Alfian, Jakarta – Indonesia has failed to attract enough investors to develop the oil and gas blocks offered in the first quarter of this year due to the global economic slowdown and concerns over revisions to the cost recovery mechanism.

Of 16 oil and gas blocks offered between December and April this year, only five blocks won developers, according to the final results of the bidding process announced in Jakarta on Friday.

Should the situation persist, the government will be in serious trouble due to its inability to meet oil production targets amid soaring demand that has already made Indonesia a net importing country.

"This is very bad, but this is the fact. If the situation remains like this, my objective to maintain national oil production at about one million barrels per day cannot be achieved," said Evita Legowo, director general for oil and gas.

Evita cited three factors hampering investors' interests in bidding for the blocks, the first being the global liquidity crisis, but the second factor is the government's plan to revise the cost recovery mechanism. Cost recovery is the investment reimbursement given to oil and gas contractors after they begin production.

The controversy over cost recovery by contractors heightened in late 2006, after the Supreme Audit Agency (BPK) revealed in its audit of major oil contractors in 2004-2005 that there was a total of $1.8 billion of potential losses to the state due to "excessive cost accounting", triggering criticism from lawmakers that finally led to the plan to revise the cost recovery system.

"We understand that the investors may be worry about this, but the government is trying to be fair and just in this matter," Evita said.

This year the government has capped state revenue spending on cost recovery payments up to a maximum of US$11.05 billion.

The third factor, Evita said, was that there were "drying holes" in the surrounding areas where the offered oil and gas blocks were located, where oil wells are drying up.

"The drying holes are not in the blocks [on offer], but the investors seem to be worry that this will also occur in these blocks," Evita said.

Energy analyst Pri Agung Rakhmanto, executive director of the Reforminer Institute, said that the third factor was likely the main reason behind the low bidding proposals from the contractors.

"I don't think that this is caused by the global crisis and the cost recovery issue. It could be that the offered blocks are not [good] prospective blocks or [that] the government did not provide sufficient data about the blocks," Pri said.

Energy analyst Kurtubi, who like many Indonesians goes by one name, argued the low investment in the oil and gas sector was caused by the new law on oil and gas. "With the [new] law, investment in the sector is becoming very bureaucratic and this hampers the investors [who want] to come to Indonesia" he said.

Oil and gas has been the backbone of Indonesia's state revenue. Data from the Energy and Mineral Resources Ministry suggests that the sector last year contributed as much as Rp 304.38 trillion or more than 30 percent of the total state revenue.

On Friday, the government awarded exploration rights for five oil and gas blocks located in the area of the Andaman islands, Halmahera and West Papua.

The nine selected contractors have committed to invest a total of $53 million for exploration activities in the first three years.