Upstream oil and gas investors are still hesitant to fully embrace the government’s revised gross-split scheme as questions on taxations remain unsettled. The recent amendment to the scheme includes greater incentives for contractors in the division of profit splitting with the government.
While the new rule - namely Energy and Mineral Resources Ministerial Decree No. 52/2017 stipulates that operational costs disbursed by contractors may contribute to the amount of taxes they must pay, it does not specify taxation methods. With such a flaw, the Indonesian Petroleum Association (IPA) has called on the government to clarify the matter.
IPA president Christina Verchere said that while investors were extremely pleased with the changes made by the government, uncertainty over the tax issue prevents them from committing to the scheme.
“The IPA [urges] the government to be cautious over creating more uncertainty as it could counter all the good work done to improve the gross-split mechanism,” she said. “In the end, gross split and taxation impact investor economics.”
Introduced early this year, the gross-split scheme replaces a cost recovery scheme that requires the government to reimburse exploration and exploitation activities conducted by investors.
In a change to the former arrangement, the new scheme has allowed the investors to obtain a base split of 57 percent and 52 percent for oil production and gas production, respectively, which can be adjusted according to the characteristics of the oil or gas field.
The revision is crucial as Indonesia has been grappling with depleting reserves. Official data shows that proven crude oil reserves in the country dropped to 3.3 billion barrels last year from 3.69 billion in 2013. Moreover, proven gas reserves only reached 101 trillion cubic feet (tcf) in 2016 from 102 tcf three years prior.
Investment in exploration activities, however, were still insignificant, with last year alone seeing only US$ 800 million, down from $1.3 billion in 2012. Responding to the industry’s concerns, Energy and Mineral Resources deputy minister Arcandra Tahar said his office was working to settle the concerns regarding taxation.
However, the rule will likely be similar to Government Regulation (PP) No. 27/2017 on taxation under cost recovery which provides the minister with the authority to determine the gross-split sliding scale in a cooperation contract, scrap domestic market obligations (DMO) for investors with approval from the Finance Minister, as well as fiscal incentives.
Arcandra further said that the government was more than open to suggestions from the IPA, and the Finance Ministry had even invited the latter to discuss its concerns this week.
"The Finance Ministry has invited the IPA to a dialogue on Tuesday to discuss proposals, ideas and input from the Energy and Mineral Resources Ministry” he said.
World Bank mining specialist Bryan C. Land commended the changes the government had made, but underlined the issue of implementation, which might be trickier than initially projected.
Moreover, there was a possibility that contract renegotiations would be necessary after submitting the plan of development (POD) because of the unique economics of each field.
“What I would stress is that while its fiscal aspects partly change, other non-fiscal aspects are veryimportant [.......] Oil companies have questions on ‘what-ifs,”’ Land said. "So, the more those can be resolved, the better it will become and it is the same challenge for every country. What-ifs create uncertainty”
Jakarta Post, Page-7, Monday, Sept 11, 2017.
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