN INDONESIA OIL & GAS INDUSTRY

Pedoman Tata Kerja No : 029/PTK/VII/2009 Tentang Penunjukan Penjual dan Penjualan Gas Bumi/LNG/LPG Bagian Negara

Peraturan Menteri Energi dan Sumber Daya Mineral No 03 Tahun 2010

Peter Verhezen, Erry Riyana Hardjapamekas, Pri Notowidigdo, 2011, Is Corporate Governance Relevant? How corporate Governance practice can affect Indonesian organization

PGN Annual Report, 2010