T

he government is formulating a decree that will exempt upstream oil and gas contractors from paying groundwater (GW) tax, a move that will ease their burdens when they operate under the gross-split scheme.

At present, groundwater tax is calculated by each regency or municipal administration, with contractors operating in accordance to the water obtaining value (NPA) formulated by the Energy and Mineral Resources Ministry through Decree No. 20/2017.

Upstream contractors pay such a tax because they use huge amounts of groundwater to extract oil and gas. This often happens when contractors try to maintain the production of mature and depleted oil fields through enhanced oil recovery (EOR) activities.

“The tax should only apply to groundwater from aquifers that can be utilized for human activities. However, the water that comes from oil and gas fields is toxic and has no use for humans. That’s why we urged contractors to transfer such water to reservoirs,” the ministry’s oil and gas director general, Ego Syahrial, said recently.

“Therefore, we want to nullify the NPA of such water so that contractors don’t need to pay the groundwater tax.”

Ego said, for instance, the production of 100,000 barrels of oil at the Minas field in Riau Islands required 4.9 million barrels of water.

As a result, the field’s operator, PT Chevron Pacific Indonesia, the local unit of American oil and gas giant Chevron, was forced to pay in advance the groundwater tax to the regional administration before eventually being reimbursed by the central government through a cost recovery scheme.

However, as the government intends to replace the cost recovery scheme with the gross-split sliding scale for all new contracts, such a tax exemption will be crucial to make upstream projects more economical for contractors.

The new scheme will no longer require the government to reimburse exploitation costs to contractors during the length of their contracts. As a result, companies will carry the burden of these costs themselves.

Moreover, as of today, the government has yet to complete the drafting process of the government regulation (PP) on gross-split taxations, resulting in further uncertainties among upstream contractors.

Pri Agung Rakhmanto, a researcher with the Jakarta-based energy think-tank ReforMiner Institute, said it was the right move for the government to exempt contractors from the groundwater tax because the collection of such a tax violated the assume-and-discharge provisions stated in their production sharing contracts (PSC).

As assume-and-discharge system is touted to guarantee that investors do not have to pay additional fees or taxes during the long duration of their PSC, many of which last for more than 30 years.

“With the cost recovery scheme, it was natural for the government to apply an assume-and-discharge system because the contractors only helped produce oil and gas for the country. But with the gross-split scheme, contractors had to bear all the risks, making upstream projects unattractive to them,” Pri Agung said.

The government hopes that EOR activities result in the recovering of around 2.5 billion barrels of oil in reserves by 2050. Hence, a high-tax system is feared to discourage investors from undertaking the costly EOR activities in the future.

The country’s proven oil reserves dropped to 2,959 million stock tank barrels (mmstb) at the end of last year from around 5,000 mmstb in the early 2000s due to a lack of new discoveries.

Of the reserves, 55.45 percent was depleted and 3.95 percent had not been developed.

"Therefore, Energy and Mineral Resources Minister [Ignasius] Jonan has underlined the importance of making production costs more efficient. Companies should operate efficiently so that they will be able to undertake EOR activities,” said Saleh Abdurrahman, the secretary-general of the National Energy Board (DEN).