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The Oil Industry: The 1963 Agreements and

After
Published online: 05 Feb 2007.

To cite this article: (1965) The Oil Industry: The 1963 Agreements and After, Bulletin of Indonesian Economic
Studies, 1:2, 16-33, DOI: 10.1080/00074916512331339829

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 No 2, September 1965

THE OIL INDUSTRY: THE 1963 AGREEMENTS AND AFTER

A s a result of the promulgation of Government Regulation

No. 18 Year 1963, the Tokyo Agreement between the foreign oil
companies operating in Indonesia and their counterpart Indonesian
State companies came into operation as from 1 June, 1963. The
regulation stipulated that the main "Heads of Agreement" decided in
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Tokyo were to be embodied in working contracts which, after lengthy

negotiations, were concluded in Djakarta on 25 September, 1963.

Background

-
The Tokyo agreement ended or at least appeared to end -
a long period of uncertainty for the foreign oil companies. All three
foreign companies had held concessions under mining rights granted
by the Dutch colonial government which the government of the Republic
of Indonesia reaffirmed in 1949. But in the following years the
companies failed to secure the new concessions for exploration and
development necessary to raise or even maintain output in Indonesia
where oil pools typically are small and scattered through the
sedimentary basins. The companies also faced controlled prices of
petroleum products within Indonesia which, in the conditions of severe
inflation, made domestic distribution quite unprofitable. In 1960
L a w No. 44 concerning Petroleum and Natural Gas Mining vested all
oil rights in the State and stipulated that in future all foreign
companies " m a y only act as contractors and are no longer allowed to
have concession rights": This law initiated the protracted two-and-
a-half years of negotiation which ended in the Tokyo agreement.

The oil companies entered the final phase of negotiation

reconciled to tax increases but out for some definitive understanding
and formal agreement on their future position in Indonesia. The
Indonesian negotiators had a more complicated position from which
to negotiate. It envisaged two or three possibly inconsistent
objectives:

(a) Continued efficient operation of this important sector of

the economy which earned $100-120 million per. annum
net in foreign exchange (about one-third of all foreign
exchange earnings) but which could not be operated at
full capacity by Indonesian nationals since there were
as yet few with the technical qualifications needed in
this technic ally complex industry.

16
 (b) A profit -sharing formula no less, and possibly more,
favourable than those secured by Indonesia's partners in th
Organisation of Petroleum Exporting Countries, like
Venezuela and the countries of the Middle East.

(c) A form of agreement which could be represented as compelli

the foreign companies to hand over the oil industry to the
State, not only in respect of concession rights on oil lands
but also as regards physical control of production, refinery
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and other operations.

A special emissary despatched by President Kennedy entered

the negotiations looking for a compromise, in the belief that a badly-
managed or crippled oil industry, by aggravating the country's economic
difficulties would push Indonesia further into the communist sphere of
influence.3'

O n the face of things this special effort at mediation was

successful. Agreement was reached despite the conflict of motive and
outlook between the two sides. In Washington President Kennedy said
that the solution was "satisfactory to both sides". In Indonesia M r
Chairul Saleh stated that 90 per cent of Indonesian conditions were
accepted while official sources' spoke of "an outstanding victory for
Indonesia".

Outline of Agreement

The Tokyo O
il Agreement contained five substantive elements:

(1) Each of the three foreign enterprises gave up its concession

ownership rights granted under the old N.E.I. government
and agreed instead to act as contractor to one of the three
State oil companies.

(2) In exchange they were awarded 20-year contracts to continue

the development of the old concession areas; and were also
permitted to make application for 30-year contracts to
explore and develop new ones. The new area contracts
required immediate payment of cash bonuses of $5 million,
and continued tenure was subject to certain conditions.
These contracts were taken up immediately.

(3) Marketing and distribution facilities were to be handed

over to the counterpart State companies within five years
at prices based on agreed formulae. The foreign

17
 companies agreed to supply products to the State distribution
organisation at cost plus a fee of U.S. 10 cents per barrel
for as long as required; pending transfer, distribution would
be performed by the companies, for an additional fee of 10
cents per barrel.

Refining assets would be handed over within 10-15 years,

again according to agreed formulae; subsequently the
companies would be prepared to supply crude oil to State
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refineries at cost plus a fee of 20 U.S. cents per barrel for

as long as required.

The operating profits of the international companies from

1 June, 1963, would be divided in the ratio 60-40per cent
-
between government and company but in all events the
government would receive a minimum payment of 20 per cent
of gross value of crude oil produced in any one year.

In essence therefore the foreign enterprises surrendered

their old concession rights, and agreed gradually to hand over their
distribution and refining facilities in Indonesia, in return for the
assurance of a further twenty-year period of development of their old
oil fields together with the prospect of longer contract periods in adjacent
new exploration areas. The regulation was made applicable to working
agreements between each pair of State company and foreign enterprise:
that is between P.N. Pertamin and P.T. Caltex Indonesia; P.N. Permina
and P.T. Stanvac Indonesia; and between P.N. Permigan and P.T. Shell
Indonesia.

Contract Areas

The first element in the agreement was the abandonment of

ownership rights in the old concession areas. Shell, the oldest
established foreign company, for example, gave up six areas in South
Sumatra, two areas in Kalimantan, one area on Tarakan island and one
area near Surabaja, in return for a twenty-year contract to exploit these
areas. In stipulating a new form of ownership the new Indonesian laws
were no more severe than, for example, those of Venezuela. That
country has had a fundamental mining law from 1784 making over to the
Spanish crown "whatever fossils, juices or bituminous substances from
earth" are found regardless of who possesses surface rights. Iran and
Mexico have similar mining laws. A twenty-year contract for already
well exploited areas, with the prospect of new ones coming into
operation meanwhile, was not unsatisfactory.

18
 More important to the companies than the form of the law
was the degree of security and continuity the leasing or contract
arrangement would enjoy in practice. Indonesia is a m e m b e r of the
Organisation of Petroleum Exporting Countries (0P. . E.C .1. Its
fellow members have had no inhibitions about re-negotiating concession
agreements as their bargaining position improved. Venezuela, for
example, has a long history of re-negotiationstarting in 1942 with a
change in royalties and moving later to a gradually heavier income tax
on oil companies. In the early 1950's Arabia, Kuwait and Iraq re-
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negotiated concessions to secure the now-famous Middle East 50/50

per cent sharing arrangements to replace royalty payments. Under the
auspices of O.P.E.C. they appear now to be preparing for further
negotiations in the 1960's.

The international companies could hardly expect these lessons

to be lost on Indonesia. They were not, of course, without some
bargaining power to resist encroachment on their contractual agreements,
especially their control over most of the convenient refining and market-
ing outlets adjacent to Indonesia. The Indonesian government's counter
was to secure arrangements with independent refiners particularly in
Japan. There is already an agreement with a Japanese group, the North
Sumatra Oil Development Company, to re-open the pre-war Shell North
Sumatran fields; and in 1963 the Mitsui Mining Company of Tokyo
announced an agreement with Permigan, one of the State companies, to
develop the Bula field on C e r a m Island and the old Tjepu oil field on
Java. There could well be more such production-sharing arrangements
with Japanese producing companies as experience on both sides grows,
leading to further relationships in the refining field.

More encouraging for the international companies was the

fact that the Indonesian government was prepared to receive applications
for thirty-year contracts to explore for and produce oil in new areas.
All three companies took the opportunity. Shell chose two new areas in
South Sumatra and one new area adjacent to its Tandjung field in
Kalimantan; Caltex obtained two sections east and west of its Duri field
in Central Sumatra; and Stanvac selected an area around its Lirik field
in Central Sumatra. Each of the three paid over the necessary $5 million
bonus before beginning their survey work. Another $5 million was due
from each company in the first year in which exports reached about 0.65
million tons. These large cash s u m s could be considered a form of
ground rent. Such payments are now c o m m o n in the Middle East and
Venezuela. It appeared from this component of the agreement that, for
the main effort in its programme to expand oil production, Indonesia
expected for some time to continue to rely on the three international
companies.

19
 This inference was lent further support by the investment
provisions. In addition to paying the initial $5 million cash bonus, each
company accepted an obligation to start its exploration undertaking
within six months and to invest certain s u m s of money each year in
developing the new areas. Shell's contract, for instance, required it
to spend the following amounts in successive years of the contract:1

- U.S. $Million
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Year

I 1.00
I1 1.25
I11 1.25
IV 1.50
V 1.75
VI 2.35
VI1 2.75
VI11 3.25

Total $15.00 million

These amounts were to represent the minimal expenses for surveys,

equipment, stocks, etc., needed for exploration. If actual expenditure
in any given year exceeded the amount stipulated the excess could be
carried over into the following year. Evidently the Indonesian
Government was in earnest in its desire for immediate development.

The companies have not been slow either. Already Stanvac

has spent more than $3 million in exploration of its new Kampar bloc
in Central Sumatra. Given the costs of exploratory and development
work it is most unlikely that any company will spend less than $15
million in its new area within the specified time. For example, Stanvtc
during the period 1955-8 spent about $20-30 million opening up the Lirik
field and joining it by pipeline to the Buatan river terminal. Most
exploration in Central Sumatra involves expensive overhead capital
development on roads, bridges, housing, river channels, marine
terminals, etc., as well as the more obvious survey and drilling tasks.

The agreement also provided for relinquishment of portions

of each new area. At the end of five years from ratification of the
contract, each company was to hand back 25 per cent of the new area;
and at the end of ten years another 25 per cent. These provisions were
not unusually onerous except perhaps in the briefness of the first

20
 period. It is fairly usual in modern oil-leasing practice to ensure in
this way that an area is properly exploited. Thus, once companies are
satisfied that they have surveyed accurately and are working on the most
favourable ground the remainder of the discovery area can be re-leased
to another company or, in this case, worked by the State company. The
areas relinquished were to be "of sufficient size and convenient shape
taking into account contiguous areas" to permit further exploration.
Permanent installations left in the relinquished portion were to become
the property of the State company. If a company was unfortunate or
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inactive enough to make no discoveries and relinquished the whole of

the new area then all s u m s remaining unspent within the minimum $15
million stipulated for discovery expenditures were to be paid over to the
State company.

Since no new exploratory areas were specifically provided

for by name, the three companies might have bid competitively for
favourable areas; that is, paid more than the $5 million bonus required.
But evidently each preferred to confine its operations to a new strip or
strips close to existing development areas.

Marketing and Refining Facilities

Marketing facilities, i. e., distribution organisations and

retail outlets (other than international aviation fuelling and marine
bunkering business, and blending and packing of lubricants), were to
be sold within five vears of the ratification of the contract between the
international company and the State company, that is, by November
1968.

The three foreign companies almost certainly welcomed

this. Marketing operations are a normal component of any vertically-
organised international oil company. They guarantee outlets for
production and refining. But they never have in themselves been
particularly profitable sectors of the industry. Most profit is made
(outside of the U.S.A. especially) in crude production. In Indonesia
domestic marketing had been made more than usually unattractive by
price control which has been motivated mainly by the perennial
struggle to hold down the cost of living, but in which a desire to make
-
the foreigner - in this case the oil companies pay m a y also have
played a part. At any rate the prices of petroleum products in Indonesia
have been, and remain, the lowest in any country in the history of the
oil industry. At the rate of exchange open to the companies during 1964,
(Rp.520 = $1, 00, which in turn was by mid-1965 only one-twentieth
the free market rate) one gallon of gasoline cost 44 U.S. cents
and of kerosine 1; U.S. cents, a price which not only encouraged

21
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Table 1 : gistribution of Crude and Products by Company, 1963

(Thousand metric tons)

-
Shell Stanvac rax Pertamb Perminan Pennina Totals

Crude Production 5,351 3, 224 11,534 761 129 1,173 22,275

Company Share 24% 15% 52% 3. 3% 0.5% 5.2%

C m d e Exports - 529 10,754 - - 995 12,378

Company Share - 5% 87% ~ - 8%

N
N Refinev Throughput 4,472 2,669 506 420 - - 8,067

Company Share 56% 33% 6% 6% - -

Product Sales
Domestic Market
- I, 881 1,246 506 420 - 4,053

company share [ 47% 31% 12% 10% - - I

Product Sales
Export Market
- I1 2,591 1,423 - - - - I 4,014

Company Share 65% 35% -

-Direkorat, Minjak dan
Source:
-
Cas Bumi
- - I
 imports of motor cars and aggravated urban traffic problems, but at
which all three foreign companies undoubtedly sustained losses. Caltex
was less affected than the other two companies. Since it has no refinery
it has had its required contribution for the domestic market refined by
Stanvac and Shell. It has exported its crude oil from the Minas field
with very satisfactory financial results due to the favourable geographical
location of Indonesian oil relative to Japanese and Australasian markets
and the artificially high posted prices of competitive Middle East crudes.
But Shell, and more especially Stanvac which had poor luck in oil
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exploration within its old areas, each with a major commitment to supply
the domestic Indonesian market, must have felt the burden keenly.

Originally the working contracts appear to have contemplated

a 20 per cent per annum sale of facilities over five years. As it turned
out, all distribution facilities were handed over by August 1965 and
placed in the hands of the P.N. Pertamin State enterprise.

This haste to dispose of marketing assets is explained in part

by the financial formula for the transfer of these assets in the Tokyo
Agreement:

The value, as of the effective date of the contract,

shall be understood to m e a n 60 per cent of the
original installed costs ("acquisition costs") as
shown by the Companies' records. For each year
elapsed until the State enterprise acquires a
particular asset, the value established above shall
be reduced by 5 per cent. The value as of the date
of sale shall then be 60 per cent of the reduced
amount.

In effect, the value of the assets was to decline over five years to 27 per
cent of original acquisition costs, according to this kind of computation:

Value of assets at acquisition cost 100

Value of assets on contract day 60
Value of assets after five years:
60 - 16 (25% of 60) = 45
60% of 45 = 27 27

Sale within one to two years could realise from 32-35 per cent of the
original value of the assets, i. e. 5 - 8 per cent more - a not insignifi-
cant differenceconsidering the unprofitability of marketing operations,
not to mention the uncertainties implicit in the prospect of further
inflation in Indonesia.

23
 Payment for these assets was to be in dollars or other
suitable foreign currency. The State enterprise could elect to defer
payment by depositing one-sixth on transfer of the assets and paying
the remainder in further annual instalments of one-sixth the agreed
value. But the total amount of deferred payments was never in the
aggregate to exceed the amounts calculated to be due to State enterprises,
but not yet paid, on account of oil exports made by the foreign companies.
In other words, the State enterprises could pay for the assets gradually
by forgoing normal payments of income tax in respect of crude oil.
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(Shell's old Tjepu refinery would be paid for against 45 per cent of its
first $5 million bonus payment due when oil exports from its new area
exceeded 0.65 million tons per annum).

Refinery assets received rather different treatment. They

were to be sold to the State enterprises not earlier than ten but not later
than fifteen years after the contract date, i. e., between November 1973
and November 1978. If not sold by the latter date they would be trans-
ferred at no cost to the Indonesian State enterprises. For the relevant
period the s a m e formula laid down for marketing facilities applied here
too. Thus, after (say) twelve years the refinery assets of any company
would be valued thus:

Value of refinery assets at"acquisition costs"' = 100

Value of refinery assets on contract date = 60
Value of refinery assets after twelve years
-
(60 36 (60% of 60) = 24 )
(60% of 24 = 14.4) = 14.4
Assets acquired subsequent to the contract date were to be written down
from their '#acquisitionvalues'"at 5 per cent per annum. "The value as
of the date of sale will then be taken at 60 per cent of the reduced amount",
Taking into account wear and tear (which can be severe on refinery
equipment) and obsolescence this formula was not unreasonable.

Both parties perhaps had reasons for wishing to leave the

present ownership undisturbed for at least ten more years. For the
companies, refining in Indonesia, unlike marketing, has been fairly
profitable. Shell and Stanvac between them have been exporting over
50 per cent of their refined products into a long-established and stable
set of markets in the Far East':' which, protected by distance from
* "Confrontation" of Malaysia has diminished this market by s o m e lO-12%
But it seemed likely that the company mainly involved, Shell, could simply
reshufflesupplies so that Malaysia would be supplied from its Sarawak and
Malayan refineries and the displaced Indonesian products could go to the
Philippines, Thailand, Hong Kong, etc.

24
 refineries in the Middle East, India and Japan, have offered reasonably
good profit margins. (Prices quoted at Sungei Gerong have consistently
been 0.6 to 1.0 U.S. cents per gallon above Middle East prices for the
same grades of gasoline, kerosine and diesel fuels.) The companies
m a y also have felt that ten years gave them adequate time within which
to prepare for the future. During this decade they would not need to
acquire expensive new equipment. Since in their markets gasoline
accounted for only 16 per cent of sales (the rest being residuals, kero-
sines and diesels), there was no great disadvantage in using somewhat
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older equipment. Meanwhile they could take steps to improve their

refining position in nearby Singapore and Brunei; or perhaps further
afield in the Philippines.

O n the Indonesian side, a ten-year period m a y have been

thought necessary to allow the upper echelons of management to acquire
the requisite skills. This was indeed implicitly admitted in the condition
written into all of the working contracts that each company shall -

“carry out such programmes for training for the various

classifications of employment for its operations in
Indonesia ... that at least 75 per cent of all positions
in each employment classification are held by Indonesian
nationals, if available with qualifications acceptable to
(Shell, Stanvac and Caltex) within eight years after the
effective date of the contract.’’

Actually, many more than 75 per cent of the employees of the three oil
companies were already Indonesians. Stanvac, for example, employed
only 118 Americans, Canadians and Europeans out of a total of 6,800
employees. 70 per cent of its managerial positions were held by’
Indonesians including two Indonesian directors on the board of P.T.
Stanvac Indonesia. But there was, and still is, a serious shortage of
chemical engineers, of high quality administrators to supervise the
refineries, and of geologists and petroleum engineers to undertake
exploration and development work.

Whatever m a y have been the intentions of either side at the

time of the negotiations of the agreement they have been overtaken by
events. The transfer of refinery ownership seems certain to come
well before the end of the ten year waiting period envisaged only two
years ago. Under strong political pressures negotiations to this end
began about mid-August 1965. Both the government and the oil companies
appear willing to negotiate a transfer - but on what terms remains to be
seen.

25
 Subsequent to the ratification date each company assumed
certain obligations (under the 1963 agreement) to keep the domestic
Indonesian market supplied with crude oil and petroleum products,
Crude had to be supplied by each foreign company on a proportional
basis calculated with reference to the percentage of total crude produced
each year from its contract areas. But no company was to be required
to go beyond 25 per cent of its total output. The expectation presumably
was that the national enterprises would supply most of their crude
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production to domestic Indonesian markets; and the shares of crude

taken as part of the international companies'contribution would increase
and go to this market as internal demand rose. For these supplies of
crude to the domestic market the companies were to receive a price
equal to cost plus 20 U.S. cents per barrel. The crude oil so trans-
ferred would then be refined, mostly by Shell and Stanvac, at cost plus
10 U.S. cents per barrel. Thus Shell and Stanvac could earn 20 or 30
cents per barrel (depending on whether theyrefined or not); probably a
considerable improvement on their previous situation. This 20 or 30
cents fee was to be "subject to the normal profit split", in the jargon of
the working contracts. It was payable by the State enterprises in rupiahs
except that the companies were to be reimbursed in U. S. dollars or
sterling for any hard currency expenditures on sea transportation or
refining These rupiah earnings could be used freely by the companies
in 1ndoi:esian operations; any surplus rupiahs remaining to them after
meeting local costs could be used in settlement of income tax claims,
normally payable in foreign currency, up to an amount defined by the
total dollar or sterling costs involved in supplying the domestic market, *
* The almost zero price of refined products in Indonesia has led to a
sharp increase in domestic demand (about 50% in 5 years). This is a rate
greater than the increase in crude production. Moreover, the yield
pattern of refinery output does not coincide with the domestic demand for
products. There is a consistent shortfall of kerosine if the formula is
applied rigidly. T o overcome this shortage the companies have co-
operated by supplying more than the crude equivalent required to supply
the local market. But for this extra crude to the formula they have charged
the State enterprises international (hard currency) prices. The total per
annum bill is reported to be in the region of $15 million - a hard currency
payment which the State enterprises have disputed. An agreement to supply
sufficient extra crude to meet the kerosine shortfall on agreed terms was
reached - after two years of negotiation - in June-July 1965. But this so
called "complementary''agreement will, it seems likely, still involve the
State enterprises in a $7 million hard-currency expenditure for crude
over and above the 1963 formula arrangement.

26
 Division of Profits

The division of profits on Indonesian oil operations finally

arrived at and stated in the Heads of Agreement signed in Tokyo was
the now well-known 60-40per cent diviflion in favour of the Indonesian
government. However, the bare statement of these proportions does
not adequately convey the nature of the compromise that was reached
or its implications. One must consider s o m e of the stipulations built
into the agreement.
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(a) The 60-40per cent division referred to operating profits

on crude oil operations after meeting all "general costs'"
of producing crude oil (including intangible exploration
costs, depreciation on equipment at 10 per cent per annum,
salaries, etc. ). Costs and profits on refining (and
originally on distribution) were calculated separately; but
the 60/40 division applied there also.

(b) The value of crude oil and products exported from Indonesia
was to be calculated on the actual delivered price to non-
affiliate customers of the oil companies (less transport
costs from Indonesia). These prices would also determine
the value of crude oil transferred to the government against
income tax. Thus profit shares were to be based on
realised rather than publicly posted international prices.
T o this extent the companies succeeded in safeguarding
themselves against the difficulty experienced in the Middle
East where, since profit-sharingagreements are based on
posted prices which these governments will not permit to
be reduced, price discounts required by market conditions
fall on the companies and not on governments.4

(c) The Indonesian government also secured s o m e cover against

falling prices. Whatever else happened the State enter-
prises were to receive quantities of crude oil equivalent to
20 per cent of the total gross value of production in any
one year (valued at international prices). But they could
always opt for the 60 per cent of operating income where
this was more favourable. This provision did not seem
likely to be invoked. A rough calculation suggests that it
would have required a 50 per cent rise in unit costs of
production or an equally improbable 37 per cent fall in
international crude oil prices to raise 20 per cent of gross
value of production above 60 per cent of net profits. While
providing an assurance that the burdens of any real

27
 economic disaster would fall on to the oil companies, the
provision would in practice have come into operation only
at a very low level of net profits.

(d) The 60 per cent share of operating income (profits) was to

include all forms of tax applicable to oil operations - a
new departure. Originally the 60 per cent share asked by
the Indonesian government was exclusive of such'lfringe
benefits". But, in the event, it was written into the work-
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ing agreements that, while the international companies

were obliged to pay over to the national enterprises 60 per
cent of operating income, in cash or oil equivalent, the
State enterprise concerned'lshall assume and discharge all
Indonesian taxes", to which the international oil companies
would normally be liable under Indonesian law, including
company tax,dividend tax, other income taxes, levies on
foreign exchange, export or income taxes, etc. The removal
of these extra burdens clearly represented a substantial
gain to the companies and incidentally relieved them of an
irksome administrative task.

(e) The payment of the government's 60 per cent in hard

currency - sterling or U.S. dollars - was reported to be
the greatest single issue in-theTokyo negotiations. Initially
the Indonesian delegation sought a stipulation that all of the
60 per cent due to the government would be payable in
foreign exchange. The companies finally secured a c o m -
promise agreement that they would be -
"entitled to use any Rupiah generated from their
respective operations in Indonesia freely...;
and to the extent that they have surplus Rupiah
remaining at any time they m a y pay such Rupiah
in settlement of their foreign currency obligations
related to income tax up to an amount equal to the
foreign exchange content involved in supplying the
domestic market. 'I

In addition to defining in this way the 60-40per cent division of

profits.the agreement laid down a formula for the physical transfer of oil
to the relevant State enterprises. A complicated set of provisions
ensured that, whatever else happened, the State enterprise would
receive, by way of advance, a quantity of crude representing 20 per
cent of the gross value of the international company's annual

28
 production. * Further quantities were later to be transferred up to .a
value of 60 per cent of the company's assessed profit if the Indonesian
government opted to take its share in oil rather than dollars. The
transfer of this full amount to the State enterprise was to be repaid by
the issue of the appropriate income tax payment receipts to the inter-
national oil company.

The provision for payment to Indonesia in the form of crude oil

transfers raised the question how State enterprises were going to
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dispose of their shares of Indonesian production, never less than 20

per cent and probably amounting to 33-3570 of total output and there-
fore considerably in excess of their previous small domestic refining
commitments. A company recently formed in Japan on a 50-50
Indonesian-Japanesebasis provides at least a partial answer. It has
grown out of co-operationbetween North Sumatra Oil Development
Corporation and P.N. Permina, and will be incorporated as the Far
East Oil Trading Company. Its six Japanese subscribers are the
Japan Petroleum Exploration Co., the Maruzen Oil Co., the Nippon
Mining Co., Kansai Electric Power Co. and two oil resources develop-
ment engineering firms. It will have an authorised capital of 100
million yen and an initial issued capital of 30 million yen. 9 Its
prospectus calls for "exclusive direct supply" of all Indonesian oil
shipments to Japan through the new company. It is reported that the
new company is expected to ship 1 million kilolitres in 1965, 1 i
million kilolitres in 1966 and 2 million kilolitres in 1967, (1. 16, 1.74
and 2. 32 million metric tons). It has agreed to import the crude oil
which the Indonesian government receives in kind from companies,8
and will possibly take other oil the government receives whether
from the fields of its own State enterprises or from the international
companies under the 60-40profit division agreements,

One advantage of this arrangement to Indonesia m a y be the

opportunity of selling through F.E.T.C. to independent Japanese
refiners at more favourable prices than the "realised" prices of the
international companies which sell mainly to affiliates or customers
under long-term contractual agreements. But this is unlikely to be
a very large market. Apart from this, it would no doubt be advan-
tageous to Indonesia, should she resolve to expropriate the international
companies, to have already reduced her dependence on them as export
channels by opening up this independent outlet in Japan.

* The reason for stipulating the minimum share as 20 per cent of the
gross value was to assure the government of a minimum income from
oil in hard currency.

29
 Recent Events

Taking it all in all, the international oil companies might

well have felt reasonably satisfied with the compromise achieved in the
Tokyo oil agreements of 1963. Their uncertainty regarding the future
seemed at least partially removed. They were assured of a fifteen-
year period in which to develop and exploit existing areas, and a 30-
year period for any new areas in which exploration was successful. They
would supply the domestic Indonesian market with crude and products on
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terms which, if not favourable, at least removed the risk of loss that
had been their experience in recent years. A s they disposed first of
marketing and then of refining facilities their activities would become
more and more those of crude oil producers and exporters - by far the
most profitable and painless way for a foreign oil company to earn a
living nowadays. Finally the 60-40 per cent division, which the companies
were resigned to accept anyway, had been suitably safeguarded in respect
of its application to export values, taxation obligations and foreign
currency transfers. The arrangement did not compare unfavourably with
established Middle Eastern oil agreements which in practice c o m e close
to having a 60-40 per cent division of revenues. It was less drastic than
many of the newer agreements recently negotiated in Venezuela, for
example, or in the Middle East which, by offering equity participation to
host governments in successful exploration projects, effectively give a
75-25 per cent division of profits.4

It is not surprising that the companies have been anxious to

keep to the terms of the 1963 agreements. Nor is there any reason to
doubt that initially the Indonesian government, or more accurately that
part of the government which negotiated the agreement, was content to
see the companies perform as promised. But since 1963 pressures
have again built up from other quarters.

O n March 18 this year trade unions demonstrated in Sumatra

at the Palembang refinery installations and at Pendopo demanding that
company property be handed over to the government and that foreign
management personnel give up their jobs. N o actual takeovers seem to
have occurred, contrary to ANTARA reports at the time. The next day
there were similar demonstrations outside the oil companies' offices
in Djakarta and the same demands were put forward by oil trade unions.
Towards delegations the companies generally adopted the attitude that,
as they were contracting companies responsible to the State Oil Enter-
prises and not owners of oil leases, they could take no action not
sanctioned by these enterprises or the government. This legal point
probably did not impress. The demonstrators then moved to the offices
of D r Chairul Saleh. the Minister responsible for the industry, to make
the same demands.

30
 The sequel to the demonstrations was not long in coming. O n
March 20 an announcement by Minister Chairul Saleh stated that:
II
For the purpose of securing the oil companies as well
as for continuing to recognise the property rights of
the foreign oil companies, upon guidance of the Presi-
dent, the Government immediately places all foreign
oil companies under the control/supervisionof the
Republic of Indonesia Government. ,I
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It was said that control and supervision teams wouId be named for all
the foreign oil companies. A decree issued later by Minister Chairul
Saleh referred to "intensification of the revolution of the Indonesian
people" and "escalation of confrontation within the scope of crushing the
neocolonialist project of Malaysia made it necessary to set up a body
for enforcing national endurance in the oil sector". It was stated that
the measures taken were temporary and without prejudice to the companies'
property rights.

Subsequently the control and supervision teams were named.

They included representatives of the State Oil Enterprises, the
Directorate of Petroleum and Natural Gas, senior Indonesian oil
company employees and trade union representatives. They were in-
structed to check into and keep abreast of all oil company affairs, includ-
ing mail, the export of oil, the safeguarding of domestic supplies and the
Indonesianisation of the oil companies' management personnel. They
moved into the Djakarta headquarters of the oil companies, in each case
with a staff of about twenty persons. In the Palembang area a local
supervisory team seems also to have been named for the refinery in-
stallation. But it is not clear whether this move was authorised by the
government.
CI
Initially, according to reports by the oil companies them-
selves, the teams did not interfere in the normal operations and
procedures of the companies. Nor was there, generally speaking, any
overt hostility to the companies or their foreign employees. Trade
union members of the teams made sweeping recommendations for the
nationalisation and complete Indonesianisation of the industry, but these
led to no immediate further action.

O n June 10, D.N. Aidit, the leader of the P.K.I. , publicly

criticised the supervisory teams. "The fact is they have no power" he
is reported to have said. "Ownership is still fully in foreign hands".
And he recommended that oil company workers shou1d"give more blows
to American Imperialists so that Indonesia can be free of their hands"!O Then
 Minister Chairul Saleh was said to have stated that re-negotiation of the
oil company contracts was essential; and that, although he wished to
ensure continuation of production and profit to maintain the interest of
the foreign companies, the existing method of treatment "has become
outmoded"'and must be revised "in keeping with the revolution".

Negotiations in August for the transfer of the refineries -

seven years ahead of the 1963 programme -and continued references to
'I
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re-negotiation''of the profit shares seemed likely to be only the first

of a series of steps designed gradually to expel the companies. The
trend towards economic isolationism, berdikari,applies as much to the
oil industry as to other parts of the Indonesian economy. The gradual-
ness of the process reflected in part the strength of the oil companies'
position, both technologically and in respect of markets. But this
position could be whittled away.

A.H.

32
 Footnotes

1. Commercial Advisory Foundation in Indonesia (CAFI), Legal

Section Circular No. H.466 (10 December, 1963).

2. National Planning Association, United States Business Performance

Abroad: Stanvac in Indonesia (1957).
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3. Petroleum Press Service, June-December 1963.

4. J. E. Hartshorn, Oil Companies and Governments (Faber 1962).

5. Direkorat, Minjak dan Gas Bumi.

6. Petroleum Intelligence Weekly ( N e w York), 30 November, 1964.

7. Chase Manhattan Bank, Capital Investments in the World

Petroleum Industry (1962, N e w York).

a. FEN 30 November, 1965.

9. Japan Times, 26 March, 1965.

10. Herald, Melbourne, 1 1 January, 1965.

33