IPA: L/C requirement should not be applied to oil, gas exports

By Febry Silaban

The Indonesian Petroleum Association (IPA), in representing the industry, is in communication with the Ministry of Trade, Ministry of Energy and Mineral Resources and upstream authority SKK Migas about a new regulation requiring the use of letter of credit (L/C) payment arrangement for export of oil and gas.

?We have communicated that this L/C requirement should not be applied to oil and gas exports because, the first, most of the crude oil and natural gas export contracts of the IPA members who are the Production Sharing Contractors (PSC) are long term contracts with payment and credit terms, generally via a Trust Account, that have been agreed and approved by the parties and have worked well so far without any payment issues,? President of IPA Craig Stewart told Petromindo.com.

Some of the payments via Trust Account are related to the project financing (loan) that cannot be amended without major implications, according to Craig.

The second, he said, the buyers are generally reputable companies with good credit ratings and therefore are likely unwilling to issue L/C and incur significant additional costs while they have never had any payment default. Some LNG buyers have stated this.

?The third, if the stipulation is imposed to the seller/PSC contractors, this arrangement is unusual in the banking system and will also increase the cost significantly (can be up to 1% of the value of all PSCs export), without additional revenues or benefits and will make the Indonesian oil and gas export less competitive while not all crude oil or natural gas can be absorbed by domestic markets,? he said.

Craig said that the fourth, if crude oil and natural gas exports, which also includes the government entitlement, cannot be done due to non-compliance to Minister of Trade Regulation No 4/2015 on the L/C requirement, it will result in the shut-in of the producing wells which will result in significant financial impact to the contractor and government. Failure to deliver the crude oil and the natural gas to the buyers is also likely to trigger significant damage claims from the buyers.

The fifth, he said, the objectives stated in Regulation No 4/2015 can still be achieved by the existing payment arrangement and through transparent reporting to government that has long been in place under the PSC. SKK Migas and the State Auditors (BPK and BPKP) also regularly audit the PSC books and accounts.

?We feel that oil and gas exports should not be included in this regulation and are in discussions with the government to resolve this issue,? Craig insisted.

Editing by Reiner Simanjuntak