The government has issued a regulation aimed at clearing up longstanding legal uncertainty over cost recovery in the oil and gas industry, which it hopes will in turn increase investment in the sector.
The government regulation, which has more legal force than a ministerial decree, includes seven new items pertaining to oil and gas extraction. It also introduces a new tax for the transfer of contracts between oil and gas companies.
Evita Legowo, director general of oil and gas at the Ministry of Energy and Mineral Resources, said the new regulation provided the legal certainty oil and gas companies had been asking for.
It removes the gray areas and clearly sets out the responsibilities and financial obligations of companies, she added.
In the past, the government provided cost-recovery benefits for oil and gas companies to encourage them to invest in the country. But many of these benefits were vague and undefined.
Cost recovery covers expenses incurred by oil and gas companies and are reimbursed by the government as part of the production sharing contract.
Under the new regulation, the government has set out what costs it will not cover. These include costs of granted assets, fines, interest payments, administrative costs or criminal sanctions, bonuses paid to the government and costs incurred before a contract is signed. These seven items have been dubbed the “negative list” under the new regulation.
The new regulation was signed by President Susilo Bambang Yudhoyono on Dec. 20 and will come into effect at the start of the new year.
Evita said the terms of cost recovery spelled out in the regulation had previously been stipulated in a ministerial decree.
“But now we have it in this new regulation,” she said, adding that it should clear up any remaining doubts.
Oil and gas companies have reportedly indicated interest in projects across the country valued at $18.9 billion for 2011. If these projects are realized, they could increase the country’s oil production to 952,000 barrels per day from the current 947,000 barrels.
Both industry analysts and players told the Jakarta Globe they were still studying the new regulation and that it was too early to comment.
Sammy Hamzah, vice president of the Indonesian Petroleum Association, said the organization had recently received details of the new regulation and was currently reviewing it.
The regulation also stipulates that companies that transfer contracts to other firms during the exploration stage of development will be levied a final tax of 5 percent of the contract’s value. If the contract is transferred during the exploitation stage, the tax will be 7 percent, to be paid up front.