Culture risk – the re-emergence of an ancient risk?

January 2013 | EXPERT BRIEFING | RISK MANAGEMENT

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On 13 November 2012, the Indonesian constitutional court declared that the existence of the Executive Agency for Upstream Oil and Gas Business Activities (BPMigas) was unconstitutional as it degraded state control over natural resources such as oil and gas. The court ruled that BPMigas should be dismantled and its functions handed over to Indonesia’s Energy & Minerals Resources Ministry, with immediate effect. Article 33 of the 1945 constitution formed the basis for this ruling. According to the court’s panel of judges, the upstream regulator did not directly manage oil and gas assets but instead handed them over to state-controlled companies or private companies, through cooperation contracts. This resulted in limited access for the state to maximise the benefits of natural resources management for the welfare of the Indonesian people.

The court ruling came after a petition made by 42 organisations including the Muhammadiyah, a notable Indonesian Islamic organisation, plus well-known scholars, among them a former minister, the economist Kwik Kian Gie, and cleric Hasyim Muzadi.

Under BPMigas, established in 2002, crude-oil production fell from 1.4 million barrels per day to around 920,000 last year. The production of gas rose from 63 billion cubic metres to 76 billion during the same period. BPMigas established around 300 production sharing contracts with producers between 2002 and 2011.

In order to replace the now defunct BPMigas, the government, in issuing three decrees, has now ‘temporarily’ created a new task force, the Interim Working Unit for Upstream Oil and Gas Business Activities (SKSPMigas) under the wing of the Energy & Minerals Resources Ministry, headed by Minister Jero Wacik.

On 20 November, The Jakarta Globe reported Minister Wacik’s initial reaction to the changes: “BPMigas has been labelled by some quarters as pro-foreigner. We will show them that we are not pro-foreigner. We will prioritise local companies to do our own oil blocks. But, this does not mean we’re kicking out foreign operators. We still need them.” In light of this, Mr Wacik had earlier tried to calm investors’ concerns about creeping economic nationalism over Indonesia’s resources, stating “foreign companies must be able to operate comfortably in Indonesia and make reasonable profits, or they will go elsewhere.” It should be noted that not so long ago, in 2010, the Canada-based Fraser Institute described Indonesia as “the country with the worst oil and gas management in the Asia Pacific”. In its global petroleum survey, Indonesia was ranked 111 out of 133 countries with regard to oil and gas investments.

Foreign oil and gas operators in Indonesia are engaged as ‘contractors’, mainly via production sharing contracts, technical assistance contracts and similar joint-venture contractual arrangements. The emphasis is that Indonesia owns the assets, with foreign oil and gas operators developing and producing them. Increasingly, it has been seen that domestic oil and gas companies are entering this arena too. But it is true that deep-water projects are still dominated by foreign investors due to advanced technological know-how requirements and the required high levels of development investment.

Culture risk, in many business plans, is covered under the headings of PEST; an external recognition and assessment of perceived and future potential political, economical, social and technological risks. In this case, underlying political and domestic power games, and religious motives may have played a role. It may also be regarded as a case of self-criticism on the part of Indonesia itself, as declining crude-oil production levels seems to bear out. Many oilfields in Indonesia are at a mature stage, classified as legacy, and are in decline. Indonesia lost its OPEC membership in 2009 through becoming a net importer of oil.

But do other factors play a role within culture risk, and are these factors, perhaps, not exclusively unique to Indonesia? Should this risk be seen in terms of dyadic relationships, along the lines of prevailing power regimes – the adversarial type, dominance, interdependence or independence? Within the Indonesian context, Mr Wacik, says “You can drill exploration wells, spend so much money and find oil only in one of them. You can drill so many and not find anything. This is why that there are not many oil companies worldwide.” Mr Wacik suggests a dominant power regime in terms of funding, and indirectly in terms of superior knowledge and technology. This is disputed by the petitioners: “the constitution says that the state must have control over natural resources. The ruling reflects this clause”.

Culture risk does seem to emphasise the notion of ‘them versus us’. However, it is not always easy to define ‘them’ and ‘us’. The perceived historic power dominance of West over East is rapidly evaporating, especially since late 2008. In Indonesia, many foreign oil and gas operators are now from China, Japan, Malaysia, Singapore and South Korea. Equally, national oil companies are now emerging. Perhaps Indonesia is unique? The country currently has a population of over 220 million people, predominantly Muslim, of which 120 million live in Java alone. In spite of this disparity there are still potential opportunities arising in sparsely-populated areas outside of Java. Perhaps the paradigm of ‘them versus us’ can now be viewed as a local issue? There is perhaps also a case of the ‘haves’ and ‘have nots’. In Indonesia the asset is – by law – owned by the country.

Culture risk should also be seen in terms of trust. The topic of trust is discussed extensively within text books and pivots around contractual, competence and ‘goodwill’ forms of trust. Indonesia did have contractual trust defined through its constitution; although the recent ruling now calls this into question. Mr Wacik and others do indeed acknowledge the competence of the foreign oil and gas companies in terms of knowledge and funding. That leaves ‘goodwill’ – a mutual expectation of open commitment to each other, or the willingness to do more than is formally expected. That should move the relationship from one of perceived dominance on either party’s part, towards interdependence.

The Economist, on 22 November 2012, carried the headline “Foreigner Beware”. The article stated “commercial oil production began in Indonesia in the 1880s. Firms have been drilling for oil and gas there ever since, despite the occasional coup and financial crisis. Still, the country is finding new ways to make life hard for them.”

Cultural goodwill is many-sided. Indonesia and its government, as well as foreign oil and gas companies, need to recognise and embrace this. In accepting that there is already a mutual interdependent relationship in place, this should form the basis for cooperation leading to enhanced trust and common success.

Lourens J Hinrichs is a strategy and supply chain specialist at Hinrichs & Company Ltd. He can be contacted on +44 7748 126363 or by email: hinrichs@indo.net.id.

Lourens J Hinrichs

Hinrichs & Company Ltd.