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Realigning oil cost recovery
The disputes between government and oil contractors over cost recovery could worsen because of a long delay in the issuance of regulations on new accounting guidelines for expenditure under production-sharing contracts, as required by the 2009 State Budget Law
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The disputes between government and oil contractors over cost recovery could worsen because of a long delay in the issuance of regulations on new accounting guidelines for expenditure under production-sharing contracts, as required by the 2009 State Budget Law.
The law sets the total costs that can be recovered by oil contractors this year at US$11.05 billion, but regulations on the technical details of this cost recovery mechanism, which were supposed to be effective as of January, are still being finalized, Oil and Natural Gas Director General Evita Legowo said this week.
The controversy over cost recovery by contractors heightened in late 2006, after the Supreme Audit Agency (BPK) revealed that in its audit of major oil contractors in 2004-2005 it had found almost $1.8 billion in potential losses to the state due to excessive cost accounting.
These findings created the impression that contractors had used the cost-recovery account as a dumping ground for all kinds of expenses, irrespective of their relevance to exploration or production.
The parliament joined the fray and has since last year put the cost-recovery mechanism under stringent public scrutiny by regulating it under the state budget law.
True, the government must control what kinds of expenditure oil contractors can recover because the government’s take (share) of the oil or natural gas fields under production-sharing contracts is based on a net take after costs are recovered by contractors. But what we have now seems to be more uncertainty and bureaucratic inertia, since the required regulation is already five months behind schedule.
The BPK recommendation that oil contractors reimburse the government with the $1.8 billion in excessive costs has remained unheeded because of differing opinions on the cost recovery claims.
Simply leaving this auditor recommendation pending without any resolution could put oil contractors into legal limbo because the BPK finding could trigger corruption investigations of oil executives by the Attorney General’s Office.
It is most urgent now for the government to enact as soon as possible the regulation on oil contract cost recovery, to prevent further uncertainty in the upstream petroleum industry. But a regulation alone, even with clear-cut provisions, will not be effective enough to prevent disputes unless the Upstream Oil and Gas Regulatory Body (BP Migas) is adequately equipped and staffed to supervise the operations of oil contractors.
The BPK finding of $1.8 billion of what auditors called “excessive costs” puts into question the technical competence of BP Migas in supervising contractors’ operations.
The fact is the BP Migas supervisory mechanism already consists of pre-audit work done through its assessments of plans for development, working programs and budget plans proposed by contractors; current audits through the compulsory reporting of activities by contractors and the monitoring and inspection of contractors’ operations; and post audit checks by external auditors such as BPK and the government finance comptroller (BPKP).
That BPK auditors found so many irregularities in the costs recovered by contractors despite multiple layers of auditing could mean either of two things: The BPK is unable to perform its job properly, or the cost-recovery directives are so loose and ambiguous (and vulnerable to multiple interpretations) that even the internal auditors of contractors — most of which are subsidiaries of major international oil firms — are unable to comprehend them.
