The oil and gas industry has urged the government to review its newly launched gross-split sliding scale scheme to create a more friendly investment climate amid uncertainties surrounding the upstream oil and gas sector. Under the new scheme, the government will be released from its duty to reimburse exploitation costs to contractors during the length of their contracts, forcing companies to carry the burden of these costs themselves.
Many investors have voiced concerns over the new scheme, which they say will make their operations economically unfeasible and eventually make Indonesia’s investment climate less interesting. “Investors will easily decide, whether they want to invest their money here or somewhere else.
That’s why this country has to make itself more competitive,” Indonesian Petroleum Association (IPA) executive director Marjolijn Wajong said during a discussion on Tuesday.
Canadian think tank the Fraser Institute recently released its 2016 Policy Perception -Index, which shows Indonesia sitting at 79"‘ place, out of 96 jurisdictions, with a reserve-replacement-ratio (RRR) of 51 percent.
The ratio means Indonesia is a country with a poor investment climate in the oil and gas sector. “Don’t be shy about changing. The new scheme is not wrong, it’s just that we need to keep innovating [...] so that the investment climate can be more friendly” Marjolijn went on.
By using the gross-split, the profit split between the government and contractors will “slide” up and down. The split will depend on a block’s variables, including the status of the field, location, reservoir depth, reservoir type, amount of carbon dioxide, use of local industrial content and stage of production.
The scheme also includes a progressive split that takes global oil prices into account. These variables will be added to or subtracted from the base calculation, which the new regulation has set at a minimum of 43 percent for companies in oil projects and at least 48 percent in gas projects.
“There has been no new exploration in the past 15 years and many of our unproven oil and gas fields are located in the eastern part, leading to high investment costs,” Institute for Development of Economics and Finance (INDEF) economist Berly Martawardaya said.
“The question is, is the split for such offshore and remote fields enough to attract investors?" Berly said it was important to evaluate the gross-split scheme, especially after it was implemented for the first time in January on the Offshore Northwest Java (ONWJ) oil and gas field operated by PT Pertamina Hulu Energi (PHE), a subsidiary of stateovsmed energy giant Pertamina.
Previously in March, PHE president director R. Gunung Sardjono Hadi said that his side would finish the evaluation of the gross-split scheme and give it to the government before the end of the first half of this year. Gunung said it was hard for the company to bear by itself value-added tax (PPN) and property tax (PBB), which were included in the previous cost recovery scheme.
Moreover, exploration activities have yet to be included within the variable split, creating greater reluctance among investors to explore new fields as a result of the high cost of exploration and uncertain results.
Data from the Upstream Oil and Gas Regulatory Special Task Force (SKK Migas) show investment in exploration activities gradually declined to US$800 million in 2016 from $1.3 billion in 2012.
SKK Migas also named no suitable winners dluring the auction of 11 oil and gas blocks in 2015 and chose only one winner for 17 blocks offered last year. During the 2012 to 2014 period, there were 89 winners in the auction of a total of 50 blocks.
Such a negative trend was also triggered by the free fall in global oil price to below $50 a barrel at present from more than $100 a barrel in 2013, forcing oil and gas companies to tighten their belts.
“The oil price has fallen to less than half, but production costs remain the same ,as it is impossible to cut costs by half when the operation has started,” said Iwan Chandra, president director of PT GE Oil & Gas Indonesia, a local subsidiary of the global technology and services provider GE Oil & Gas.
Iwan said many companies had to face unforeseen challenges, such as unplanned shutdowns within their operations. An unplanned shutdown at an offshore field could cost a company about $3 million and about $150 million if it occurs at a liquefied natural gas (LNG) plant.
Jakarta Post, Page-13, Wednesday, May, 10, 2017
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