Can we learn something from Karaha Bodas case?

Pertamina CEO Ari Soemarno confirmed today that the company should pay USD319 million fines to Karaha Bodas Company (KBC), more than enough to build thousands of new schools for our kids. At the end of the day, state budget should pay to Pertamina. The question, can we really learn something out of it?

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Flip Flop on Natuna D-Alpha

In less than one month, government officers made flip-flop and conflicting statements on the status of ExxonMobil & Pertamina's contract to develop the massive gas reserves called Natuna D-Alpha project.

Today, both energy minister Purnomo Yusgiantoro and BPMigas chairman Kardaya Warnika stated that the Natuna PSC had been automatically terminated in January 2005. Few weeks ago, both officers stated that give time to Exxon & Pertamina until January 2007. In between, both guys also stated that Exxon may still operate the gas block but with brand new contract.
On the other hand, ExxonMobil which controls 76% shares in Natuna D-Alpha (Pertamina 24%) insisted that the contract is valid until 2009. (FYI, Pertamina initially owned 50% shares in Natuna D-Alpha. But somehow Pertamina divested 26% few years ago, and nobody raised the question, why? I could understand if the divestment is considered a big mistake, especially with the sky-high energy price in recent years)
Anyway, back to the Natuna legal battle, it's clear that both parties have different interpretation of the contract itself. Article II.2.2 of Natuna PSC amended in 1995 stated that if contractors (Exxon & Natuna) failed to come up with clear commitment before January 2005, the contract shall automatically terminated. Exxon claimed that it's letter dated December 2004 to BPMigas confirming the commitment to develop Natuna has been enough to secure the first two year extension, which means until January 2007. Article II.2.3 also stated that if one of the parties (BPMigas or contractor) asking for extension after the first two year of extension to further confirm the project, it's deemed obliged to approve additional second two-year extension (until 2009).
Government claimed that the contract has not been terminated unilaterally, but automatically. It means, government should provide proofs that contractor (Exxon & Pertamina) failed to meet the requirements in the contract. So far, no such proofs available that legally convincing. But Kardaya seems to believe that government is in strong position even if Exxon challenge that in international arbitrary. People that familiar to oil & gas business doubt though. "It's gonna be the next Karaha Bodas," he said.
What if government think that Indonesia managed to postpone hundreds of million dollar fine of Karaha Bodas case? Well, let's read brand new flip-flop statements in the newspaper in the coming weeks or so.
But the first statements, maturity of contract in 2007, has completely different legal consequences, i.e. government acknowledging Exxon's commitment made in December 2004 and the 2-year extension accordingly. Meanwhile if government claim the contract had been terminated automatically in Jan 2005, it has to come up with proofs to support that and probably a stupid question: Why government said before that the contract would mature in Jan 07? Or another stupid question: What's happened in the last two years? Where are all these guys?
I try to take positive leasons out of this. Suppose that gas price stays the same like 5 years ago, nobody would care about Natuna D-Alpha, because it's just too costly to develop. Now that government want to renegotiate for better terms, that's good. But we have to do it right. Some people try to blame Soeharto or BJ Habibie for the contract given to Exxon. Partly true because we always forget to protect ourselves from future ups-and-downs in contracts with smarter guys. Meaning, we have to learn to be smart in negotiations, articles by articles, paragraph by paragraph, and word by word.

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Cepu conflict is getting silly

In the last few days, top executives of state-owned oil and gas company PT Pertamina stated repeatedly that it would drill giant Cepu oil wells straight early next year should the negotiation with ExxonMobil fail to resolve the dispute on operatorship (who operate the block).
Petroleum engineers and those who are familiar with oilfield operation might found such statements as ridiculous. In fact, the president of Pertamina, Mr Widya Purnama, is an electronic engineer, who has limited knowledge about oil and gas operations. But he is a die hard type of leader.
Pertamina is frustrated with the situation that energy department rejects its proposal to have rotating system applied in the project. Today, Widya said that Pertamina would start drilling 40 oil wells in Cepu by February 2006 with investment up to US$120 million. It is too bad that fellow journalists failed to digest what's wrong with the statement.
Technically, you don't have to be a petroleum engineer to understand, no way that Pertamina could drill oil wells by February, while it takes months even to prepare the paperworks. They would need few more months to lay the pipelines in the ground if they're lucky to get faster clearance on land permits.
Even if they could do that in three months, wait a minute, is it legal in the first place?
Pertamina and Exxon signed the Cooperation Contract (KKS) with Upstream Oil and Gas Regulator (BP Migas) in October. If Pertamina move on with the drill straight strategy, what might be the respond from BP Migas, local administrations, residents?
How about Exxon? Well, as the KKS is a legal binding document, BP Migas almost unlikely to let Pertamina drill the oil wells without consent from Exxon. If they do that, Cepu project would end up in international arbitrary like previous high-profile cases i.e. Karaha Bodas and Cemex.
The oil and gas block in East Java is co-owned by Pertamina, Exxon, and a company to be established by local administrations with share ownership of 45%, 45%, and 10% respectively. The block has more than 700 million barrels of oil reserves (some even predicted 1 billion barrels). At peak, Cepu could produce 170,000 bpd. But commercial production is pending on negotiation on operatorship. Exxon claimed it has been appointed as the operator through the memorandum of understanding (MoU) signed in June by Martiono Hadianto (President Commissioner of Pertamina), Aburizal Bakrie (Chief Economic Minister), and Exxon.
Martiono was the leader of government-sponsored Negotiation Team consisted of Iin Arifin Takhyan (director general for oil and gas at the energy department), Umar Said (Pertamina commissioner), Mustiko Saleh (vice president director Pertamina), Lin Che Wei (then expert staff for minister of state-owned enterprises), Roes Aryawijaya (deputy minister SOE), Rizal Malarangeng and M. Ikhsan (expert staffs at the chief economic minister office).
But look at how these guys easily change their minds. I support the nationalism sentiment on the issue. But I hate people without principles. These guys should have fight all the way through the MoU and KKS, but if they had agreed on something, stick to it. The leaders should ask team members whether they agree or disagree before striking a deal with third party like Exxon.
What we have now, conflicting statements between Pertamina executives and between ministers, is just make things worse for all of us. No way we could be a core nation with such periphery mentality. Oh, poor Indonesian.
It is mentality driving a man on to perfection and forcing him to utilize all knowledge in the loving service of his race.

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The President's Second trip to US; Cosf of Personality!

President Susilo Bambang Yudhoyono decided to cancel his trip to Middle East but move on with his US trip. He flew to US last weekend to speak in front of institutional investor's Indonesia Global Investment Forum to be held September 15-16 at 3 West Club, New York.

This is the first time an Indonesian president visits US twice in less than six months. In his May 2005 trip, he met US President George Bush at White House. This time, no schedule of meeting for the two leaders. But he will meet Condy Rice, US secretary of state and other world leaders.

Saint Louis, Missouri is hist first stop. The Saint Louis trip has been scheduled long before the Katrina as we could see in Webster University's website. On September 12, the university is about to award Yudhoyono an honorary doctor of laws degree.

Popularly known as SBY, Yudhoyono graduated from Webster University's campus in Kansas City in 1991 with a M.A. in management. He received a doctorate in agriculture from the Bogor Agricultural Institute week before the final round of presidential election campaign last year.

SBY attended the Command and General Staff College at Fort Leavenworth, Kansas as a young military officer. Fort Leavenworth will be his second stop in this trip before New York where the College award Yudhoyono an honorary certificate.

It is clear these first two-stops are about SBY's personality. At least 98 aboard with the president including 20 journalists. Well, personality care needs journalists to tell people right?

Yes he will speak before the UN members on restructuring of the world body. But what sounds contradictory is his speech at the Investor Forum.

Rumors said SBY need to speak at the New York forum because the organizer is one of his relatives, a former CEO of US company in Indonesia. Yudhoyono actually is not quite confident to promote Indonesia's invesment opportunities in a disfunctional government as investors had experienced in the last few months.

International investors are surely welcome his efforts to fight corruption (this migh be the reason why Webster University give Yudhoyono a honorary doctor in laws), even though recently the president asked for a cooling down and public started to sense 'politization of police investigation' in some corruption cases when it comes to close aides, friends, and relatives.

But his government is seen incapable to make important decisions, including the fuel price hike needed to ease state budget pressure. Besides, SBY's leadership is very much doubted in handling the economy, especially his cabinet members. Confusing and conflicting statements between the president, vice president, and ministers has put this government under heavy criticism from investors.

Worse, so many disputes with foreign investors left unsettled. Karaha Bodas, Cemex, and ExxonMobil in Cepu are some cases hanging in the air without clear settlement and give negative signal for foreign investors.

The president promised many times to foreign investors, including US president George Bush, to settle those disputes as part of his campaign promises to attract more investment in order to improve the economy.

The president tried to settle those cases. Say in the ExxonMobil versus Pertamina over Cepu oilfield, he asked chief economic minister Aburizal Bakrie to reopen the negotiation. Aburizal then set up a team consisted of government officers and Pertamina board of directors/commissioners. Both parties signed the memmorandum of understanding in June 2005.

But recent statements made by government officers gave signal that the negotiation back to square one as the suspiciousness between government officers is so high. Nobody dare to make decisions, including the president. With such a disfunctional administration, does SBY think that investors really want to hear his nice speech in New York?

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Introducing, Indonesian Lobbyist Firms

Washington DC is home to the largest number of lobbyist firms in the world. They have specialties in certain industry, area, or country. Their customers ranged from governments and big corporations. The recent statistics shows, number of lobbyist firms already thousands in the US capital city, doubled in less than one decade.

Lobbyist is one of the highest paid professionals in the country with starting salary at US$300,000. Wow!

Lobbyist firm is already part of political system in most western democracies, publicly declared and registered. But I never heard of a publicly registered lobbyist firm in Indonesia. I know for sure most of former high-level officers (both from departments and military) became lobbyist for many tycoons, installed them as member of commissioners, let say. Some analysts and PR consulting firms are also conducting such activities. But rarely we heard that public-listed company is hiring a lobbyist firm to lobby parliament members (DPR) or government.

So I was bit surprised when a friend told me that a well-respected company is open a bid to hire lobbyist for certain issue. You know how much is the annual retainer fee? US$84,000!

There are some analysts who act as lobbyist or informal spoke person, let say with writing articles in newspapers, for big corporations with damn good payment. But I never heard of formal bidding to hire lobbyist in the country. So, here we are. I am bit skeptical of its effectiveness though. Indonesian political and social system still sees lobbyist negatively. Lobbying is seen similar to bribery.

But I am not surprised if that’s one of the most promising jobs in the future. Anyway, Indonesia government has to pay huge sum of money to these kinds of firms for various international lobbying activities. On human rights issues, where Indonesia under international pressure most of the time, Indonesian government turned to US-based lobbying firms.

On Saturday, February 5, 2005, Diane Farsett published an article at CommonDreams.Org titled How Indonesia Wins Friends and Influences US Foreign Policy.

Farsetta wrote that Hill & Knowton and White-Case, for example, contributed to Indonesia’s lobbying bill for mid-1991 through 1992, which totaled US$6.8 million. Burson-Marsteller got US$5 million in 1991 and another US$5 million in 1996.

In early 2001, Indonesia's Sekar Mahoni Sakti Foundation hired Advantage Associates, "to create a positive view of Indonesia with the U.S. Congress, Administration, and Department of Defense," according to U.S. Foreign Agents Registration Act filings. One goal was "to lift an embargo on spare parts for the C-130 military aircraft."

The government retained APCO Worldwide in 2003, to pitch its importance as a "front-line state in the war on terrorism," wrote the PR trade publication O'Dwyer's. The deal included media outreach and legislative meetings. In 2004, Alston & Bird contracted with an Indonesian logging magnate to "position" the country "as a solid ally in President Bush's war on terror and one that is committed to democracy and human rights." In addition to policymakers and reporters, Alston & Bird was directed to sway other U.S. "opinion-shapers," including "think tanks and academia."

Indonesia's most influential ally may be former U.S. Senator - and current Alston & Bird special counsel - Bob Dole. In January 2004, the Far Eastern Economic Review reported that Indonesia had hired Dole as a lobbyist. "Among the issues Dole might address is the restoration of a program to train Indonesian military officers in the United States," according to National Journal's CongressDaily.

According to Kevin Bogardus in his article Bob Dole: Indonesia’s Man in Washington; Former Republican Presidential candidate is paid to lobby for the country’s oil interest, published by Center for Public Integrity in September 22, 2004, Indonesian government paid the Alston & Bird law firm nearly $850,000 to have Dole and nine other lobbyists wine and dine Washington officials during a five-month period in the past year. Another political insider, Jonathan Winer, a former deputy assistant secretary of state for International Law Enforcement and chief counsel to Sen. John Kerry, the Democrats' presidential candidate, is part of Dole's team.

One of the top tasks for Dole and company is protecting the interests of Indonesia's state oil company Pertamina in a huge, multi-million dollar legal case brought against it by Karaha Bodas Co., a Cayman Islands-based joint venture between U.S. companies Caithness Energy and Florida Power and Light Co.

Last month, Jeffrey H. Birnbaum, wrote interesting article in Washington Post titled The Road to Riches Is Called K Street. Below is excerpt from his article.

The number of registered lobbyists in Washington has more than doubled since 2000 to more than 34,750 while the amount that lobbyists charge their new clients has increased by as much as 100 percent. Only a few other businesses have enjoyed greater prosperity in an otherwise fitful economy.

Lobbying firms could hire former White House or Capitol Hill aides with starting salary of US$300,000 a year.

The fees that lobbyists charge clients have also risen substantially. Retainers that had been $10,000 to $15,000 a month for new corporate clients before President Bush took office now are $20,000 to $25,000 a month or more, lobbyists say.

All-Republican lobbying firms have boosted their rates the most. Fierce, Isakowitz & Blalock and the Federalist Group report that at the end of the Clinton administration, $20,000 a month was considered high. Now, they say, retainers of $25,000 to $40,000 a month are customary for new corporate clients, depending on how much work they do.

Such fee inflation is widespread, even by newcomers. Venn Strategies LLC, a bipartisan lobbying firm that opened in 2001, has doubled its retainer for new clients. "When we first started, most of them came in at $7,500 a month or $10,000 a month," said Stephanie E. Silverman, a principal in the firm. "Now retainers are more in the $15,000- and $25,000-a-month range."

Corporate clients accept the extra cost as the price of success in Washington. At the turn of the year, the American Ambulance Association decided to step up its lobbying and switched to Patton Boggs LLP, the Capitol Hill powerhouse, from a smaller lobbying shop across town. In the process it boosted its lobbying budget by about a third, to more than $300,000 a year.

Take the example of Hewlett-Packard Co. The California computer maker nearly doubled its budget for contract lobbyists to $734,000 last year and added the elite lobbying firm of Quinn Gillespie & Associates LLC. Its goal was to pass Republican-backed legislation that would allow the company to bring back to the United States at a dramatically lowered tax rate as much as $14.5 billion in profit from foreign subsidiaries.

The extra lobbying paid off. The legislation was approved and Hewlett-Packard will save millions of dollars in taxes. "We're trying to take advantage of the fact that Republicans control the House, the Senate and the White House," said John D. Hassell, director of government affairs at Hewlett-Packard. "There is an opportunity here for the business community to make its case and be successful."

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Harvard alumni as President’s economic advisor

Harvard-educated economist Dr Sjahrir has been appointed as economic advisor for president Susilo Bambang Yudhoyono.

The chairman of New Indonesia United Party, summoned yesterday by the president, will give advise on economic implementation strategy for the cabinet including poverty eradication, employment, and investment.

Dr Sjahrir, owner and CEO of Sjahrir Securities, admitted his tasks will be, among others, settlement of disputes with Cemex Asia Holding (regarding PT Semen Gresik Tbk) and Karaha Bodas Company (US-affiliated company).

There were speculations that Sjahrir’s junior like Dr Muhammad Chatib Basri, noted economist from University of Indonesia, will also be appointed as president’s advisor on economic policy.

Sjahrir is known for his friendship with some noted businessmen like Peter F Gontha (former key figure in Bimantara Group led by Soeharto’s son Bambang Trihatmodjo) or Aburizal Bakrie (chairman and owner of Bakrie Group), now the chief economy minister.

Yudhoyono’s cabinet is heavily filled with US-graduated ministers. At least 10 ministers are US-graduated. They are Andung Nitimihardja (minister for industry, University of Pittsburgh), Sri Mulyani (national planning, Illinois), Sofyan Djalil (IT & multimedia, Tufts), Purnomo Yusgiantoro (mining & energy, Colorado School of Mines), Alwi Shihab (coordinating minister for social affairs, Temple and Harvard), Mari Elka Pangestu (trade, UC Davis), Bambang Sudibyo (education, Kentucky), Jusuf Anwar (finance, Vanderbilt), Hassan Wirayudha (foreign affairs, Harvard and Virginia).

It is not clear whether the president will establish National Economic Council, one of his presidential campaign plans. Some economists argued against such council since it would overlap with cabinet portfolios. Abdurrahman Wahid established such council in 1999 led by senior economist Prof Emil Salim (UC Berkeley-graduated) where Sri Mulyani was the secretary of the council. But Wahid’s successor, Megawati, preferred to had informal economic advisors such as senior economist Frans Seda.

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