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Tue, 20 May 2008

JAKCHAT/New BPMigas chief seeking to reduce loopholes for extra costs

From: JakChat

By Dilli
 Quote:
We still stick with 85 percent to 15 percent in favor of the government in terms of oil production, and 65 percent to 35 percent in favor of the government in terms of gas production. We think with oil prices hitting new records, such arrangements are still attractive for investors.


Bet you the Oil Companies will not be happy with that!

Welcome to Indonesia, 85% of what you produce is ours..... I believe the oil operators were looking for a bit of a better deal more in line with the gas operators.


Tue, 20 May 2008

JP/New BPMigas chief seeking to reduce loopholes for extra costs

Ika Krismantari, The Jakarta Post, Jakarta

Upstream oil and gas regulator BPMigas is responsible for ensuring oil and gas contractors operating in the country generate full benefit for the people, as demanded by the 1945 Constitution.

However, data since its inception in 2002 indicate the regulator has not lived up to these expectations, particularly its failure to reverse the trend of declining oil production, which has contracted by an average of 4 percent per year since 1995.

Despite the negative production growth, the cost recovery paid by the state to oil and gas contractors continues to grow, to US$8.33 billion last year, up from $7.8 billion in 2006 and $7.3 billion in 2005.

In response to growing criticism from the public and lawmakers, the government recently replaced the head of BPMigas with Priyono, a former upstream director at the Energy and Mineral Resources Ministry.

To gain insight on what is in store for BPMigas, The Jakarta Post's Ika Krismantari talked recently with Priyono. The following are excerpts from the interview.

What are your priorities now as the new chairman of BPMigas?

I have set two main priorities under my authority, which are increasing production and controlling the cost that can be recovered during exploration activities.

I also want to cut the bureaucratic process within the BPMigas, which is notoriously known to be too complicated. I have decided to change the previous system of cross-function with self-supervision. The new system will enable operators to complete one matter in one division, which is tasked to oversee that matter, without having to double-check it with other divisions.

I will put in place self-monitoring for cost recovery in each division, so they don't have to completely depend on the supervision of the financial department, as has been done so far.

How you are going to reverse the production decline?

One of the efforts we will carry out is promoting enhanced oil recovery technology in several aging fields, to maintain the level of production. We also want to optimize the development of idle and abandoned fields by easing the procedures for getting permits.

One thing to remember that this sector has different characteristics compared to other sectors. The oil and gas sector requires long-term investment, which mostly take 5 to 10 years to show results.

If we look at the data on production activities now, these operations come from investment that was put there several years ago.

So, I hope that 2008 can be a turning point for us to increase production, as 13 oil and gas blocks are expected to come onstream this year, producing about 47,100 barrels of oil equivalent per day. Among those fields are Cepu block with an expected daily output of 20,000 barrels per day and Tangguh blocks with a total production of 7.6 metric tons per annum.

Does that mean the country will meet the production target of 977,000 barrels of oil a day this year?

Yes, I hope so. The country's oil production reached 955,847 barrels per day in January, 986,848 barrels per day in February, 985,872 in March and 978,960 in April. We will strive to reach a production of 1 million barrels of oil by the end of this year.

I think the country will not find it difficult to meet this year's oil production target. To try and increase production, I will also expedite the process in submitting the plan of developments (POD) and put on operation (POP) to make it easier for contractors to carry out exploration activities and speed up the production process.

How do you see the public's negative perception of the assessment of the cost recovery and what will you do in the future to fix this?

One thing to remember is that this issue does not only happen in the oil and gas sector. Other fields also experience this kind of excess.

What people don't know is that aside from cost recovery, there are exploration costs, which we don't reimburse if the contractors fail to find reserves. The cost is a lot larger than cost recovery. Cost recovery means nothing compared to other expenses of the contractors.

To make a better cost recovery regulatory framework, what we are going to do is close the loopholes, so that the opportunity for the contractors to get "naughty' and recover all their costs will be smaller.

The new cost recovery policy will be a clear-cut regulation with more details in mentioning what kind of costs can be recovered, not like what exists now ... which only mentions the item Petroleum Operation as one of things that can be claimed back, without explaining in detail what Petroleum Operations are.

So there will be no cost recovery for dental checkups in Singapore and no cost recovery for vacations. We only reimburse costs related to production activities.

I will also set up a special task force to try to map the exploration costs, which costs deserve to be recovered. The task force will work intensively and as soon as their job finishes, I will issue a notification letter mentioning in detail what costs cannot be recovered.

With global oil prices surpassing US$120 a barrel, what are the production split arrangements and will the new contracts include price escalation calculations like the one applied in the Cepu block contract?

We still stick with 85 percent to 15 percent in favor of the government in terms of oil production, and 65 percent to 35 percent in favor of the government in terms of gas production. We think with oil prices hitting new records, such arrangements are still attractive for investors.

About the possibility of including price escalation in the contracts, we have proposed the idea to the director general of oil and gas, and the decision is now in their hands.