Trading – A target for industry improvements. Vol 109

1. Introduction.

For the past five years the ESDM has made great strides in cleaning up the management of the resource sector with programs such as the Clean & Clear, on-line submissions, plus pioneering the beneficial ownership program. Industry has supported government programs, in such areas as the coal DMO policy, and the pursuit of the mineral smelter program etc.

Unfortunately, the ESDM has been less successful in stimulating greenfield exploration in coal, minerals and oil & gas. The past five years of improving the management of the resource sector clearly supports the Governments quest to attract quality investors. The investment fundamentals for both local and foreign investors are country risk, exploration risk and sentiment. One aspect reflecting investors concerns for a clean business environment is brought out in a quote from Ferdy Hasiman’s book “Strong Business People Vs State Sovereignty” [Bisnis Orang Kuat Vs Kedaulatan Negara] wherein he states “Freeport Indonesia is aware that in order to survive and continue to expand business in this country, they must associate and be friendly with political elites, business elites, and military elites. Conversely, doing business in this country without associating with elites who are close to power will certainly not last long”. Such elites are often perceived as sometimes operating with less than optimal transparency, leaving them open to speculation of not operating as good investors.

This article compares some areas identified by the EITI Trading for improvement in the oil & gas sector and compares this against recent efforts to strengthen the management of the mineral & coal sector, along with some suggested further improve to the Minerba [mineral & batubara/coal] administration. The ultimate goal is for the ESDM to provide a management environment that squeezes out unwarranted facilitators and middle men, in order to attract good investors to Indonesia.

It should be noted that the Migas Mafia and the possible Minerba Mafia, as mentioned in this article, are not necessarily undertaking illegal or corrupt activities, but are seen as business opportunist. Investors may see such Mafia as possible speed bumps on the way to a cleaner and more transparent business environment that is sought by good investors.

2. EITI on Trading of Oil & Gas.

The Final Report “EITI Commodity Trading Indonesia” was recently issued and is available in English from the EITI web site [ http://eiti.ekon.go.id/en/laporan-commodity-trading-eiti-indonesia/].  This 20 page report is a can-opener to bring transparency and credibility to the resources industry. The report is directed at the trading of oil & gas within Indonesia (and imports) and may also be a guide for what further action may undertaken in the Minerba sector.

The purpose of the EITI report is to bolster public trust in Indonesian SOE’s trading, and in particular “to address negative allegations against Pertamina and provide an opportunity to rebuild their reputation as an SOE”. It would seem this is a nice way of saying that the Government wishes to combat the perception of a Migas Mafia.

2.1 The EITI Trading Report.

This EITI Trading report appears to be based upon 2015 data that was published in December 2017. The EITI Commodity Trading (Oil & gas) report is based on some 1,909 transactions supplied by SKK Migas to represent some 115 shipments of crude oil & condensates with a value of $4.74 billion, mostly valued under the Indonesian Crude Price (ICP) system. Exports by pipeline transactions to Singapore & Malaysia are not included in this study. This first study found a number of methodology issues need to be improved upon, including setting the scope, data anomalies, exporter not named, incomplete data and clarity on trade values. The $4.7 billion mentioned in this report represents less than 20% of the extent of commodity trading by Indonesian SOE’s. Pertamina’s trading arm, Integrated Supply Chain (ISC) has a near monopoly on imports of around 1 million barrels per day. Market driven trading by SOE’s represents only a tiny fraction of the oil & gas trades. It Is not clear if Domestic Market Obligation (DMO) trades are included in the SKK Migas records. The nature of negative and zero value transactions ($67 mill) is unclear, and there is some confusion with naming of some source blocks that makes reconciliation difficult.

The research indicates that extensive information exists within a variety of state institutions on market-driven trades, where more than $20 billion worth of crude and product purchases are recorded electronically by SKK Migas. Other information is held by the Ministry of Finance that holds proof of payment and currency exchange records, while the Ministry of Trade records monthly statistics on fuel products imported and exported. Some of the records are not in a suitable format for easy reconciliation.

Indonesian imports about 400,000 barrels per day of crude oil to feed its refineries, and another 400-500,00 barrels per day of finished products. Indonesia exports about 40,000 barrels per day of mostly low value heavy crude that its old refineries can not readily process. Future EITI trade reports are recommended to review exports, imports, domestic trading and pricing arrangements. Gas pricing and trading patterns are more complex, including a greater variation between first and final trade. There appears to be gaps in the SKK Migas records, including consistency in invoicing and bill of lading numbers, payment details and foreign currency exchange rates. Some EITI analytical work indicates there are some apparent issues in sales compliant with the ICP benchmark price & volume, and for pricing of different grades of crude oil.

EITI Recommendations include the request for more data and transparency from the various Ministries and SOE’s, along with a broader scope for future reports. 

2.2 Interpretation of EITI trading report.

The numerous gaps in the data, poor & diverse record keeping, and inconsistencies between some trades are opportunities where the Migas Mafia might operate. The scale of business is in the millions to billions of dollars, providing incentive for Migas Mafia. At no point in this report was the potential Migas Mafia named, and it would seem a different approach is needed to identify those behind any such Migas Mafia. This is a great first EITI report on commodity trading in the oil & gas sector that needs to be followed up with greater support from the various Ministries and Multi Stake Holder Groups. It is understood that no follow up of a second Migas Trading report has been undertaken since the issuance of the first EITI Trading report.

2.3 The Ahok factor.

The Jakarta post printed several articles (26 November 2019) on the appointment of Ahok as Pertamina’s new president commissioner. He does not have a direct role in running Pertamina, but is to “oversee the company and advise the board of directors on strategic moves”. Having the support from the President, we may assume he has a strong influence upon the direction of Pertamina. The Jakarta Post editorial suggests this influence “is to build good corporate governance through the development of an effective internal control and internal audit system and high standards of transparency and accountability”.

The Energy Watch Indonesia researcher Mamit Setiawan stated “However, I think, as president commissioner, it will be difficult for him (Ahok) to eradicate the oil and gas mafia”. Herein I hope this is a challenge that Ahok is capable of meeting, and the EITI trading report points the way.

3. Minerba leading the way.

The ESDM has introduced many measures to improve the management of coal and mineral trading, including the use of Letters of Credit through Indonesian banks, Export documentations clearance before ships can sail etc. Parallels of the Migas Mafia are suspected in the coal & minerals industry, termed here as Minerba Mafia. The use of this term Minerba Mafia in this article is not intended to imply members of Minerba are involved in improper activities, but that other parties are envisaged to operate in a less constructive way within the Minerba sector. The KPK has done a great job in reducing many traditional areas of corruption, but such Mafia figures are adapting to the new environment, and seeking other ways to profit. Closing down some of these Mafia trading parties in the coal and mineral sectors may improve the perception of good business in the Indonesian resource sector.

3.1 Commodity trading in the Minerba sector.

The mineral & coal sectors recognize that commodity trading can be a respectable and positive business, connecting commodity sellers to buyers, and often adding value to a trade through providing capital guarantees, reliability of commodity delivery etc. Regulations have been introduced to acknowledge legitimate trader’s profit as distinct from transfer pricing on mineral and coal exports.

In the past there has been a practice of a producer selling to a first trader, that sells to a second trader before final sale to end user. This was often used as a mechanism to reduce royalty on the first trade, and a way to provide pass through business to selected connected Mafia parties, at the expense of the producer receiving the maximum benefit from the sale of the coal or mineral. Alternative a sale direct between producer and buyer may be made through a facilitator who gains a commission. The potential investors concern is if this is a genuine independent third-party business, or a contrived means by Mafia to take a cut from the sales.

Some SOE’s and companies have made public their policy to purchase concentrated metallic ores from local miners. The clarity around such trades is not reported in the present EITI reconciliation system. Without such full transparent disclosure of seller, volume, price and buyer, there is room for possible Mafia trading activity.

Some small independent domestic nickel miner’s ore sales to the new smelters have registered their complaints publicly that their selling price to selected nickel smelters is about half of the export price. Is this simply the big smelters exercising their buyers leverage, or is this an opportunity for smelter Mafia? Minerba has acknowledged this issue, and is known to be working on the issue. On the output side of the smelters, it is possible that the sale of processed products is through another Mafia trader/ facilitator with unknown beneficial owners.

The recent temporary closure of nickel ore trading was undertaken to better monitor the volume and grade of raw ore exports from diverse and remote sites. An EITI type delayed reconciliation process is not suitable to counter such day to day trading patterns.

3.2 The Minerba Solution.

On the 2 December 2019. Minerba undertook the launching of three new computer systems to record the mineral and coal industries activities of commodity sales [Aplikasi Modul Mineral Verifikasi Penjulan – MVP], exploration reporting [Exploration Monitoring System – EMS] and submitting of exploration data [Exploration Data Warehouse – EDW] for minerals and coal. The new MVP system may provide investors with more confidence that potential Mafia activity is being squeezed out of the industry.

The new Aplikasi Modul Mineral Verifikasi Penjulan – MVP system is part of a wider Minerba On line Monitoring System (MOMS) system. The new MVP systems relies on participation /compliance with other MOMS digital systems regarding company name, location, payment of certain fees etc. If a party is not registered with MOMS (or up to date with compliance requirements) then the party will not be able to participate in the new systems, and not be able to sell minerals or coal. Essentially the commodity selling company fills out various on-line data fields, and then the companies appointed Surveyor (cargo-superintending) firm is automatically notified and completes the data entry for a “final” documentation. The company can then opt to print out or go digital for port clearance etc. The forms vary slightly for domestic or export sales, and sales to traders. These new computer systems rely upon the registered Surveyors to ensure reliable and correct trading data. These systems will help with synchronization across the various sections within the ESDM, and also across ministries. Some parts of the system are open to the public, while other parts are restricted, based on the level of Government echelon, or for approved requests for information. This MVP system is compulsory from 1^st January 2020.

It is hoped this new MVP on-line system will not only automate and speed up commodity trades, but will also squeeze out potential Minerba Mafia through a more transparent buyer to seller documentation. Material for the recent Minerba launching presentations can be found at http://bit.ly/LaunchingMVPEMSEDW

3.3 Annual Work Program Approvals.

Each mining company must submit its annual work program and budget for ESDM approval before commencing the following years operations. Such approvals are necessary to secure export approvals, but also to underpin business aspects of credit and insurance etc. This allows for possible Minerba Mafia intermediaries to put pressure on miners to nominate a particular contractor or product. This practice may have evolved from the environmental permit process, where it is understood that some approvals were delayed until a particular “preferred” local environment firm was engaged with unusually high fees.

One part of the solution may be to have greater transparency in the RKAB (work program & budget approval) management system.  Perhaps the new Exploration Monitoring System – EMS, may have elements that can form the bases to improve the RKAB approval system.

3.4 ESDM links to traders.

The Coal DMO program includes an aspect of quota trading to allow for coal companies to meet their Minerba set commitments towards this program. Initially coal quota trading was conducted on a business to business bases. Minerba then introduced a requirement that all DMO quota trading be prior approved by the ESDM. This allows for a different type of possible Minerba Mafia facilitator / trader to be introduced to become involved this DMO quota trading in return for a fee. Transparency and beneficial ownership of such possible Minerba Mafia facilitator /trading is encouraged to improve the reputation of the coal industry. It is understood that the Minerba is looking at how to improve the DMO system. Perhaps part of the solution may be to include DMO trading onto the MVP on-line platform.

3.5 Small Scale Operators.

The ESDM recently mentioned there are some 1,150-coal production IUP’s. Many may not be actually producing. The ESDM recognizes they shall produce more than 100 million ton of coal in 2019. There is a similar picture of many small miners operating in the gold, tin, zircon, and other mineral commodities. The EITI system does not look into the smaller operations, wherein by staying small can be an IUP survival strategy. However, many hundreds of small deals can influence trading patterns, and provide a space for Minerba Mafia.

It is understood that in some districts the small-scale local commodity buyers will only pay with cash, and are not interested in completing too much paperwork. These sellers and buyers will clearly be operating outside the new MVP on-line system. However, it may be possible for the new MVP system to identify some of the buyers through a forensic auditing process. The ongoing evolution of satellite and drone technology of mapping small mines may eventually lead to a system to better detect such small producers / traders operating outside / beyond the MVP system. Such small-scale poor mining practices may be eventually brought under control through improved integrity of local government, and the ESDM’s ongoing education & socialization programs. 

One NGO estimate is that some 2,500 small scale gold producers have a combined output of more than formal gold production of Indonesia’s good gold miners. The President is very supportive of eliminating the use of mercury, and this approach may help combat the many small-scale gold traders. Bringing such numerous small-scale operators out of the hands of informal / locally registered gold traders, and into the mainstream operations is a long-term goal of the ESDM. Perhaps they can make a start through the local Mines Department that is responsible to encourage and train on mine safety and environmental awareness, plus NGO’s that seek to introduce substitutes for mercury.

4. Conclusion.

One of the candidates (Prabowo) to the 2014 presidential elections campaigned on the notion that his party could pay for many social programs through “plugging up the leaks”. We may note that Prabowo and his party are now (2019) sided with the Jokowi government. A strong follow through on this EITI oil & gas trading report may plug such leaks. It would seem the Minerba has made a good start to squeeze out possible Minerba Mafia, with more initiative to follow.

Applying the principals of the EITI trading report, and the experience gained in implementing the new MOMS Minerba systems to the mineral industry could be a good start for the new Minister of Mines & Energy to continue to the make the resource sector more attractive for good investors.  The new Minerba on-line systems will have positive effects on many other parts of the minerals and coal industry.