Govt to scrap oil & gas cost recovery cap

Tuesday, 5 January 2010

The Jakarta Post

Pressured by falling oil production and failure to attract enough investors to develop new oil and gas blocks, the government says it will abandon the recently adopted practice of putting a ceiling on the annual cost recovery payment reimbursed to contractors.

“The policy of capping cost recovery is not appropriate. This is not supposed to be capped. We will fix this matter,” Coordinating Economic Minister Hatta Rajasa told reporters Monday.

Indonesia’s oil and gas production sharing contract (PSC) scheme previously required the government to reimburse all contractor cost items within the scope of the cost recovery payment rules.

The payment is reimbursed after the contractors enter the production stage.  But following strong criticism over alleged lack of transparency in the implementation of cost recovery, as of last year, eligible expenses due for payment from the state budget have been capped annually.

The law on the 2010 state budget caps the total cost recovery payment at US$12 billion, up from US$11.05 billion in 2009.

Hatta said that the article would be revised for the 2010 budget. “We have corrected this. The most important thing is not to cap the payment, but how to avoid moral hazard [in the payment],” he said.

Hatta’s statement received a positive response from oil and gas contractors.

“We as the player in this business fully support the government’s decision. Oil and gas investment is high risk and capital intensive, therefore, it requires certainty. Including the cost recovery payment as a parameter in the short-term law budget is an extremely nice fit with the long term nature of oil and gas investment,” Budi Basuki, president director of Medco E&P Indonesia said in a text message.

The government’s decision to scrap the cost recovery cap may satisfy the oil and gas contractors, but external analysts say this may make no significant contribution to help the country’s oil and gas blocks to find new investors.

“Despite the claims about cost recovery capping, the government actually has never truly capped cost recovery spending. The payment is only carried over to the following year, but is never capped,” energy analyst from the Reforminer Institute Pri Agung Rakhmanto said.

He added that the government had responded wrongly to public concern over the transparency of cost recovery payments. “Instead of focusing on the capping of the cost recovery payment, the government should have responded to the issue by strengthening the capacity of [upstream oil and gas regulator] BPMigas who control the cost recovery process,” he said.

Pri Agung added that cost recovery capping was actually not the main reason behind Indonesia’s failure to find investors for most of its oil and gas blocks last year. “The main problem is the poor  exploration data. The government only offers the basins without initial geology and physical surveys.

If things stay like this, the next tender will still have poor results even though the capping has been scrapped,” he said. Oil and gas contribute about 30 percent to state revenues. But, the sector’s  performance is in question as it missed production and investment targets last year. BPMigas reported last week the country’s oil lifting in 2009 was 949,138 barrels of oil per day (bopd), lower than the state budget target of 960,000 bopd.

The energy and mineral resources ministry also revealed that the investment generated by the sector in 2009 was $12.18 billion, lower than the 2009 investment target of $13.77 billion as well as  the 2008 actual investment total of $13.52 billion. (The Jakarta Post)