IPA calls on government to continue respecting contracts
Monday, April 19 2010 - 06:47 AM WIB
IPA Chairman Ron Aston said in a recent interview with Petromindo.Com that as upstream investment is long-term in nature and what investors need is certainty. In view of the declining oil production and increasing domestic gas consumption, Indonesia needs to attract more investment in upstream sector.
?Any move to change the existing contracts will send a negative signal to existing investors and potential future investors and could lead to legal conflicts. The most important thing for investors is certainty over investment return. Once a contract is signed and established, both parties should respect the contract. If there are ideas that a new government law can overrule the contract, it should be by mutual consent.
?Maintaining the investment attractiveness is vital for Indonesia?s oil and gas sector. The government should ensure that the terms are competitive and prospective investors will find it attractive to come to Indonesia,? he added.
He added that investors are concerned on the government?s plan to impose cost recovery regulation in the form of Peraturan Pemerintah or PP (Government Regulation).
?I know the government has a responsibility to issue a PP covering cost recovery. Hopefully, it would not impose any cost recovery capping and retroactivity otherwise it will be a negative move in the eyes of investors. If, however, the regulation just focuses on administering cost recovery as BPMIGAS does, then it will be better received by investors. Existing contracts should not be changed retroactively and capping should not be introduced to existing contracts? he said.
Aston said there could be two responses from investors on the proposed Cost Recovery PP. ?One is that they will examine their contract and if they think the regulation overrules their contract, then it could lead to legal dispute. Second it would be regarded as a negative move in terms of improving the investment attractiveness. If the regulation is retroactive and imposes capping then the future investors will say hm?no. I can?t make economic judgment with certainty if I see somewhere down the road contract is reversed.?
?Investment in oil and gas is long term, perhaps for 20 years or more. The level of investment is huge, possibly running into billions of dollars. Investors need to know for certain that the return of their investment is guaranteed. It might be high return or a low return, the market will essentially determine the return they will get. If existing contracts are amended, that (will) introduce uncertainty. They simply won?t come in the first place.?
He further said that if the government introduced a cost recovery cap in the PP there will also be risk that current oil and gas production would be reduced. ?It will reduce production. If the level of expenditure is reduced then operators won?t be able to deliver their agreed levels of production, it is as straightforward as that. The idea of imposing a limitation on cost recovery will be counterproductive to increasing production.?
The government is in the final stage of drafting Cost Recovery PP in a move to tighten control over reimbursable costs by PSC contractors. Some government officials said that the PP is aimed to eliminate cost mark-ups by contractors.
BPMIGAS Chairman R. Priyono, who oversees upstream oil, gas operations in Indonesia has criticized the PP as ?excessive?. (alex/benget)