Why Indonesia's Energy Sector Is So Corrupt

Indonesia’s Corruption Eradication Commission (KPK) announced in April that several high-ranking officials from Indonesian state oil company Pertamina are suspects in a corruption case, including former company president and CEO Karen Galaila Agustiawan, chief legal counsel and compliance officer Genades Panjaitan, and former director of finance Frederik Siahaan. The case centers on Pertamina’s investment in Australia’s Basker Manta Gummy (BMG) oil block in 2009, which caused state losses of more than 568 billion Indonesian rupiah ($41 million).

The BMG block was expected able to produce 812 barrels per day (bpd), but only produced 252 bpd, or just 31 percent of the expected output.

Agustiawan was appointed as CEO of Pertamina to replace Ari Sumarno in 2009 and resigned just two months before the end of Susilo Bambang Yudhoyono’s administration in 2014. She explained her resignation by saying she wanted to spend quality time with her family and decided to accept an offer to serve as a lecturer at Harvard University.

However, former secretary of State Owned Enterprises Indonesia (BUMN) Said Didu argued that Agustiawan resigned because she could not take pressure from within Pertamina regarding the 2014 price increase of liquefied petroleum gas (LPG), which was opposed by the government. She could not overcome the political pressure, from state and nonstate actors alike, that might lead her to suffer legal risk as a scapegoat.

Agustiawan was actually successful in leading Pertamina, which recorded its highest-ever earning (around $2.7 billion) under her leadership in 2012, and acquired assets from ConocoPhillips in Algeria and ExxonMobil in Iraq. The first women to be appointed director of a state-owned company in Indonesia, Agustiawan was included in Fortune Magazine’s 2014 list of the 50 most powerful women.

Agustiawan is not the only elite in Indonesia’s energy sector facing corruption allegations. Rudi Rubiandini, the former director of the special task force for upstream oil and gas business activities at SKK Migas, was sentenced to seven years in prison and fined $14,500 because he accepted bribe of $900,000, from elites in SKK Migas and $180,000 from Widodo Ratanachaithong, CEO of Kernel Oil Pte, regarding regulations on limited auctions of crude oil and condensate.

During Rubiandini’s trial, Agustiawan and Rubiandini admitted that there is an idiom in energy politics called “open the drum and close the drum.” “Open the drumg” refers to bribes from SKK Migas to the government’s Ministry of Energy and Resources (ESDM) and “close the drum” is a bribe to Commission VII (covering energy, mineral resources, research, technology, and environmental affairs) of the House of Representative (DPR).

Corruption and Investment Challenges

The issue of corruption in the Indonesian energy sector is not really surprising for people who work in this industry. Even the allegations against higher officials in Pertamina and SKK Migas are not something new; it is just a small peek into rent-seeking practices in the oil and gas sector in Indonesia.

Proving the practice of corruption in the energy sector is the hardest task because it involves many rent-seekers, including actors in governments (in the president’s circle, and in ESDM), politicians, and businessmen. And most of the time, these figures play in the safe zone, where their actions are protected and embedded into the system through regulations that either benefit or create opportunities for the mafia to play.

According to Rizal Ramli, former coordinating minister for maritime affairs of Indonesia, the Law Number 22 of 2001 Concerning Oil and Gas (UU 22/2001) was funded and sponsored with the United States Agency for International Development to accommodate their interest in liberating the Indonesia oil and gas sector. However, the law opened the door to mafia practices in the energy sector.

For instance, UU 22/2001 did not set a limit on cost recovery. As a consequence, the costs of courting the elites began to be included into “cost recovery” and created a financial bubble of up to 200 percent.

The government tried to tackle this, by issuing the regulations on operational costs. However, the new regulation was issued by the Ministry of Energy and Mineral Resources, and thus could change with a new administration. By contrast, UU 22/2001 is legislation, and thus has more power and political stability. Changing that law would require a long process of trials and hearings.

In practice UU 22/2001 enables corruption at shadow institutions such as SKK Migas, which has a lot of power to regulate, supervise, and decide which company wins tenders to sell oil and gas. And because SKK Migas is not a company but a government institution, it is only audited by the government auditor (BPK). This allows political bargains to happen within the organization.

This also means that the business ecosystem is very close, and as a result there is no transparency and accountability, including in the procurement process. The company that will win a certain tender is already decided before the bidding is thrown open to the public.

The endemic corruption makes international oil and gas investors hesitant to engage. As consequences, Indonesia is one of the least attractive countries for oil and gas investment in the world, alongside Venezuela, Libya, Iraq, and Nigeria.

After more than 16 years, the Indonesian House of Representative still has not been able to finalize the revision of UU 22/2001, thanks to the bargaining power of the oil and gas cartel in the parliament. That’s little surprise, as mafia practices in the oil and gas sector make for a very lucrative and attractive business, with estimated profits of $70 million per year.

Revising UU 22/2001 is the only way to eliminate the opportunity for rent-seekers to play in the energy sector and, as a result, attract oil and gas investment to Indonesia. However, the revision also should protect the industry so that it can thrive and innovate without any third party intervention.