IPA13-BC-097

PROCEEDINGS, INDONESIAN PETROLEUM ASSOCIATION

Thirty-Seventh Annual Convention & Exhibition, May 2013

THE OPERATION-BASED CSR OF MEDCO CITY GAS PROGRAM

Hirmawan Eko Prabowo*

Trian Hendro Asmoro*
Beti Putri Wulandari *

ABSTRACT
The CSR (Corporate Social Responsibility)
program has become a crucial issue for corporate
sustainability in recent years. The new CSR
approach has included the introduction of
characteristics of sustainability adopted from ISO
26000. Integration of CSR with business operations
is an essential factor but rarely implemented by oil
& gas companies, even though they have a strong
commitment to conduct CSR programs as part of
their business process.
Furthermore, many CSR programs actually do not
have a direct relationship with the actual oil & gas
operations, and are executed on a spending basis
only. In fact, particularly in developing countries,
companies still face problems with their local
communities, even when they have spent a lot of
money on their CSR programs.
Community or city gas is a CSR program which can
be implemented in the oil & gas industry. It follows
the operation-integration paradigm and will deliver
natural gas from the field operated by the company
to the surrounding community. The community will
therefore directly gain benefits from the company’s
operations, while the company can convey its CSR
program and maintain its profitability at the same
time.
INTRODUCTION
Corporate Social Responsibility
The term CSR (Corporate Social Responsibility)
generally refers to the commitment of business to
behave ethically and contribute to economic
development while taking into account people,
communities, society at large and the environment
(Gustafson, 2006). In practical terms, CSR, also
known as corporate citizenship or corporate
conscience, is a form of corporate responsibility for
the community.
There are two contrasting views on CSR activities.
One view argues that the principal task of a
company is to produce economically in accordance
with the demands of the investors who have
invested funds in their company. Therefore the
argument is that companies which undertake CSR
are unethical because they are not fulfilling the
main aim of the investors, which is, of course, to
make a profit. The second view argues that
companies should implement CSR for the reason
that a company is a living entity doing business
within the community and therefore has an
obligation to that community in effect the company
has a social contract with the local community.
However, this contract might conflict with the
expectations of the company shareholders.

The “city gas” program implemented by Medco can
be further enhanced, and similar programs in other
fields can be established. This program shows that
the company can therefore run an operation-based
CSR effectively by integrating CSR within the
company operation. The program is part of the
company's efforts to implement the principles of
triple-bottom-line economic, social and
environmental considerations to cover all business
activities and ensure their sustainability in the
future.
* MEDCO E&P Indonesia
As corporate organizations develop awareness of
CSR, organizations will typically go through a five-
stage learning curve (Zadek, 2004), as shown in
Table 1, i.e. defensive, compliant, managerial,
strategic, and civil.
Medco CSR Program
The philosophy underpinning the Company’s CSR
programs extends beyond giving back, and strives
for a mutually beneficial relationship with various
elements of society that will prevail over many
generations. In undertaking its social mission, PT
Medco E&P Indonesia (Medco) carries out business
practices that are aligned with its responsibilities to
the community and environment within CSR
programs that are sustainable and can fulfill the
very essence of the CSR principles.
Every CSR program must have empowerment
features and become integrated into the daily
activities of the Company, whether at head office or
in the fields, in such a way that environmental
conditions are preserved and surrounding
communities are able to sustain, maintain and even
improve their quality of life. Hence, the Company
embraces the principles of triple-bottom-line,
integrating economic, social and environmental
considerations into all business activities to ensure
their sustainability.
Furthermore, the CSR programs are carried out
within the framework of the Government’s National
Medium Term Development Plan (RPJMN) 2010-
2015, the aim of which is to develop capacity,
science skills, and economic competitiveness. The
programs which have been developed are extensive
and diverse, and categorized into 7 major groups,
namely environment, education, health,
infrastructure, stakeholders, natural disaster and
sponsorship & contribution. Accordingly, Medco is
committed to innovate and execute new local
economic development programs that are
environmentally friendl, and to preserve
environmental programs, such as organic farming.
ADVANCEMENT OF CSR: INTEGRATION
OF BUSINESS OPERATION
Overview ISO 26000 1. Be consistent with sustainable development and
The CSR program has become a crucial issue for
corporate sustainability in recent years. Although
oil & gas companies have a strong commitment to
the CSR program, the program actually does not
have a direct relationship with the oil & gas
operations, i.e. exploration and production of oil
and gas.
Meanwhile, the company's CSR program mostly
leads to environmental and community
empowerment. Although these programs have some
impact on maintaining operations sustainably, the
company in this case has not fully integrated its
CSR program into its operations.
In addition, the program is currently executed on a
spending basis, such as spending on road
infrastructure, school buildings, medical facilities,
restorations, and other community programs. On the
other hand, the natural expectation of shareholders
as major stakeholders is that the company should
maximize its value and spend money on an
investment basis so that it will generate a return that
leverages the company’s value.
ISO 26000 has therefore been developed to assist
organizations in contributing to sustainable
development. It is intended to encourage
organizations not only to adhere to legal
compliance, which is a fundamental duty of any
organization and an essential part of social
responsibility, but also to exceed the demands of the
legal requirements. In applying ISO 26000,
organizations are advised to take into account
societal, environmental, legal, cultural and political
matters as well as differences in economic
conditions, while being consistent with international
norms of behavior.
Operation‐Based CSR
The new CSR approach has adopted the
characteristics of sustainability, which are described
in ISO 26000. Integration with the business
operation is an essential factor but rarely followed
by oil & gas companies, even though they conduct
CSR programs as part of their business process.
According to ISO 26000, it is the responsibility of
an organization to ensure that the impact of its
policies and activities on the community and the
environment is transparent and ethical, i.e. it must
adhere to the following criteria:
social welfare
2. Take into account the expectations of all
stakeholders
3. Comply with the law and be consistent with
international norms
4. Integrate CSR into the organization's activities
ISO 26000 also gives core subject guidance on
social responsibility, which consists of the
following 7 core subjects, where the company will
focus or prioritize on one or more, as follows:
1) Organizational governance
2) Human rights
3) Labor practices
4) Environment
5) Fair operating practices
6) Consumer issues
7) Community involvement & development
Moreover, the CSR strategy needs to be divided
according to the different stages of oil and gas field
cycle, i.e. exploration (to find hydrocarbon),
development (to set up production facilities) and
production (to produce and sell the hydrocarbon).
The function of CSR, core subjects and field cycle
is shown in the schematic in Figure 1.
Based on the current CSR conditions and ISO
26000 requirements, the spending-based program of
CSR does not meet two of the CSR criteria as stated
in ISO 26000, namely taking into account the
stakeholders expectations and integrated with the
activities of the organization. In fact, particularly in
developing countries, companies still face problems
with their local communities, even when they have
spent a lot of money on their CSR programs.
MEDCO CITY GAS PROGRAM
Overview of Program a result, the company executed scenario 2 by using
City gas is a CSR program which can be
implemented in the oil & gas industry to respond to
the requirements of the new CSR strategy and
complies with the integration of business
operations. Technically, the program will deliver
gas from the field operated by the company to the
surrounding community. The community will
therefore directly gain benefit from the company’s
operations, while the company can convey its CSR
program and maintain its profitability at the same
time.
As part of its community gas program, Medco has
implemented its “city gas” program in Tarakan
City, East Kalimantan, where it operates. The
program supplies up to 0.07 MMSCFD (million
cubic ft per day) gas to the city to be used by in
households in cooperation with a local government-
owned company and through a City Gas Sales
Agreement (GSA), which is valid from April 6th
2011 until April 5th 2016.
Technical Analysis operation, the program will generate an IRR
The gas supply for the city gas program is from
producing wells and is processed at one of Medco’s
gas plant, G-08 Station, in Tarakan. This gas is also
used to supply the state-owned electrical company,
PLN. Medco uses existing facilities across
Sebengkok area, which is used as a tie-in point for
city gas facilities, as shown in Figure 2. Figure 3
shows Medco and city gas allocation facilities,
including Medco’s facilities from upstream to
downstream and from the city gas tie-in point to
customers.
This program is designed to anticipate two
scenarios, as shown in Figures 4 and 5. The aim of
creating two scenarios is to take into consideration
the condition of the existing pipelines. If the
pressure is above 240 psig leaking occurs, which
will obstruct the gas supply to the subscribers. An
economic analysis is then performed for the two
scenarios. By using scenario 1, with new pipelines,
a positive NPV of a 16-year contract with IRR 5%
and US$ 6,964 NPV are predicted.
Meanwhile, by using scenario 2 with the existing
pipelines, IRR of 26% and US$ 7,519 NPV will be
achieved by the end of a 2-year contract. The
comparison of economics analysis for these
analyses is shown at Table 2. Clearly using the
existing PLN pipelines would result in a more
profitable economic return in the short term and as
the 4 existing PLN pipelines across Sebengkok area.
Other considerations to be taken into account are
time and safety during construction, since the right
of way of Medco’s pipeline is in a densely
populated areas.
Benefits of Program
The benefits of this community or city gas program
can be evaluated by conformance and performance.
The program has shown that it conforms to ISO
26000, in particular with the CSR criteria, i.e. it is
consistent with sustainable development and social
welfare, it takes into account the expectations of all
stakeholders, it complies with the law, it is
consistent with international norms, and it integrates
CSR into the organization's activities.
Regarding the economics of the project, the gas
price available to 3,366 household subscribers is
US$ 3 per MMBTU, where subscribers consume an
average of 0.02 MMBTU per day. After years of
(Internal Rate of Return) of around 5% (scenario 1)
and IRR of 26% (scenario 2). Furthermore, city gas
has been able to reduce monthly household
spending on cooking fuel by up to 60% which is a
cost saving of more than 3000 city gas household
customers
The benefits clearly show that the city gas program
is economically feasible. In addition, there are other
considerations for implementing the program,
namely:
a. The main objective of this program is to
integrate CSR with the company’s operations,
so that the return on investment is not the main
decisive indicator.
b. This program is part of the effort to reduce the
environmental impact of gas flaring.
c. The program has successfully consolidated the
relationship between the company and the
community.
CONCLUSION
The program of community or city gas will
integrate the CSR activities of companies that
produce oil and gas as guided in ISO 26000, as well
as satisfy the interests of all stakeholders, including
shareholders. This is because CSR is no longer just
a cost, but also an investment to get a return in the
future. The company will therefore preserve the
interests of shareholders, which is naturally
maximizing the value of the company, as well as
maintaining the company’s operation sustainability
within a community
In addition, the program will benefit the
community, therefore the active community
involvement with the program and feeling of
belonging to it will directly safeguard the public
interest in the company's operations, since the gas is
from the company's operations. This program shows
that a company can run an operation-based CSR
effectively by integrating CSR within the company
operation
To summarize, the city gas program is a part of the
company's efforts to implement the principles of
triple-bottom-line of economic, social and
environmental considerations to cover all business
activities and to ensure their sustainability in the
future.
ACKNOWLEDGEMENT
The authors wish to thank SKKMIGAS, Direktorat
Jenderal Migas, Pemerintah Kota Tarakan, and PT
Medco E&P Indonesia for allowing this paper to be
published. We also acknowledge the valuable
contribution and support of members of Medco
CSR, Engineering and Operation team.
REFERENCES
Gustafson, Jim ‘Gus’, 2006, Corporate Social
Responsibility: Are You Giving Back or Just Giving
Away?, Paper on Business: The Ultimate Resource
Discovering ISO 26000, www.iso.org
ESDM, 2012, Perusda Tarakan is Ready to Manage
Natural Gas Network for Domestic,
http://www.esdm.go.id/news-archives/oil-and-
gas/47-oilandgas/4610-perusda-tarakan-is-ready-to-
manage-natural-gas-network-for-domestic.html
Ioannou, Ioannis, George Serafeim, 2010, What
Drives Corporate Social Performance? International
Evidence from Social, Environmental and
Governance Scores, Harvard Business School
Medcoenergi, 2012, Company Profile 2012,
Medcoenergi International
Medcoenergi, 2007, CSR Profile, Medcoenergi
International
Zadek, Simon, 2004, The Path to Corporate
Responsibility, Harvard Business Review Ed.
December
 TABLE 1

FIVE STAGES OF CSR COMPANY AWARENESS STATED BY SIMON ZADEK (2004)

Stage Organization Act Reasons

1. Defensive Refuse to practice, output
or responsibility
2. Compliance Adopt appropriate
compliance policies as a
business expense
3. Managerial Unite social issues in the
core management
4. Strategic Integrate social issues in
the core business strategy
5. Civil Promote industry
participation in CSR
Protecting the attack on the reputation of the
short-term affect sales, recruitment, productivity
and brand
Preventing the reduction of the economic value
of medium-term business and reputation risks
for court
Preventing the reduction of the economic value
of the business over the medium and long-term
trade-offs achieved by the integration of
responsible business practices in daily
operations
Improving long-term economic value and
benefit gained first by aligning strategy and
process innovation with social issues
Improving long-term economic value by
overcoming losses obtained first, and realize
benefits through collective action

TABLE 2

ECONOMIC ANALYSIS. THIS ANALYSIS IS PERFORMED TO 2 SCENARIOS WHERE

MEDCO HAVE RESPONSIBILITY TO BUILD PIPELINE FROM PIPELINES
AFTER METER AT G-08 STATION TO CITY GAS FACILITIES AND FROM
EXISTING PLN PIPELINE TO CITY GAS FACILITIES

Description Scenario 1 Scenario 2

Cash Flow 204,894 10,608

Discount Rate 5% 5%

IRR 5% 26%

NPV 6,964 7,519

Years of contract 16 2
 Figure 1 - Social Responsibility Model for Oil & Gas Company.

Figure 2 - Schematic Diagram Gas Source to City Gas Customers.

.
Figure 3 - Medco and City Gas Allocation Facilities. It is shows Medco’s facilities from upstream
until downstream and the City Gas tie-in point until customers.

Figure 4 - Schematic Diagram Scenario 1. This diagram shows the allocation of Medco after meter at
G-08 Station to city gas facilities by new pipelines.
Figure 5 - Schematic Diagram Scenario 2. This diagram shows the allocation of Medco from
existing PLN pipelines to city gas facilities.