Indonesia’s oil industry in crisis

Indonesia’s oil industry has been at the centre of several recent disasters. As the industry seeks to recover losses, risk mitigation is no longer a priority. 

Editorial

Recent catastrophes in the Indonesian oil industry have prompted questions over industry standards. At the end of April, an unregulated oil well in Aceh province caught fire. The blaze lasted three hours, killed ten people and left a further 19 injured.

The fire occurred less than a month after an oil spill in Eastern Borneo. The spill devastated the coastal ecosystem, affecting an area the size of Paris. State-owned oil and gas firm, PT Pertamina eventually admitted responsibility.

The industry is in crisis

The two incidents have highlighted many of the safety lapses within the oil industry. Illegal wells put whole communities in peril. Villages construct wells to manually pump oil from deep underground. They then distil the oil in barrels, a risky practice which frequently causes fires.

The villagers sell the distilled oil for fuel in motorcycles and fishing boats. Former chief of the Indonesian Mining Fire and Rescue Agency, Mangantar Marpaung, said, “the local governments know, but because they can’t provide any other jobs, they look the other way.”

It is not just government officials wilfully ignoring safety risks. Pertamina faces an investigation for its failings which led to the Borneo oil spill. A preliminary investigation found omissions in the firm’s environmental impact assessment form. Pertamina did not carry out maintenance inspections on its 20-year-old underwater pipeline.

The investigation also found poor operational procedures. The refinery which fed the pipeline had no warning system or monitoring system. When the pipe sprang a leak, it took several hours for detection. The reaction to the spill was painfully slow, allowing more oil to enter the ecosystem.

The calamity was a collection of errors. When the firm finally accepted responsibility for the leak, its set fire to the oil. The resulting blaze quickly raged out of control, leading to the death of five fishermen in the area.

In the interests of industry expansion, regulation enforcement has taken a back seat

The Indonesian oil industry was a pillar of economic growth and state revenues. But the slump in oil prices in 2014 left the industry scrambling to regain lost revenues.

Source: PWC

Pressures to recover lost revenues and cut costs drove the industry to accept more risks. A culture of secrecy has emerged to protect state revenues and companies’ profits.

Indonesian law requires oil companies to complete an environmental management and monitoring report. Contractors must also make regular reports to the authorities detailing their ongoing compliance.

The oil spill in Borneo demonstrates that this process is not functioning. Pertamina did not fully carry out its environmental duties. It did not investigate the full extent of the risks its pipeline posed. The government also failed to ensure Pertamina met its ongoing environmental responsibilities.

The industry needs fixing

The Southeast Asian oil sector should have the most comprehensive risk mitigation measures. Its location makes it prone to natural disasters. Extreme weather and seismic activity threaten onshore and offshore drilling activities. The area’s high volume of shipping traffic also makes it prone to accidents.

However, many of the largest players in the industry are state-owned, like Pertamina. This means governments can profit by looking the other way or not enforcing the law to the letter.

The environmental regulation of the oil industry should be handled regionally. Oil spills are not confined by geographical boundaries. Therefore, implementing and policing environmental legislation should not be confined to nation states. A meta-governmental body could also effectively police state-owned oil firms.

Oil industry environmental regulation could fall under the jurisdiction of the ASEAN Regional Forum (ARF) or Southeast Asian Association for Regional Cooperation (SAARC). This would widen the scope of environmental risk assessments. It would force companies to examine their practices from a regional perspective.

There could also be improvements at a national level

Introducing a culture of transparency where there is a culture of secrecy is not easy. But there are steps the government can take to reduce accidents.

It can prioritise companies with internal accountability measures when awarding drilling rights. It should also establish whistle-blower protections within state-run industries. Indonesian employment law currently has no specific protections for whistle-blowers. This needs rectifying to harbour a culture of transparency.

The Indonesian oil industry represents opportunity but also environmental risk

Indonesia is on a campaign to become one of the top ten largest global economies. Its oil sector represents an opportunity to bring this dream to fruition.

Indonesia has potential petroleum resources of 150 billion barrels of oil. Its GDP would receive an extra US$90-120 billion through further exploration. This would amount to an additional 1%-1.4% of annual GDP growth between 2017 and 2027.

However, without a safe and well-regulated oil industry, its achievements will be muted. The country may achieve its economic goals. But the environmental catastrophes will ruin livelihoods. It will create a chasm between rich and poor communities.

Oil spills ravage coastal communities, disproportionately affecting Indonesia’s poor. Fishermen in Balikpapan Bay will struggle in the wake of such a devastating oil spill. One such fisherman stood on the coast at Balikpapan Bay, examining the chaos of the oil spill. He lamented, “the smell is so strong it is giving me a headache.” Unfortunately, his headache will find no relief any time soon.