BPMigas to revise cost recovery mechanism

Ika Krismantari ,  The Jakarta Post ,  Jakarta   |  Tue, 06/10/2008 10:20 AM  |  Business

In response to widespread criticism of refund payment claims by oil and gas contractors, upstream oil and gas regulator BPMigas plans to revise its rebate mechanism.

The agency's chairman Priyono said the regulator would reduce the number of items contractors could claim on.

"A special task force is now trying to identify all recoverable costs. The team will categorize the expenses into those of development and exploration. Then it will see which costs are deemed too much," he said.

The refund adjustments, he said, would be imposed on all upcoming oil and gas development contracts.

Pressured by soaring oil prices, the government has begun to step up efforts to maximize its gains from oil and gas production by forcing contractors to boost efficiency.

The government makes the refund payments by offsetting its percentage take of companies' oil output.

Priyono said under the revised policy, the government would only refund expenses for community development during the exploration period, rather than during the development stage as is currently the case.

The new cost recovery system will also be field-based rather than block-based. Oil and gas blocks consist of a number of fields; either producing or non-producing.

At present, contractors can claim for expenses incurred in the explorations of all fields located within a producing block, regardless of whether they are producing.

Under the new scheme, the government would refund oil and gas contractors for all expenses directly related to development and exploration activities only after a block has begun production.

Based on a report by BPMigas, the government paid US$8.33 billion in oil and gas recovery claims last year.

The Supreme Audit Agency (BPK) has regularly slammed BPMigas for its weak supervision in determining items eligible for cost recovery, which it says offers leeway for companies to include inappropriate claims.

In the BPK's recent audit of the 2005 accounts of nine oil and gas blocks belonging to French-based Total E&P Indonesie, U.S.-based ExxonMobil, Chevron, Conoco Philips, Vico and China's CNOOC, the agency found that dubious claims had resulted in $525 million in repayments.

Among the claims included expenses for wine, farewell parties, golf club memberships, dancing courses, charities, HIV campaigns, the sponsorship of Jakarta's French movie festival and even an Islamic Haj pilgrimage to Saudi Arabia.

Some key points in the revision of cost recovery mechanism

1. Block basis cost assessment will be revised to field basis.
2. Community development expenses will be covered during the exploration period.
3. Non-capital expenses will be adjusted into capital expenses for development wells.
4. Longer period for capital depreciation.
5. Depreciation costs will be on a monthly basis.

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