Regencies suspect markup in oil production costs

Regencies suspect markup in oil production costs

Moch. N. Kurniawan, The Jakarta Post, Jakarta

The Association of Oil and Gas Producing Regencies (FKDPM) has
questioned the calculation of oil and gas production costs by the
Ministry of Finance, saying the costs had been marked up so as to
reduce the regencies' revenues.

"We have data indicating that the production costs of the oil
and gas companies in many areas are lower than the figures
released by the Ministry of Finance.

"We've asked them to clarify, but they seem reluctant to do
so," Drajat Hadiwijoyo, a senior Association official, said.

At least three oil and gas producing regencies -- Indramayu in
West Java, Natuna in Riau and Sidoarjo in East Java -- have
questioned the figures released by the ministry, he added.

For example, based on the association's calculations, the
production costs incurred by the state oil and gas company
Pertamina in Indramayu stood at between US$3.5 and $4 per barrel,
while the ministry had stated the costs at $8.25 per barrel,
Drajat complained.

Last month, the association criticized the ministry for
issuing Decree No. 214/KMK.06/2002 on oil and gas revenue-
sharing, saying the revenue share received by the oil and gas
producing regions was too low at only about 1 percent or 2
percent of the government's total revenue.

Under the intergovernmental fiscal balance law No. 25/1999,
oil producing regions are entitled to 15 percent of the
government's net oil earnings, and 30 percent of the government's
net gas earnings.

Under the production sharing contracts, the government takes
85 percent of the contractors' oil output and 30 percent of their
gas output after production costs have been deducted.

The Association accused the ministry of lacking transparency
and breaking its earlier commitment to include the Association in
determining the split.

At the peak of their anger two weeks ago, the association
threatened to blockade all oil and gas operations across the
country, but it later backed down.

When asked for comments on the production cost issue,
Pertamina upstream director Iin Arifin Takhyan said he would
check out the truth of the production cost calculation by the
Association.

However, he noted that production costs varied between areas,
depending on various factors, including the condition of the
infrastructure in the respective areas. The contractors also took
into account administrative costs in their Jakarta head offices,
and included some prospecting costs in their production costs.

Regarding the Indramayu case, he said, the production costs of
Pertamina's wells in the regency were high because the state firm
also included some prospecting costs in the Java Sea in its
production costs.