Ministry wants better cost-recovery assessment

The Jakarta Post ,  Jakarta   |  Sat, 07/28/2007 12:06 PM  |  Business

Urip Hudiono, The Jakarta Post, Jakarta

The Finance Ministry, in collaboration with other related institutions, plans to improve cost-recovery assessment in the oil and gas industry, which has often given rise to controversy over alleged lack of transparency at the expense of the public purse.

The ministry will ask the industry's upstream regulator, BP Migas, to improve its methods and transparency regarding the exploration costs that oil and gas block operators can claim back from the government.

""The cost recovery issue involves the Finance Ministry, as well as the Energy and Mineral Resources Ministry and BP Migas,"" Finance Minister Sri Mulyani Indrawati said Friday.

""We, in our capacity as the state treasurer, want it to be as transparent as possible, but each institution has its own responsibilities. The government has set up BP Migas to enforce (oil and gas) contracts, and determine which costs can be claimed back.""

The Finance Ministry's secretary-general, Mulia P. Nasution, said he expected BP Migas to be more effective in enforcing contracts and the related cost-recovery assessments, and contractors to be more efficient in their operations.

The ministry would, however, continue to keep its distance from BP Migas's assessments, leaving the conducting of audits to the Energy and Mineral Resources Ministry, the government's Development Finance Comptroller (BPKP) and the Supreme Audit Agency (BPK).

As an incentive to attract more investment to the oil and gas sector, the government allows oil and gas companies to recover certain costs arising during the exploration phase.

Although these costs are only repaid after actual production has commenced, the arrangement effectively reduces the state's take from the oil and gas sector.

For 2007, BP Migas proposed US$10.4 billion as the total-cost recovery ceiling, accounting for 30 percent of this year's $35 billion in estimated gross revenues from the oil and gas sector. The agency has yet to announce last year's actual level of cost recovery, while the figure for 2005 was $7.53 billion.

In its mid-term revisions to the 2007 budget, the government has estimated net revenues from the oil and gas sector at Rp 105.4 trillion (11.7 billion), compared to Rp 139.8 trillion in the original budget, due partly to higher levels of cost recovery.

The House of Representatives, which is also involved in the matter as it has to approve the proposed budget revisions, has objected to BP Migas's latest proposal for higher cost recovery, and asked the government to amend oil and gas contracts so as to reduce cost recovery to $9 billion.

The House's argument is based on a finding by the BPK that many contracts are detrimental to the taxpayer, and a finding by the BPKP that 18 percent of 2005's cost-recovery figures might have been marked up.

Sri Mulyani acknowledged the public concern over the matter, but also said that recent high oil prices may have affected exploration costs for contractors. Revenues from the oil and gas sector are also affected by fluctuations in oil prices and exchange rates, and not by cost recovery alone.

""As regards concerns over past contracts being detrimental to the taxpayer, the government is considering the conducting of a review. But what exact form this will take has yet to be discussed,"" she explained.

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