Indonesia changes rules for oil, gas cost recovery

Indonesia, responding to criticism of current cost recovery procedures in the oil and gas industry, has drafted rules that will reduce national expenditure by redefining some costs as downstream instead of upstream.

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Apr. 21 -- The Indonesian government, responding to criticism of current cost recovery procedures in the oil and gas industry, has drafted new rules that will reduce national expenditure by redefining some cost components as downstream instead of upstream.

"We hope that this will decrease spending on cost recovery in our state budget," Indonesia's energy and mineral resources minister Purnomo Yusgiantoro said of the new rules.

Among other changes, natural gas transmission pipelines and LNG export terminals will be redefined as downstream components and no longer deductible as upstream expenditures.

Officials said the changes will become part of new regulations that have been drafted for the oil and gas industry, which are being held up pending "synchronization" with other regulations, including taxation laws.

The country's cost of recovery mechanism formerly allowed oil and gas contractors to reclaim expenses on certain upstream activities from the government after the start of production.

The changes come in response to critics who questioned the program's transparency and said it was prone to abuse.

In 2008, the government paid oil and gas contractors around $9.35 billion under the scheme, up $650 million from the $8.7 billion paid out in 2007.

The government and Indonesia's House of Representatives have agreed to cap cost recovery spending at $12 billion this year, largely by redefining upstream costs as downstream.

In March, six domestic and international oil companies operating in Indonesia paid up to $167 million to the country's upstream watchdog BPMigas to settle cost-recovery claims.

The funds were paid as part of efforts by the country's Corruption Eradication Commission (KPK) to help prevent the possible abuse of cost-recovery claims and are being held in one of Indonesia's national banks pending official inquiries.
ConocoPhillips paid $104.17 million, while several Indonesian firms paid the remainder: state-owned Pertamina, $45.52 million; Medco Energi, $10.89 million; Kondur Petroleum, $5.21 million; and Kalrez Petroleum and Kangean Energy Indoensia each less than $1 million.

At the time, officials said the KPK would continue giving recommendations on upstream oil and gas management, including cost recovery, asset management and investment credits in a bid to prevent abuse and potential financial losses to the government.

Contact Eric Watkins at hippalus@yahoo.com.

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