Ministry to clarify confusing cost recovery decree

The government promised to issue a detailed regulation to clarify a decree on cost recovery in the oil and gas industry after confusion on the decree led the Indonesian Petroleum Association (IPA) to submit a motion for a judicial review of the ruling,

The Energy and Mineral Resources Ministry’s director general for oil and gas, Evita Herawati Legowo, told reporters on Tuesday that oil and gas production sharing contract (PSC) holders were confused about how the decree would be implemented.

“To end the confusion, my ministry and the Finance Ministry are preparing a detailed regulation for implementing the decree,” she said during a workshop on Indonesia’s oil and gas exploration plans at her office in Jakarta.

She added that the companies were worried that ambiguities in the decree might hamper business. She cited article 38 point A, which stipulated that the PSCs would be upheld. However, point B said there might be several points in the PSCs that should be adjusted to comply with the decree.

“The decree doesn’t clarify what kind of adjustments the government will make to PSCs. This is the source of their anxiety,” Evita said.

She claimed that her ministry had communicated with the association regarding the issue and, which said it would drop the judicial review request if the planned regulation did not harm their business interests.

The IPA submitted the request regarding the cost recovery decree with the Constitutional Court on June 6.

The association’s vice chairman, Jim Taylor, of US-based ConocoPhillips, claimed that the decree had caused many oil companies operating in Indonesia to delay investments. The potential reduction in oil production might reach 150,000 barrels per day (bpd) in five years to come, he added.

“There are several companies that have already reconsidered investment plans. If this situation stays, the country’s oil production will fall,” he said as quoted by Kompas in Jakarta on Monday.

The cost recovery regulation stipulates that the government will reimburse oil and gas contractors’ expenses after their concession areas began commercial production. The payments would be made with state funds annually.

Cost recovery was previously regulated in oil and gas production sharing contracts (PSC) with each contractor.

According to upstream oil and gas regulator BPMigas, which supervises cost recovery reimbursement, the government paid $11.95 billion for cost recovery in 2010. BPMigas chair R. Priyono had estimated that cost recovery payments would be between $12 billion and $13 billion this year.

Experts have also blasted the decree, saying it would hamper the oil and gas investment climate. They argue that companies would cancel investment plans as a number of costs would be refunded under the decree.

The Energy and Mineral Resources Ministry expects the oil and gas sector to attract US$14.9 billion in investment in 2011.