Govt to scrap oil, gas cost recovery cap

Pressured by falling oil production and failure to attract enough investors to develop new oil and gas blocks, the government says it will abandon the recently adopted practice of putting a ceiling on the annual cost recovery payment reimbursed to contractors.

“The policy of capping cost recovery is not appropriate. This is not supposed to be capped. We will fix this matter,” Coordinating Economic Minister Hatta Rajasa told reporters Monday.

Indonesia’s oil and gas production sharing contract (PSC) scheme previously required the government to reimburse all contractor cost items within the scope of the cost recovery payment rules. The payment is reimbursed after the contractors enter the production stage.

But following strong criticism over alleged lack of transparency in the implementation of cost recovery, as of last year, eligible expenses due for payment from the state budget have been capped annually.

The law on the 2010 state budget caps the total cost recovery payment at US$12 billion, up from US$11.05 billion in 2009.

Hatta said that the article would be revised for the 2010 budget. “We have corrected this. The most important thing is not to cap the payment, but how to avoid moral hazard [in the payment],” he said.