Finance Ministry reviewing cost recovery

The Ministry of Finance is reviewing cost recovery counting system applied in the country?s oil and gas industry as the exploration and exploitation costs reimbursed by oil and gas contractors are rising and cutting the government?s revenue, Kompas daily reported on Friday.

Under standard cooperation contracts, the government takes 85 percent of contractors? oil output and 70 percent of their gas output and gives the rest to the contractors. The government?s takes include royalty and taxes payable by the contractors. The oil and gas output is split among the government and contractors after operating costs, including exploration and exploitation costs, are subtracted from gross revenue.

Minister of Finance Sri Mulyani Indrawati said on Thursday that cost recovery had become a ?basket? in which contractors put all costs, including cost components that should not be reimbursed by the government. This has cut the revenue that that government could get from oil and gas.

?Directorate general of taxes has invited various parties in order to get various perspectives regarding the cost recovery. Honestly speaking, we have to make this clear. Under the current circumstances, the government may get less that it deserves,? Sri Mulyani said.

Director general of taxes Darmin Nasution said that while in the past only the state comptroller agency BPKP could audit the country?s oil and gas contractors, now the directorate general of taxes has been also given the right to carry out the audit.

?According to (upstream authority) BP Migas, the audit by the directorate general is not a big issue,? Darmin said.

Darmin said his office would sit together with the Indonesian Petroleum Association (IPA), which groups all oil and gas contractors, to discuss the agreement on oil and gas taxes and with BP Migas on cost recovery counting mechanism.

?We have appointed PricewaterhouseCoopers (PwC) as mediator between the directorate general and IPA. They will not work as an auditor but a mediator,? he said.

The directorate general of taxes? move aims to meet the recent demand by the House of Representatives? Budget Commission to audit the oil lifting by contractors over the period of 2005-2006. The Commission demanded the audit be completed before March 2007.

Meanwhile, BP Migas? chairman Kardaya Warnika acknoweledged that cost recovery claimed by oil and gas contractors had been on the increasing trend in the past two years following the rise in exploitation activities as a result of the increase in oil price.

As a matter of fact, he said, there has been a clear guideline regarding the cost components that could be included or should be excluded from the cost recovery basket.

?However, if (the government) wants to change the rule, we shall follow,? he said.

He said the cost recovery had been rising over the past two years because among others the 300 percent increase in rig leasing costs. This is however not followed by the rise in oil output because the exploitation activities are focused on marginal and old fields which need big investment to keep production from falling. (*)