An Indonesian government senior official said that the country is gearing up to defend its local- content provisions for the oil and gas sector as developed nations intensively question such provisions at the World Trade Organization (WTO), local media reported on Monday.
Deputy Energy and Mineral Resources Minister Rudi Rubiandini said the government would not back down from regulations that require oil and gas companies to use locally made products and services.
"We're going to defend our stance over the policy with the aim of supporting local businesses," he said over the weekend.
The Energy and Mineral Resources Ministry's oil and gas director general, Evita Herawati Legowo, reaffirmed the government 's commitment to the local-content policy despite declining output.
"The government has grounds for implementing any policy that we have committed to. With that, we will prepare the answer to the subject in question," she said.
As a follow-up to the 2001 Law on Oil and Gas, upstream oil and gas regulator BPMigas issued a ruling in December 2009 requiring the use of local content to ensure domestic companies benefit from the expenditure of oil and gas contractors and to help absorb more workers.
Last year, BPMigas increased local-content requirements from 35 percent to 51 percent, even though it is unclear whether the country's local firms have adequate capacity to deliver.
But as the requirements for the utilization of local products and services increases, the United States, Japan and the European Union (EU) have intensified their inspection of rulings at the WTO, particularly after last week's report indicated that Canada was likely to lose a dispute at the organization over its local- content policy.
Canada requires firms wanting to have guaranteed prices for renewable energy to source up to 60 percent of their equipment locally -- a policy that has been challenged at the international trade body.
If Canada loses the dispute, it will set a precedent for the United States, Japan, and the EU to challenge Indonesia, Brazil, India and Nigeria over local content policies that are deemed discriminatory and against the spirit of free trade.
The US and EU questioned Indonesia's local-content policy at the meeting of the WTO's Council for Trade in Goods on June 22, the Jakarta Post reported.
The US trade representative said in its recent report that foreign energy companies operating in Indonesia were concerned that "these local preference policies severely undermine their ability to make decisions about sourcing and personnel that would allow them to function efficiently and profitably."
"BPMigas is under pressure from the Indonesian [legislature] to maintain or increase the local content requirements and is considering further revisions," the report stated.
BPMigas chairman R. Priyono said the agency would not withdraw the local-content policy, and that it had communicated the matter several times to stakeholders.
"We have been communicating this policy on several of our road shows overseas, including in the US. Thus, we will explain the same thing at the WTO," Priyono said.
BPMigas claimed that between January and September this year, the oil and gas sector sourced $1.02 billion worth of local products, or 35.5 percent of the sector's total goods expenditure. Last year, the sector purchased $1.3 billion worth of local products or around 37.6 percent of spending on goods.
The sector also sourced 4.41 billion dollars worth of services from local firms, or 73.31 percent of total service expenditure, according to the regulator. Last year, 5.35 billion dollars was spent for local services, or around 71.2 percent of the total.
Before the local-content ruling, according to Priyono, contractors spent an average of 20 percent of annual spending domestically.
Total expenditure in the oil and gas sector is worth between 110 trillion rupiah (about $11.46 billion) and 150 trillion rupiah, he said.
As many as 303 oil and gas contractors currently operate in Indonesia, with around 70 of them having reached production stages.
BPMigas has estimated the average daily oil output will continue to decline by 3.6 percent to 870,000 barrels per day (bpd) this year due to unplanned shutdowns and aging oil wells.