Yessar Rosendar – Faced with declining national oil production and fierce opposition, the government has ditched a controversial proposal to limit the expenses that oil companies can submit for reimbursement, a move that is being welcomed by the industry.
Evita Legowo, director general of oil and gas at the Energy Ministry, told the House of Representatives on Tuesday that the government determined that limiting the reimbursement of certain expenses, known as cost recovery, would hinder efforts to reverse the gradual decline in national oil output.
She acknowledged that a limit had been written into a bill on the cost-recovery mechanism but said it had been removed with the approval of the coordinating minister for the economy and the finance minister, among others.
The move was intended to help reach oil-production targets, including the 2010 goal of 955,000 barrels a day, a level greeted with some skepticism when it was set last week.
"With optimized exploitation of old blocks and new ones, we hope that we can reach the target," Evita told lawmakers.
Upstream oil and gas regulator BPMigas this month proposed 917,000 bpd for this year, a figure it labeled "optimistic."
Dipnala Tamzil, the executive director of the Indonesian Petroleum Association, said the removal of the cost-recovery cap would help increase production from old oil blocks. "Old blocks need more investment to maintain production and it means you need more cost recovery," Dipnala said.
He called on the government to create a climate of certainty for investors, especially in the oil and gas sector, in which it can often take three decades or more to recoup an investment.
"Investors need certainty, especially in oil and gas where it is capital intensive. You don't want regulations to change midway and disturb your investment before you have gotten a return on it," Dipnala said.
The cost-recovery mechanism has become controversial in recent years. Lawmakers have said the government was spending too much on reimbursing energy companies, which some claimed had abused the mechanism by seeking reimbursement for nonessential expenses, including entertainment.
However, worries about a cap were blamed when only five of the 16 blocks the government offered at tender in December attracted successful bids. Anggito Abimanyu, the Finance Ministry's head of fiscal policy, said the government had allocated $12 billion for cost recovery this year. "It's a temporary figure until we finish the cost-recovery regulation," he said.
Last year, Chevron recovered the most from the government ($2.9 billion), followed by Total ($1.6 billion) and state-owned PT Pertamina ($1.5 billion).
Abdul Hamid Batubara, the president director of PT Chevron Pacific Indonesia, welcomed the government's decision. He said capping cost recovery would limit its exploration and development activities.
"If it is really not capped, then it is really what we had hoped for. It will make our production activities easier," Abdul said.
The regulation should have been completed in January last year, according to a state budget law. Evita said it was in its final stages and should be with ministers this week.