Domestic Banks to be Used by Oil and Gas Operators

In an attempt to help shore up the liquidity of the country's banking sector, upstream oil and gas regulator BPMigas will soon require oil and gas operators to use domestic banks to facilitate their multi-billion operations.

Included in the domestic banks are foreign banks operating in Indonesia, BPMigas chairman R. Priyono said Wednesday.

"This policy aims to increase our banks' liquidity. As the oil and gas sectors use many dollars, it will also boost dollar liquidity in our domestic banks. It will have positive effects on our banks' balance of payments," Priyono said during a discussion on the economic crisis and its impact on the oil and gas sector.

Priyono said the regulation could be put in place as soon as next month and would be mandatory, applying to both national and foreign oil and gas operators.

"Oil and gas operators must use domestic bank services, otherwise their expenses will not be reimbursed under the cost recovery scheme," Priyono said, adding that BPMigas had the authority to issue such a regulation.

Priyono said oil and gas operators might spend about US$11.8 billion next year. "We hope all of the transactions for these funds will be through our domestic banks."

Oil and gas companies spent about $10.56 billion in 2007. As of October this year, they have spent about $9.2 billion.

The BPMigas proposal received mixed reactions from oil and gas players.

President of the Indonesian Petroleum Association Roberto Lorato, who was also a speaker in the discussion, said he could not comment on the proposal, saying that investors and the government needed to discuss further on the matter.

Roberto, however, said oil and gas investors were "starting to feel less comfortable within the last 12 months".

"They are starting to feel less comfortable, because they perceive a number of changes, or sometimes there are simply rumors about changes to production sharing contracts, about changing part stakes and about changing cost recovery provisions, which are affecting investors comfort on what they have signed for and on what they will get," Roberto said.

Lukman Mahfoedz, project director at domestic oil and gas operator PT Medco Energy, said that his company had been using domestic bank services and was quite satisfied with them. He went so far as urging domestic banks to also take part in financing investment in the upstream oil and gas sector.

"Medco plans to spend about $300 million on its projects in 2009. It would be very good if domestic banks could participate in some of these projects."

With an average capital adequacy ratio (CAR) of about 16 percent, domestic banks are believed to have stronger foundations than they had during the 1997 crisis. However, data from the central bank shows that domestic bank lending for the energy sector is quite small.

As at the end of August 2008, outstanding loans for the energy sector stood at Rp 41.6 trillion ($4.2 billion), or about 3.5 percent of total bank credits disbursed.

Author: Jo Amey