Indonesia modifies E&P cost-recovery process

Indonesian President Susilo Bambang Yudhoyono met recently with top foreign oil and gas company executives in a closed-door meeting.

Jun 16th, 2008

Eric Watkins
Senior Correspondent

LOS ANGELES, June 16 -- Indonesian President Susilo Bambang Yudhoyono met recently with top foreign oil and gas company executives in a closed-door meeting also attended by Vice-President Jusuf Kalla, Energy and Mineral Resources Minister Purnomo Yusgiantoro, PT Pertamina Pres. Ari Soemarno, and R. Priyono, newly appointed head of oil and gas regulatory body BPMigas

Officials did not disclose the purpose of the meeting, saying only that it focused on "oil-related" issues to enable the president and vice-president to meet with foreign oil and gas firms holding concessions in Indonesia. The meeting coincided with concerns in the country over oil and gas contractors' cost recovery claims to the government.

According to a recent editorial in the Jakarta Post, "Aside from the whopping total cost, a major concern [of cost recovery claims] has been the dubious nature of many expenses, especially when the country is in dire need of higher revenues from the oil and gas sector to help provide better public facilities."

An audit by the Supreme Audit Agency (BPK) published late last year on the 2005 accounts of nine oil and gas blocks (of a total 80) unveiled some $525 million in questionable claims for government refunds under the cost recovery scheme, according to the newspaper. Citing BPK, the newspaper said the refunds were filed by Total E&P Indonesie, ExxonMobil, Chevron, ConocoPhillips, and CNOOC.

"Items claimed for refund ran the spectrum from a Pinocchio DVD to a complicated chain of transactions often involving drilling," it said. According to the BKP report, such expenses reduced the government share of revenue from the oil and gas sector. In 2005, it said, the government received $19.9 billion net take from the oil and gas sector after paying out $7.68 billion in refunds.

While the compensation for questionable items was small compared to the profit, the BPK stressed the impact of "regulation loopholes and reckless supervision by the oil and gas regulator BPMigas" (OGJ, Mar. 24, 2008, Newsletter).

Bureaucracy cut
In April, the newly appointed head of BPMigas, R. Priyono, vowed to cut the bureaucratic processes that oil and gas companies currently must undergo in order to obtain their exploration licenses.

"If they (oil and gas companies) have to go through three or four tables, let's make it just one," Priyono said, adding, "Such a bureaucratic system is simply out of date."

The new system would help BPMigas implement its main task of increasing the country's oil production, which has declined over the past 5 years due to depletion at aging fields and reduced exploration for new ones.

Priyonoi said some positions in the agency will be restructured to improve efficiency, adding that the plan was being negotiated with the energy and mineral resources ministry.

At the time, Purnomo said Priyono also must improve the monitoring of cost recovery, which has come under public criticism for its alleged lack of transparency.

Priyono promised he would ensure that each department had a standardized financial surveillance system to guarantee that cost-recovery funds were well-spent. He also said a new system would be introduced to tighten the cost recovery mechanism, by refunding exploration costs only in producing fields.

According to BPMigas' latest report, the government paid some $8.33 billion to oil and gas producers in 2007 for recovery costs, up 6.4% over the $7.8 billion paid in 2006.

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