Rendi A. Witular, The Jakarta Post, Jakarta | Fri, 03/12/2010 10:59 AM
The Indonesian Petroleum Association (IPA) will hold its 34th Convention and Exhibition themed “Investing Together for Future Growth” at the Jakarta Convention Center from May 18 to May 20. With members contributing 95 percent of the country’s oil and gas output, the IPA expects such a forum to be a catalyst for policymakers to resolve recent hurdles undermining investment in the sector. The Jakarta Post’s Rendi A. Witular recently talked to IPA chairman Ron Aston of Talisman Energy over the issue. Here are the excerpts:
Question: What are the most contentious issues facing the industry?
Answer: We have a number of issues that we have conveyed to policymakers. On top of that issue is cost recovery, which is the bedrock of the production sharing system. The government provides its share of the investment necessary to explore, develop and maintain production. Cost recovery is not a reimbursement to the oil and gas industry because the contract falls to the Indonesian production sharing regime, in which we are taking the risk upfront. If it doesn’t succeed it’s a loss for the investors, if it succeeds it then proceeds to developing and producing oil and gas under the term agreed by the government in the contract, and the agreed cost recovery that will be provided.
If the government looks to introduce regulations that contradict the agreed contract by capping the level of the allowed cost recovery or retroactively adjusting the contract that is already put in place, existing and potential investors will see a potential legal issue arising from that. The key line for the IPA is no capping in cost recovery and no retroactivity.
The second issue revolves around competitiveness of gas pricing. Indonesia is blessed with a very significant gas reserve. And of course the government wants to realize this and give priority to its domestic requirements. We fully understand and support that. But much gas reserve in Indonesia is in remote areas, challenging technically to retrieve and expensive to take them to the market.
In order to provide an economic return the industry wants to see competitive gas pricing. What we don’t want to see is any form of either direct or indirect capping on the price for the gas that investors want to obtain. If investors have the same price domestically as they do in exports, they will not worry. Gas pricing should not also be used to provide an indirect subsidy to the domestic power market as it will deter investment if it is not competitive.
Then to fully develop the gas potential is through infrastructure. There is a need for clear regulatory processes to determine tariffs to encourage pipeline infrastructure investment.
Our third issue is regulatory environment. The approval and regulatory process needs to speed up and provide more facilitation and less control in order to accelerate the production process. We also like to see improved coordination between ministerial departments and better consultation with the industry.
The recent issue in the environmental regulation could potentially slow production down if the required approvals to conduct activities are new to the regional administrations.
The fourth is fiscal certainty. This includes confirmation of sanctity of the production sharing contract (PSC) and the application of the uniformity principle. The tax rate is set for the life of the PSC irrespective of rate changes. There should also be confirmation of assume and discharge responsibility in the PSC, except for corporate and dividend tax. Annual exemption from import duties should be made permanent.
The fifth revolves around PSC extension. Provision of a clear and transparent process to extend PSCs is required. This is vital to maintain investment in the later stages of the PSC life and ensure production growth continues.
The sixth is around the competitiveness of exploration activities. Recent tender license rounds have been disappointing in response from the industry. The terms offered by the government, the contractors split, the fiscal terms, etc, need to maintain competitiveness on a global basis.
What’s your response to a plan to revise the current oil and gas law?
Governments in any sovereign countries can introduce law and regulations as they choose. The position of the industry then will be simply to interface and discuss the direction of the regulation. At this point in time we haven’t seen any proposal or draft of the revision, so we cannot comment.
But a crucial determinant for us is certainty behind our investment. There’s a need to have that; factors involved in the investment decision will not be changed over such a short period. That’s the question of contract sanctity. Our role is to work with the government and to tell them “if you do this it may have this impact” and “if you do that it may have less favourable impact”. It is a role of being the partner of choice that we constantly aim to achieve.
Will the problems outweigh the benefits of investing in the sector?
Absolutely not. There is no doubt exploration activities have slowed down. But despite the concerns, we want to stimulate exploration activities. The success rate in Indonesia is good. There are not many major findings in other parts of the world because it is getting more challenging from a geological perspective.
