ASPERMIGAS Oil & Gas Workshop – 2 Jakarta, 10 October 2019

INDONESIAN UPSTREAM OIL & GAS INDUSTRY

SECOND TERM PRESIDENT

AND
MAKING PREVIOUSLY IMPOSSIBLE DECISIONS

Presented by:
Bill Sullivan

(in association with Stephenson Harwood LLP)

District 8, Treasury Tower Floor 25-B
Sudirman Central Business District
Jl. Jend. Sudirman Kav.52-53, Jakarta 12190
Tel : 62 21 5020 2789 Fax : 62 21 5020 1789
Email : bsullivan@cteolaw.com
Mobile: 62 815 8506 0978

© CHRISTIAN TEO & Partners 2019

 OUTLINE OF SESSION
1. Introduction
2. Making Previously Impossible Decisions
3. Increasing Oil & Gas Exports
4. Current Account Deficit
5. What the President Really Meant
6. Foreign Investment Relocating from China
7. The Bigger Issue
8. Summary and Conclusions

ASPERMIGAS Oil & Gas Workshop – 2 1

 INTRODUCTION

1. The President’s Second Term will commence on

20 October

2. It is timely to consider what the President’s

Second Term means for new foreign investment in
the Upstream Oil & Gas Industry

3. Will the President’s Second Term be positive or

negative for new foreign investment in the
Upstream Oil & Gas Industry?

ASPERMIGAS Oil & Gas Workshop – 2 2

MAKING PREVIOUSLY IMPOSSIBLE DECISIONS

1. President said in 27 July interview that

(a) as he is not able to run for a third term in 2024
(b) he is now free of the political burdens that
constrained him during his first term and
(c) finally able to make decisions that would
“previously have been impossible”

2. President may no longer be politically constrained

from making “previously impossible decisions” but he
is definitely economically constrained in what he can
and cannot do
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 INCREASING OIL & GAS EXPORTS THROUGH
GREATER FOREIGN INVESTMENT

1. Is encouraging greater foreign investment in the

Upstream Oil & Gas Industry specifically one of the
“previously impossible decisions” that the President
has in mind?

2. Greater foreign investment in Upstream Oil & Gas

Industry would be consistent with GoI’s economic
priorities

3. Greater foreign investment should eventually lead to

increased Oil & Gas exports and reduce the Current
Account Deficit
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 CURRENT ACCOUNT DEFICIT – PART I

Source: TRADINGECONOMICS.COM | BANK INDONESIA

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 CURRENT ACCOUNT DEFICIT – PART II

1. Year on year CAD has continued to deteriorate

2. 2nd Quarter 2019 CAD was 6.2% higher than 2nd

Quarter 2018 CAD

3. MoEMR and MoSOE were reprimanded at July

cabinet meeting for not taking sufficient steps to
reduce CAD

4. In mid-August, the President was quoted as saying

“[CAD]” is the country’s biggest economic
problem at present”
ASPERMIGAS Oil & Gas Workshop – 2 6
 CURRENT ACCOUNT DEFICIT – PART III

5. Ministry of Trade is to be merged with Ministry of

Industry to focus on domestic trade

6. Foreign Ministry to be given new responsibility of

promoting exports through “economic diplomacy”

7. Encouraging greater foreign investment in

Upstream Oil & Gas Industry specifically is
probably not what the President meant by
“previously impossible decisions”

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 WHAT THE PRESIDENT REALLY MEANT –
PART I
1. The President has
(a) repeatedly expressed his dissatisfaction with
Indonesia's relatively low GDP growth rate of
5%
(b) indicated a strong interest in seeing Indonesia
benefit from the ongoing relocation of
manufacturing activity from China to elsewhere
in South East Asia
(c) identified Vietnam as currently doing a better
job than Indonesia in attracting foreign
investment
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 WHAT THE PRESIDENT REALLY MEANT –
PART II
1. The “previously impossible decisions” the President has
in mind are likely to be decisions that are intended make
Indonesia a more attractive investment destination at
the economy wide level

2. The President’s Second Term may bring about

(a) reform of the Manpower Law to make it easier/
less costly to terminate workers
(b) reduction in corporate tax rate from 25% to 20%
(c) further simplification of investment licensing
(d) continued focus on infrastructure improvements
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 WHAT THE PRESIDENT REALLY MEANT –
PART III
3. The President was probably not talking about
decisions that would directly benefit one industry
only

4. The upstream Oil & Gas industry should realistically

be
(a) expecting to benefit indirectly from the President’s
“previously impossible decisions” and
(b) not expecting special treatment unless this
happens to be consistent with improving the
Indonesian economy/investment climate as a
whole
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 FOREIGN INVESTMENT RELOCATING FROM
CHINA – PART I
1. President is correct to focus on:
(a) how to attract to Indonesia foreign investment
relocating from China
(b) Vietnam as Indonesia’s biggest competitor for
relocating foreign investment
(c) making Indonesia more competitive at the macro
level
2. Unfortunately Indonesia is not doing what is necessary to
attract more foreign investment generally
3. World Bank recently identified 33 large scale
manufacturing investments/projects relocating from China
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 FOREIGN INVESTMENT RELOCATING FROM
CHINA – PART II
4. How many of the 33 relocating manufacturing
investments/projects did Indonesia attract?

5. Indonesia attracted NONE of the 33 relocating

manufacturing investments/projects
6. The successful countries were:

(a) Vietnam : 23 projects

(b) Cambodia, India, Malaysia, Mexico, Serbia and

Thailand : 10 projects

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 FOREIGN INVESTMENT RELOCATING FROM
CHINA – PART III
7. World Bank identified various reasons for Indonesia’s
poor performance including:
(a) lengthy establishment & licensing procedures
(b) REGULATORY UNCERTAINTY
(c) Complex bureaucratic processes

8. “Ministers are making too many rules and increasingly

so”

9. Number of new Indonesian regulations increased from

(a) 5,000 in 2011/2014 to
(b) 6,300 in 2015/2018
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 POLICY/REGULATORY UNCERTAINTY
1. Recent policy and regulatory mis-steps

(a) confirm investors’ worst fears about the

inconsistency of GoI policy towards the
resources sector
(b) suggest that GoI has made little progress in
overcoming the “flipflop phenomenon”

2. Policy/regulatory certainty is key to making

Indonesia as a whole a more attractive place to
invest
ASPERMIGAS Oil & Gas Workshop – 2 14
 THE BIGGER ISSUE – PART I

1. Recent Mining Industry experience is very relevant

to prospective foreign investors in Upstream Oil &
Gas Industry

2. Bringing forward Nickel Ore Export Ban from 2022

to 2019 is an excellent and recent example of
policy/regulatory mis-steps that have increased
investor uncertainty

3. 2019 Nickel Ore Export Ban shows GoI does not

understand the bigger issue for Indonesia
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 THE BIGGER ISSUE – PART II
4. Bringing forward the Nickel Ore Export Ban to 2019
may
(a) well increase investment in smelter construction
and reduce CAD but
(b) at the same time increase negative perceptions of
Indonesia generally as an unreliable investment
destination
5. GoI should have carefully balanced the industry
specific impact against the economy wide impact
6. It is not just all about what is best for investors in a
single industry
ASPERMIGAS Oil & Gas Workshop – 2 16
 SUMMARY & CONCLUSIONS – PART I

1. The President says he is committed to making

“previously impossible decisions” in his Second Term

2. Making Indonesia a more attractive place to invest

should be the focus of the President’s “previously
impossible decisions”

3. GoI is not doing what is necessary to ensure greater

foreign investment

4. GoI is making worse Indonesia’s endemic problem

of policy/regulatory uncertainty
ASPERMIGAS Oil & Gas Workshop – 2 17
 SUMMARY & CONCLUSIONS – PART II

5. GoI needs to be much more careful in considering how

its policy decisions will affect investor perceptions of
Indonesia generally as a reliable/unreliable investment
destination

6. 2019 Nickel Ore Export Ban shows GoI is not

sufficiently focused on the bigger issue

7. Indonesia cannot reasonably expect more foreign

investment in Upstream Oil & Gas Industry unless and
until it overcomes the problem of policy/regulatory
uncertainty affecting Indonesia generally
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 Thank You

ASPERMIGAS Oil & Gas Workshop – 2 19