Govt considering scrapping cost recovery scheme

Alfian ,  The Jakarta Post ,  Jakarta   |  Tue, 07/29/2008 10:03 AM  |  Business

The government is considering eliminating the cost recovery scheme for future oil and gas contracts amid calls for greater transparency in the abuse-prone mechanism.

The cost recovery mechanism allows funds spent by oil and gas operators in exploration activities to be reimbursed by the government after the production phase begins.

This scheme is meant as an incentive for investors to develop the country's oil and gas sector, but its implementation draws public criticism due to lack of transparency and accountability.

Evita Herawati Legowo, the newly appointed director general for oil and gas at the Energy and Mineral Resources Ministry, said Monday the idea of scrapping the cost recovery scheme had been under discussion for some time.

"Currently we have one type of contract for oil and gas investors. Now we are considering offering alternative contracts based on other mechanisms."

Evita said this option would be offered to new contracts, not existing ones. However, this is still under discussion, she added.

Luluk Sumiarso, the former director general for oil and gas whom Evita replaced, said under other types of contracts, the government would select investors who offer maximum benefits.

"We will choose investors who give the largest production split to the country," Luluk said.

"Two large foreign companies have shown interest in this new mechanism," he added, while refusing to name them.

Critics say the cost recovery program lacks transparency and accountability and is therefore prone to abuse.

In 2005 for instance, the Supreme Audit Agency (BPK) found oil and gas contractors claimed expenses for such goods and services as DVDs, parties, dancing courses, charities and even Islamic haj pilgrimages to Saudi Arabia.

Ryad Areshman Chairil, from the Center for Indonesian Energy and Resources Law, said the mechanism contributed nothing to oil production.

"Government spending in cost recovery ironically increases when our oil production declines," Ryad said.

"In 1999 when our production was around 1.5 million barrels per day, government spending in cost recovery was only about US$3.7 billion. But when our production declined to 1 million barrels per day in 2006, spending in cost recovery increased sharply to $9 billion."

Chairman of the oil and gas upstream regulator BPMigas, R. Priyono, however, said a contract without the cost recovery mechanism was not good for the country's long-term interests.

"The production-sharing contract (where the cost recovery mechanism is incorporated into it) is not merely about the portion we receive, but also about protecting our country's interests.

"Without the cost recovery mechanism, we are unable to verify that the investors have correctly implemented their plans," Priyono said.

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