Expense rebates, or cost recovery claims, from oil and gas contractors to the government have long been the subject of debate over inefficiencies costing the state losses in potential revenue. Aside from the whopping total cost, a major concern has been the dubious nature of many expenses, especially when the country is in dire need of higher revenues from the oil and gas sector to help provide better public facilities.The Jakarta Post's Rendi Akhmad Witular recently explored key problems in the cost recovery mechanism, as well as what can be done by policy makers to maximize government take from the sector. Following are his findings.
For fear of losing out on investment contracts, the government pumps out billions of dollars annually in incentives to repay oil and gas contractors for expenses related to investments and operations in Indonesia.
However, the devil is in the details, as what is intended to be goodwill compensation often turns out to be a way for contractors to pass on inappropriate expenses to the government.
An audit by the Supreme Audit Agency (BPK) published late last year on the 2005 accounts of nine (of a total 80) oil and gas blocks unveiled some US$525 million in questionable claims for government refunds under the cost recovery scheme.
The refunds were filed by France-based Total E&P Indonesie, U.S.-based ExxonMobil, Chevron, Conoco Philips and Vico and China's CNOOC, according to the BPK.
Items claimed for refund ran the spectrum from a Pinocchio DVD to a complicated chain of transactions often involving drilling.
Such expenses, the BPK concluded, reduced the government share of revenue from the oil and gas sector.
The bigger the amount of cost recovery claims, the smaller the oil or gas production there is to be split with the government, as the government makes the refund payments by offsetting its percentage take of companies' oil or gas output.
In 2005, the government received $19.9 billion net take from the oil and gas sector after paying out $7.68 billion in refunds.
While the compensation for questionable items was small compared to the profit, the BPK stresses the impact of regulation loopholes and reckless supervision by the oil and gas regulator BPMigas.
SLIPPERY BUSINESS: An oil production facility of a major oil and gas giant is seen in this file photo. Weak supervision on exploration contracts and cost recovery claims by regulator BPMigas has caused inefficiency in the country’s oil and gas sector.(JP/R. Berto Wedhatama)SLIPPERY BUSINESS: An oil production facility of a major oil and gas giant is seen in this file photo. Weak supervision on exploration contracts and cost recovery claims by regulator BPMigas has caused inefficiency in the country’s oil and gas sector.(JP/R. Berto Wedhatama)
"Vague contracts and regulations, coupled with weak supervision by BPMigas, provide incentives for the firms to claim inappropriate expenses as much as possible," said BPK senior auditor Widodo H. Mumpuni, who overseas audits on cost recovery.
"The problem is not only the amount of the claims but also the appropriateness of the expenses. With no serious efforts from the government, I don't expect the abuses to ease anytime soon," he said.
The BPK has required the Energy and Mineral Resources Ministry to revise the existing contracts of oil and gas contractors but to no avail.
Based on several oil and gas production sharing contracts received by The Jakarta Post, the questionable claims stem primarily from loose clauses and inaccurate definitions.
In a contract between the government and Total Indonesie's Mahakam Block, for example, cost recovery includes noncapital expenses, which can include personal expenses and public relations spending.
The BPK believed the phrasing "noncapital costs include but are not limited to the following..." was used by a company to charge unrelated expenses to cost recovery bills.
The terms "personal expenses" and "public relations" are not defined, lending themselves to multiple interpretations.
Total spokeswoman Judith J. Navarro-Dipodiputro refused to comment on the findings, saying BPMigas was more authorized to respond to the issue.
BPMigas deputy chairman Abdul Muin said the existing contracts were due for revision, as there were numerous disputable clauses.
"I agree with the BPK recommendation (for contract revision). We are getting into a lot of trouble because of the contracts made by our predecessors. But from what I know, the companies are not intending to profit from the loopholes," he said.
However, Energy and Mineral Resources Minister Purnomo Yusgiantoro has plainly refused requests for revising the existing contracts as it would require joint approval from the companies.
While problems in the contracts are likely to continue, weak supervision by BPMigas in detecting the abuses and punishing those involved provide incentive for the contractors to claim inappropriate expenses.
The BPK said some BPMigas officials and government auditors were also involved in the abuses.
For example, in 2005 BPMigas requested a refund of Chevron's East Kalimantan operation for petty cash expenses of $111,312, of which $80,249 was deemed irregular by the BPK as many items lacked receipts.
According to the BPK, the expenses were for financing exhibitions and business trip made by several BPMigas officials, as well as overseas business travel for the auditors of state development comptrollers (BPKP).
Expenses of this kind are against the agencies' internal regulations, which ban their officials from being entertained by other parties.
The expenses were later claimed by Chevron for a refund.
In the BPK report, Chevron clarified there were no regulations on the kind of items which could be included in the petty cash expenses, and that all transactions were accounted for by receipts.
In its written statement to the Post, Chevron, whose total operations in Indonesia account for half of the country's oil output, said it was subject to the U.S. Foreign Corrupt Practices Act, which functions as its internal control.
The company said it monitors and prohibits the practice of offering bribes, whether in monetary or other form, to government officials in return for business favors.
It also denied it had profited, as indicated by the BPK, from loopholes in regulations.
"We have never heard of any such claim on the part of the BPK, which always performs its duties with the utmost professionalism. What is also important to understand is that no one has anything to gain by inflating costs. Investors would also suffer losses as the equity to split would be smaller.
"With current high oil prices, operational costs have increased dramatically. In all fairness, we should not only look at cost recovery, but also at the revenues received by the state," said Chevron.
In some cases, BPMigas even approves a cost recovery claim amounting to more than 100 percent of the expenses estimated for a project, despite a failure by the contractors to deliver the promised oil and gas output.
Although BPMigas has discovered cases of cost inflation, there has been no punishment so far to recalcitrant oil and gas contractors.
"That explains why some companies keep putting up dubious expenses for rebate. They know that if they are caught, they will escape unpunished," head of BPK auditing for BPMigas, Wasito, said.
-- JP/Rendi Akhmad Witular, with additional reporting from Ika Krismantari.