TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
No progress seen in govt’s latest oil, gas incentives
Change Size
An oil pump seen at sunset in the desert oil fields of Sakhir, Bahrain, Sept. 30, 2015. The Indonesian government is preparing stimuli for the oil and gas industry for the 13th economic policy package to buttress investment in the industry in a sluggish market. (AP/Hasan Jamali)
T
he government’s proposed incentives for oil and gas businesses may not be the game-changer policy the weak industry badly needs.
The planned incentives will exempt oil and gas companies from paying import value-added tax (VAT), import duties, domestic VAT and property tax (PBB), as well as waiving similar taxes during the exploitation phase.
Non-tax incentives will include clearer rules on investment credit and domestic market obligation (DMO) holiday. A DMO is a requirement imposed on firms to allocate a certain amount of oil or gas production to meet domestic demand.
The government expects the incentives to increase oil and gas exploration and exploitation amid weakening investment in the sector, which has been hit by low prices for the past couple of years.
However, businesses and experts have been shaking their heads at what they see as a lack of significant breakthroughs in the incentives offered in an upcoming revision of the 2010 Government Regulation (PP) No. 79 on cost recovery and tax treatments for the upstream oil and gas industry.
The changes are unlikely to encourage oil and gas players to significantly boost their current activities amid low crude prices. ReforMiner Institute researcher Pri Agung Rakhmanto said that firms would still have to pay indirect taxes and fees with the new revisions.
“The revisions will not change the situation in which contractors will be subject to indirect taxes because our product-sharing contract system does not entail an agreement between a contractor and a state-owned company, but one with a government body,” he said, referring to the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas).
There were 113 active exploration sites, with only US$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, SKKMigas data show.
The reluctance to commence exploration is especially worrying due to the constantly decreasing oil and gas reserves in the country. SKKMigas estimates that Indonesia’s reserves decrease by around 0.65 billion stock tank barrels a year.
Business players have also slammed the product-sharing contract (PSC) system. Indonesian Petroleum Association (IPA) executive director Marjolijn Wajong said many firms favored a return to an assume-and-discharge system, which was nixed in 2010 for the current cost recovery scheme.
An assume-and-discharge system would guarantee that investors did not have to pay any additional fees and taxes in the future during the long duration of their PSC, many of which can last over 30 years.
“This way, our calculations on exploration and exploitation will not be disturbed as we will have some kind of guarantee. Without an assume-and-discharge scheme, future governments may suddenly burden investors so that the economic calculations become undesirable,” Marjolijn told The Jakarta Post.
Although there are no signs of reinstating the assume-and-discharge system, the government has started to rethink its cost recovery scheme — the reimbursement scheme for oil and gas production and exploration costs — as it has failed to stimulate more activity in the sector while burdening the state budget.
The government has already told the House of Representatives that it would seek to slash its cost recovery budget to US$10.4 billion from $11.7 billion in next year’s budget.
Despite protests from experts and business players, the government remains optimistic that the revisions will create a better investment climate in the oil and gas sector.
The Energy and Mineral Resources Ministry’s oil and gas director general, IGN Wiratmaja Puja, said the incentives offered would provide more efficient exploration in the 14 conventional oil and gas fields the government has put to tender.
“When we used to auction off six fields at a time, investors would fight over it but now we’ve put 14 fields to tender that no one’s picked up. However, it will become more attractive for investors once the regulation is revised,” he said.
The revision is expected to help increase the economic value of oil and gas projects — which are mainly measured by the internal rate of return (IRR) — to 15.6 percent from the current 11.59 percent, making the upstream side more attractive.
