The US$14 billion oil and natural gas mining contractors plan to spend this year on exploration and production development would not generate a lot of new jobs, which we badly needs, as the country is widely predicted to suffer from a steep economic downturn, with a projected growth rate as low as 3.5 percent.
Oil and gas mining operations are capital and technology intensive businesses.
But the contractors’ spending plan, up 15 percent from last year’s investment in the hydrocarbon sector, could still serve as a very positive signal that our petroleum industry remains fairly attractive both in terms of geological prospects and business atmosphere.
More significant is the spending plan when set against the backdrop of the steep fall in international oil prices, which are as low as $37/barrel today from their peak of over $145 in the middle of last year.
We see this positive indicator as significant progress by the Upstream Oil and Gas Regulatory Body (BP Migas) in managing its working relationships with oil and gas companies, notably with regard to the controversial differences of views over cost recovery mechanisms.
An executive of BP Migas said the agency had straightened the approval process for contractors’ working programs and budget plans. Starting this year both the proposals for working programs and budget plans will be discussed simultaneously, not separately as they have been previously.
BP Migas seems to have improved the mechanism of cost recovery for contractors by setting more clearly-defined provisions on which expenditures can be accounted as recoverable costs.
In the past, production sharing contractors were often embroiled in disputes over the categories of recoverable costs, thereby slowing down production operation and discouraging new exploration.
Our oil output has now decreased by more than 40 percent to 978,000 barrels/day from its peak level of 1.5 million barrels per day in the early 1990, degrading the country into a net oil importer due to decades of inadequate investment in explorations and production.
Legal and regulatory uncertainty and bureaucratic problems were especially inimical to investors in the upstream segment of the hydrocarbon industry -- exploration, mining and refining crude oil -- as this business not only involves high risks and requires big capital but also has a very long period before payback.
No wonder new explorations fell sharply after the 1998 economic crisis and since the start-up of local autonomy processes and the transition to the new oil and gas law
Consequently, no significant volumes of new reserves have been discovered or added to national production capacity, but oil and gas consumption has risen steadily as a result of the robust economic growth over the past three years.
Hence, continued investment in oil and gas explorations is the only way to discover new reserves to sustain production.
Better management of production sharing contracts by BP Migas is quite crucial for stimulating investment in the petroleum industry. On top of this, the 2001 oil and gas mining law already provides a conducive legal framework, as it allows contractors and investors to get reasonable margins from both crude oil mining, refining and final products.