The government is rushing to complete a regulation that will allow it to grant companies additional tax and non-tax incentives aimed at boosting oil and gas exploration. The Energy and Mineral Resources Ministry’s oil and gas director general, IGN Wiratmaja Puja, said the draft revision of Government Regulation No. 79/2010 on cost recovery and taxation in the upstream oil and gas industry would be submitted at the end ofthe year and was expected to be issued next year.
The revised version will include both .tax and non-tax incentives, in a bid to revive the sluggish upstream sector. It will apply to both new contracts and existing ones, as long as the incentives do not violate any terms agreed upon in the contract, according to Wiratmaja. The terms and conditions in existing contracts will be respected and remain unchanged,” he said. The planned incentives will exempt oil and gas companies from paying import value added tax (VAT), import duties, domestic VAT and property tax and waive other taxes during the exploitation phase.
Meanwhile, the non-tax incentives are set to include clearer rules on investment credit and the domestic market obligation (DMO) holiday. The DMO is a requirement imposed on firms to allocate a certain amount of oil or gas output to meet domestic demand. The governments effort to increase exploration work appears to have a valid basis. By the end of November, only US$750 million of the industry’s $10.4 billion in total investment this year was put into exploration. Only 20 exploration wells have been drilled this year, with 11 more still ongoing.
Companies’ reluctance to engage in exploration stems from the steep drop in global crude prices in the past two years. According to Wood Mackenzie’s Asia Pacific research, global investment in exploration and production activities, in line with the price trend, will climb to $ 450 billion in 2017, up 3 percent from this year. In spite of this bright outlook, the energy consultancy predicts that Indonesia will not benefit from higher crude prices as well as bigger global investment due to the country’s notorious reputation for rampant red tape.
Confirming these estimates, Up-stream Oil and Gas Regulatory Special Task Force (SKK Migas) chief Amien Sunaryadi said the “approved number of exploration wells to be drilled next year will be less- than those proposed, because of the uncertain global outlook.” SKKMigas data show that only 25 exploration wells will be drilled next year, compared to the 35 initially proposed, while the country’s oil reserves will decrease by around 0.65 billion stock tank barrels a year due to aging existing wells.
Revising the government regulation is not the only means by which the government hopes to whet investors’ appetite. The Energy and Mineral Resources Ministry is working on a ministerial regulation that would allow new oil and gas contracts to use a gross-split sliding scale instead of the current cost recovery system.
Unlike cost recovery, a gross-split scheme will not involve reimbursement from the government. The profit scheme will depend on several factors, including the type of technology used, the volume of production and global oil prices. However, Energyand Mineral Resources Minister Ignasius Jonan vehemently denied that the revision would reinstate the much-sought- after “assume and discharge” system, which had been replaced in 2010 by cost recovery - the reimbursement scheme for oil and gas production and exploration.
Responding with doubt, the Indonesian Chamber of Commerce and Industry’s (Kadin) deputy chairman for the oil and gas sector, Bobby Gafur Umar, said many oil and gas players were concerned about how the government would implement incentives in the system. “Minister Jonan is very clear in that. They [oil and gas contractors] have to be given incentives to increase their split. This is very interesting. However, we have to see the practicality, and this means that the plan of development has to be designed in such detail that we even know how much local content is used. However, even this is difficult,” he said.
Jakarta Post, Page-13, Friday, Dec,23, 2016
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