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luggish investment due to a lack of appealing fiscal policies and regulatory certainty has painted a bleak picture for Indonesia’s upstream oil and gas sector this year, the Indonesian Petroleum Association (IPA) announced.

IPA president Jim Taylor, of US-based ConocoPhillips, emphasized the importance of the country improving the sector’s investment climate to be more competitive in a bid to see more vibrant investment activities, particularly in explorations, over the coming years.

“To secure Indonesia’s future energy supply, aggressive efforts, major new supportive investment and a supportive regulatory environment are essential,” he told reporters at a press conference in Jakarta on Wednesday.

To provide existing and potential investors with a conducive economic environment, the IPA highlighted several principal issues that needed to be addressed.

The first concerned contract sanctity. The association said that all existing production-sharing contracts (PSCs) should be honored.

On the issue of the 2010 government regulation on cost recovery and income tax in the upstream business sector, which is feared will create uncertainty over the status of PSCs, the association claimed that it was very disappointed with the decision of the Supreme Court, which rejected its judicial review request on Oct. 18.

“The basis of the denial isn’t yet known. The IPA will continue to strive for dialogue with the government to ensure that the implementation of the regulation will honor the sanctity of existing contracts,” said Sammy Hamzah, the association’s vice president.

The next issue the association says should be addressed is gas pricing. The IPA recommends that gas prices in the country should be market-based in order to motivate contractors to boost production. The association believes that this policy would benefit customers, since they would receive more reliable gas supplies.

Despite the country’s fast-growing economy, around 6.5 percent expected this year, the exploration investment that was needed to find new oil and gas reserves and ramp up production has been declining over the past several years, he added.

According to the Production Improvement Controlling Team (TP3M), during the first seven months of 2011, only 33 percent, or 58 exploration wells out of a planned total of 176 wells, were drilled by oil and gas contractors.

“Without further significant investment, exploration activities will continue to decline and Indonesia’s oil and gas production will not bring any additional value or benefits to the state and its people,” Taylor said.

Over the past three years, investment in the upstream oil and gas sector was relatively stagnant, at between US$10 billion and $12 billion. Upstream oil and gas regulator BPMigas’ data shows that after reaching $12.09 billion in 2008, investment dropped to $10.42 billion in 2009. Last year, the amount increased slightly to $11.03 billion, and is expected to hit somewhere between $12 billion and $13 billion this year.

The PSC extension process is the third of the IPA’s concerns. In the future, it hopes the extension process will be more transparent and conducted as early as possible, to allow for the extended timeframes required by PSCs to plan and develop major new sources, particularly for gas-related projects.