Ministry to propose lower tax rates to boost exploration
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The government is currently mulling a plan to trim taxes for companies engaged in oil and gas exploration in a bid to boost dwindling oil production in the former Organization of Petroleum Exporting Countries (OPEC) member country.
Energy and Mineral Resources Minister Jero Wacik said last week his office had proposed the Finance Ministry cut the taxes for oil firms actively exploring new sites in the country, which he hoped would increase the number of oil blocks in the future.
“We will support new oil exploration by giving lower tax rates for the investors. If it is necessary, [the taxes] might as well be eliminated,” he told The Jakarta Post in a text message.
Indonesia joined OPEC in 1961 but left in 2008 after it became a net oil importer as production fell to 970,000 barrels of oil per day (bpd), far below the 1.6 million bpd it produced in 1996.
Southeast Asia’s largest economy has experienced a further decline in oil production in the past few years, falling from 954,000 bpd in 2010 to 898,000 bpd in 2011.
As of September, Indonesia’s oil production stood at 870,000 bpd, far below the initial target of 930,000 bpd as stated in this year’s state budget.
Commenting on this decline, Jero said that cutting rates for income tax, value-added tax and import duties on exploration equipment might be necessary to attract more investment in the upstream oil and gas sector.
“Indonesia still has huge potential oil reserves, but given high taxes, not to mention the high cost and high risk of exploration activities, we have yet to see much investment in the sector,” he said.
Separately, Gde Pradnyana, operations deputy at upstream oil and gas regulator BPMigas, said the regulator hoped the government could completely rub out import duties on oil exploration equipment, such as oil rigs and oil survey ships.
“The risk of failure in oil exploration activities is very high. Therefore, they [the investors] should not be burdened further with taxes,” he said.
Although new investment in the oil and gas sector rose to $13.59 billion last year, from US$11.03 billion in 2010, the figures were still far below those recorded in the 1990s, according to the Indonesian Petroleum Association.
IPA vice chairman Sammy Hamzah said separately that the association would welcome any move from the government to cut taxes and provide additional incentives for firms that had shown commitment in the oil exploration sector.
“With income taxes at 10 percent and import duties at 20 percent alone, we must see a 30 percent increase in the amount of money we have to spend on exploration, although there is always the high possibility that we find dry wells,” he said.