Batam as Free Trade Zone; A Little Bit Late Anticipation by Upstream Oil and Gas Sector

First of all, for those who are not too familiar with the business activities of oil and gas in Indonesia, what I mean with “upstream” oil and gas sector is the activities related to exploration and exploitation of oil and gas. The scope of upstream is starting from searching resource, drilling, producing, field processing, and then selling it to buyers. While “downstream” refers to the activities of refining, marketing, and distributing the oil-and-gas-based products such as fuel, LPG, lubricants, etc.

Currently there are more than 200 oil companies operating in Indonesia under contractual agreement with the Government of Indonesia, both in exploration and producing status. These oil companies are under supervision and control of BP Migas (Badan Pelaksana Kegiatan Usaha Hulu Migas, or upstream oil & gas executive body) in line with Indonesia State Law (Undang-Undang) No. 22/2001.

Based on State Law No. 24/2007 and State Regulation (Peraturan Pemerintah) No. 46/2007, status of Batam has been officially Free Trade Zone (FTZ) since 2007 – together with Bintan and Karimun islands. But the official operating guidelines, Finance Minister Regulations (Peraturan Menteri Keuangan) No. 45 and 46/PMK.03/2009 which were signed by the Finance Minister in March 2009, have just been effective on April 1, 2009. Therefore, following the FTZ status, now administratively all flows of materials in and out Batam as well as the customs ruling must follow all those governing regulations. In FTZ, the imported goods are basically free to come in (no import duties and import taxes applied). But, whenever the goods go out from Batam, the goods must be declared to Customs.

Batam has been a long time become an entry point and logistics base for importation of oil & gas materials. Before the spirit of regional autonomy implemented in early year 2000, most oil companies in Indonesia had their logistics base (office and warehouse) established in Batam. But now only a few (perhaps 3 or 4 companies) still have their own-operated logistics base there. Others, either outsource their logistics activities in Batam, or use other ports of entry throughout Indonesia for importation of oil and gas materials from overseas.

For the purpose of learning what the impacts of this Batam FTZ status to oil companies, I and one of my colleagues visited Batam early March 2009. Points of our visit were ports, Customs office, and BIDA (Batam Industrial Development Authority) office. To me, the most striking part of our visit was when we (I and my colleague) had a chance to talk to a BIDA officer – a lady. She said, since Batam status now is FTZ, all rules of the games underlining the status must be implemented and followed – no exception.

The current practice is, if an oil company would like to import oil and gas operation materials, the company should prepare the so-called “masterlist”. This masterlist then goes to Directorate General of Oil and Gas (Ditjen Migas) for verification. Ditjen Migas is technically assisted by PT. Surveyor Indonesia for doing the verification. After being verified (if Ditjen Migas agrees), the masterlist goes to the desk of Customs Head Office in Jakarta for final approval. Now, with the FTZ status, if an oil company uses Batam as point of importation entry, it means the masterlist must be approved by Batam authority, no longer by Customs. To my opinion, this new ruling if also applied to oil companies may disturb the upstream oil and gas business process in Indonesia. Quite serious. I sent a short message (SMS) to one of my friends at BP Migas before end of March 2009, but this fellow did not reply me back. I understand, he was newly appointed as a middle rank official (equivalent to Echelon II level if in Ministerial Department). Perhaps he was still busy figuring out what he should do in his new position.

What I want to say in this short article is that BP Migas – despite strategic role of oil and gas for Indonesia – often late in anticipating changes in business environment such as new government regulations. BP Migas itself is actually a government institution. So it has a lot more access to other government institutions than oil companies have. BP Migas should have known in advance if there are any new regulations that will affect the upstream oil and gas activities. Doesn’t have to wait until an oil company experience a problem. Eventhough up to certain extent oil and gas industries are treated as “lex specialist” (some government regulations may not be applied), but people at operational level (Customs, Trade Department, etc) are often not aware of this special treatment. That’s why BP Migas needs to be more proactive instead of only being reactive. When BP Migas was first established in 2002, many oil and gas stakeholders expected this institution to be an agent of change, not another agent of increasing bureaucracy.

After the fall of New Order regime, this country is “very productive” in producing so many new rules and regulations. The new rules and regulations sometimes contradict each other.