3. Indonesia
Indonesia’s history in the petroleum sector dates back to the end of the 19th century, when the country was still a Dutch colony. Since then, foreign oil companies have played a pivotal role in exploring, developing, and operating the country’s resources. After a shaky sectoral history following World War II, the framework engaging these companies has undergone a major change marked by the formation of the country’s national oil company (NOC) in 1957, and the government’s decision in 1966 to secure state interests through production sharing agreements (PSAs).32 A few years before these major changes, mainly in the early 1950s, the local content agenda in the oil and gas sector appeared in the Indonesianization of the petroleum sector workforce. Since then, the local agenda has evolved over time and is undergoing several major milestones. Toward the early 1950s, the country witnessed aggressive Indonesianization of foreign oil company personnel. Surprisingly, this was initiated by the companies33 themselves in a move to improve their position in tough negotiations with the government. The negotiations were taking place in a rising nationalistic/socialist environment. Indonesianization efforts were highly successful for disciplines requiring a low to medium level of capabilities. For higher technical positions, the foreign oil companies established training schools and offered scholarships to send Indonesian staff abroad to leading technical schools. Indonesianization efforts at the managerial levels were limited. By 1963 Indonesianization of the workforce was formalized in the working contracts entered by the foreign oil companies and Pertamin, the NOC at that time (Hunter 1966). Under the PSA, contractors have been mandated with a domestic market obligation that requires them to sell a share of their production entitlement to the domestic market at a discounted price. This, coupled with the overall government fuel subsidies and the NOC’s aspirations, instigated the development of a well-established forward link. As for the local content agenda related to backward links from the oil and gas sector, policies were initiated in the late 1970s, when the government envisioned driving technology transfer in oil field services and equipment (OFSE) from foreign companies to domestic ones by forcing partnerships between multinationals and local firms operating in the OFSE segment. This policy was complemented by a set of import tariffs on certain OFSE. Overall, the government aimed at reaching local content levels of 35 percent. Failing to reach this target required production sharing (PS) contractors to receive an exemption from the Ministry of Industry and Trade. During this period Pertamina enjoyed a monopoly in the oil and gas sector as it was mandated with regulatory and operational powers. The adopted approach to develop a backward link proved to induce a limited impact. By the turn of the century, the achieved local content levels were believed to be in the range of 10 to 20 percent (Nordas, Vante, and Heum 2003). In 2001 the oil and gas sector underwent a major restructuring process. In that year, the Indonesian government published a new Oil and Gas Law that primarily aimed at improving the governance of the sector and introducing competition. As per the new law, upstream regulatory roles were transferred from Pertamina to three regulatory bodies:
Directorate General of Oil and Gas (DGOG) under the Ministry of Energy and Mineral Resources (MEMR), acting as the policy and concession management body BPMIGAS, upstream regulatory body
Under the PSA, production-sharing contractors incur all capital expenditures during exploration and development, to recover them over the production phase. 33 At that time, Royal Dutch Shell, Stanvac Petroleum, and Caltex Pacific were the main companies operating in Indonesia. 32
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