Upstream oil and gas regulator BPMigas has asked lawmakers to review the government’s plan to issue a regulation controlling cost recovery payments, saying that this will hinder investment in the sector.
The cost recovery mechanism allows funds spent by oil and gas operators to be reimbursed by the government after the production phase begins, as part of an incentive for investors to develop the country’s oil and gas sector.
But, critics say the cost recovery program lacks transparency and accountability and is therefore prone to abuse, leading to the authority considering a change in the scheme.
However, BPMigas chairman R. Priyono said that the planned regulation would change the existing scheme from the contract regime to the public regime which could hamper the investment climate in the industry.
“Therefore, we think the cost recovery regulation needs to be again reviewed,” Priyono told lawmakers from the Commission VII overseeing energy and mining in a hearing last week.
Amir Hamzah, BPMigas’ head of public relations division, security and representation, said that,
currently, all clauses in oil and gas operations are regulated in these contracts; meaning that these
matters are within the domain of civil law.
“But, if the cost recovery is included in the government regulation, the allegations on violations will be included in the public law and certainly can [become] included in the domain of criminal law.
This will make the investors afraid and will decrease investment in the sector,” said Amir in a text message.
This year is the first time that the government caps cost recovery spending at about US$11.05 billion.
For the next year, the government and the House have agreed to cap cost recovery $12.005 billion.
The capping is officially regulated by the law on the state budget.
As for the detailed implementation of the law, the government is now formulating the implementation regulation on the controlling of cost recovery.
As mandated by the law on the state budget, the regulation was supposed to be issued January
this year, but this is still being discussed between the energy and mineral resources ministry and the finance ministry.
The full content of the new regulation has yet to be revealed to the public, but during a recent
Indonesian Petroleum Association (IPA) conference, Priyono said that the regulation would reduce
the contractors’ capital spending, but not their operating costs.
He cited the cost of pipeline construction as an example of capital spending that might be reduced from the cost recovery claim.
But, later on both the government and BPMigas seem in doubts over the plans to control cost
recovery.
Director general for oil and gas at the Energy and Mineral Resources Evita H. Legowo blamed the
revisions of and the restrictions on the cost recovery spending for the recent failure of the private sector to take up opportunities to bid to help develop oil and gas blocks, since investors were apparently put off by the increased risk of not optimizing cost recovery on their initial exploration and development costs.
Of 16 oil and gas blocks offered between December and April this year, only five blocks attracted developers.
BPMigas later on identified the capping of cost recovery payments as a contributing factor leading to the country’s lower-than-targeted oil production figures this year.
The state budget sets the oil production target at 960,000 barrel oil per day (bopd), but data
from BPMigas showed that, as of the end of October, oil production achieved was only at 948,670 bopd, significantly less than hoped for.
