A

revised government regulation pertaining to cost recovery and taxation in the upstream oil and gas sector will be issued this week to attract more investors.

Interim energy and mineral resources minister Luhut Pandjaitan claimed that the revised regulation, which will soon be signed by President Joko “Jokowi” Widodo, will eradicate the need for upstream oil and gas companies to pay value-added tax and property tax.

“Many things [will be erased], including value-added tax and property tax. Why would anyone need to pay property tax in the middle of the sea? Especially in the deep sea, it’s just unnecessary. We shouldn’t strangle people from the beginning. Let them start producing first before we tax them,” he said.

The revisions of Government Regulation No. 79/2010 are expected to increase investment in the upstream oil and gas sector, which has suffered from a lack of exploration activities due to low crude prices.

For the last two years, global prices have been in free-fall from around US$110 per barrel of Brent crude in June 2014 to around $48.

The Finance Ministry previously issued its own regulation in 2014 stipulating that property tax would not be implemented on oil and gas companies during the exploration period. However, the Energy and Mineral Resources Ministry concluded that it was not sufficiently legally binding.

The latest data shows that there are 113 active exploration sites, with only $367 million invested in exploration activities in the first half of the year, out of a total investment of $5.7 billion in the oil and gas industry.

The regulation’s revision has been a long time coming as the government hopes that its incentives will convince oil and gas players to carry out more exploration. The country’s oil reserves have
been depleting by around 0.65 billion stock tank barrels a year since 2000.

According to the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), the country’s reserves have dropped to 3.6 billion stock tank barrels by the end of 2015. However, national demand reached 1.63 million barrels of oil per day (bopd) at the end of last year.

The government has already set precautionary measures by drastically slashing the 2017 oil lifting (ready-to-sell production) target to 780,000 bopd from 820,000 bopd. The new target is expected to help stretch the oil reserves to last approximately 13 years without any new findings.

However, all hope is not lost. Government data claims that there are around 3.7 billion stock tank barrels in potential reserves, most of which are located in deepwater ocean basins located in the eastern part of the country.

Even so, convincing investors to come to Indonesia will be tough as deepwater and other non-conventional exploration methods require large investment and advanced technology.

“Yes, our reserves are being depleted, which is why we want to increase exploration. One of the ways to do so is to reserve government regulation No. 79 to entice more people to invest in deepwater [exploration],” Luhut said.

Energy and Mineral Resources Ministry secretary-general Teguh Pamudji said that suggestions to assume and discharge taxes on upstream operational equipment had been protested by the tax office as it violated Law No. 36/2008 on income tax.

“There have been some issues where we are at a deadlock. One of them was the reimplementation of the assume and discharge scheme due to several stipulations in a law from the tax office,” he said.

Despite the previous protest, the tax office agreed to change the ring fencing scheme from a single oil and gas block basis to a national one, which would allow companies to aggregate operational funds to several blocks at the same time.