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Jakarta Post

Govt to offer incentives to oil and gas firms

  • Grace D. Amianti

    The Jakarta Post

  /   Sat, September 24, 2016   /  07:41 am
Govt to offer incentives to oil and gas firms Engineers work at an oil and gas processing site. The government is finalizing a specific regulation to lower gas prices for industrial customers, to help local industries compete against imported goods. (Antara/R.Rekotomo)

The government is preparing a set of incentives to attract oil and gas companies to invest more in the upstream industry to compensate for its plan to reduce its cost-recovery budget next year.

The tax and non-tax incentives will be offered in the upcoming revision of the 2010 Government Regulation (PP) No. 79/2010 on cost recovery and tax treatments for the upstream oil and gas industry.

The government believes that current cost recovery — the reimbursement scheme for oil and gas companies’ exploration and production costs — has been ineffective in attracting contractors to conduct exploration activities and is in fact a burden on the state budget.

In a joint press conference on Friday, Finance Minister Sri Mulyani Indrawati and interim energy and mineral resources minister Luhut Pandjaitan explained that the incentives would contain waivers of several tax requirements during exploration and exploitation phases.

During the exploration phase, firms will be exempted from the requirement to pay the import value-added tax (VAT), import duty, domestic VAT and property tax (PBB).

Meanwhile, during the exploitation phase, firms will have the opportunity to avail of similar waivers, but only if their projects meet the government’s own economic valuations.

With regard to non-tax incentives, the government says it will provide clearer rules on investment credit and domestic market obligation (DMO) holidays. A DMO is the requirement imposed on firms to allocate a certain amount of oil or gas production to meet domestic needs.

Sri Mulyani added that another point in the revision would be the implementation of a sliding-scale concept that would enable the government to achieve higher profit-sharing from sharp price increases.

“Based on past experiences, the government doesn’t have the ability yet to earn higher profits when oil prices increase significantly. With a sliding-scale concept, there will be a new regime, in which the government and contractors can share the pain and the gains,” she said, insisting that the new concept would be based on fairness.

The government expects the incentives will increase the economic value of oil and gas projects — which is mainly measured by internal rate of return (IRR) — to 15.16 percent from the current 11.59 percent, making the upstream side more attractive.

The revision announcement was made a day after the government told lawmakers at the House of Representatives that it sought to slash over US$1 billion from its planned cost-recovery budget next year.

If approved, the 2017 cost-recovery budget will stand at $10.4 billion, down from the original proposal of $11.7 billion.

The announcement apparently took business players by surprise as they had expected a different outcome. Sammy Hamzah, Indonesian Employers Association (Apindo) head of energy and mineral resources division, said he was dismayed by the “incentive offers”.

“The finance minister said that the spirit of the incentives was to return to the assume-and-discharge concept, but this is not like that,” he said, referring to the concept that was dismissed in 2010 when cost recovery was put in place.

Indonesian Petroleum Association (IPA) executive director Marjolijn Wajong also said it was actually hoping to see the government reinstate the assume-and-discharge concept, which she claimed provided greater business certainty.

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