Big Contracts: On the Verge of (Government) Troubles - Introduction (Part I)

Introduction

Recent issues on high oil prices, sub prime mortgage and natural disasters have conditioned a perception where the global economy is on the brink of recessions. Countries are no longer optimist on their economies. Not even the IMF has a positive attitude on the world fate. On its 2008 global economic outlooks, the institution highlighted the world economic growth at 4.1% compared to the last year 4.9%. In the US alone, the economy does not seem to be in the favour of business and households. With the sub prime mortgage haunting most financial institutions, the more than $150 billion stimulus package does not help alleviating the economic decline at 1.5% growth rate. To make it worse, some of the top global financial institutions have conceded their shares to sovereign investment authorities. Citigroup as the largest financial institution hopes to get another fund from the Saudis even though the company has been injected with $ 7.5 billion of cash by the Abu Dhabi Investment group. Even GIC, the Singaporean sovereign wealth fund would bail out $ 6.9 billion, an amount of 4 percent stake of the group. UBS, the Switzerland giant financial institution also needs an amount of $9.75 billion to secure its financial portfolios. Likewise, Merrill Lynch and Morgan Stanley are in dire needs of cash to recover from their non performing loan nightmares.

Yet, these issues do not halt the world in searching energy supplies. In fact, even with tighter global economies, countries are trying hard to secure their energy needs, thanks to the surging energy demand from China, India and the United States.

To give a perspective, the OPEC output reaching 29.6 million barrel per day is insufficient to meet global demands. Not even George W. Bush can persuade this cartel to raise oil outputs. In the power sector, China has raised its power generation up to 14.4% at 3.26 billion megawatt hours in 2007. The country also increased its generating capacity by 114.36 % at 713.3 gigawatts. As a result, the vast need of coal has made the country a net coal importer in January 2007. Coal shortages also forced power plant operators in the country reduce some of their capacities.

Likewise, in Indonesia, the demand to secure energy supplies has been carried out through government initiatives to increase investments on oil explorations, power plants and gas block developments. However, things seem to be unfavourable for the time being.

In the oil sector, the decline of oil productions at 910,000 bpd has created worries on the state fiscal deficit. Although the recent hike on oil price appears to relieve the state fiscal revenue, the government has to bear energy subsidies for premium fuel and kerosene. However, with major oil companies in the nation have production declines due to their aging oil wells; the government target to produce 1.034 million bpd of oil in 2008 appears to be dimmed. Even with the incentive such as tax reduction and more contracts sharing percentage given to oil companies, analysts suggest that the 2008 target is far from achievable.

In the power plant development, the ministry of energy and mineral resource has targeted to produce additional 10,000 mW power by 2009. The initiative will be secured through developing 35 coal fired power plants both in and outside Java. However, recent developments on the contract negotiations suggest that only 3 contracts were secured. When counting from the total portfolio, the government is still $ 2.78 billion short from the total $4.8 billion needed to fund the projects. Financiers’ dubious attitude on the government intention to guarantee the project was initially deemed as the major reason slowing down the negotiation progress. Now, even when they have the government guarantee, the talk over the interest rate decelerates the prospect of securing the country’s dire need of electricity. To make it worse, on its 20 February 2008 edition, the Jakarta Post dispatched the message from the state electrical power officer on the possibility of power outage due to the shortened supply of coal used to generate the Jawa Bali power interconnection.

Moving into the gas concession, different perceptions over the gas pricing have made some of the contract extensions under jeopardy. Consider this, while in January 2008, the Indonesian ministry of energy and mineral resource confirmed that the negotiation of the Natuna gas block was about to be concluded with ExxonMobil as the operator, just within a month, Pertamina, the state oil company, was denoted to take over the concession.

With such attitude, we might wonder what is happening on big energy contracts. To answer the question, I will use the state and the MNE relational framework. Chiefly, I will address the role of the state and the role of the MNE in the global economy. Subsequently, I will discuss elements leading to differences and disputes between the state and the MNE. Finally, I will provide some recommendations for the MNE in dealing with a government over big energy contracts.