IPA?s resolution on the need for exploration and production incentives

Indonesia has developed a flourishing economy and has become a key driver for regional growth. However, some challenges in the oil and gas industry remains, including legal/regulatory and policy barriers during exploration phase. Resolving these issues will allow Indonesia to achieve its ambitious targets for economic growth, the Indonesian Petroleum Association (IPA) said in a statement on Friday.

Given that increased exploration ultimately leads to increased production, mechanism to promote exploration activities?such as incentives and barriers removal?would be beneficial to all parties. Exploration is at a dramatically low activity level in Indonesia, with very few wild cat wells drilled in recent years and with no significant discoveries. This situation is now even more serious with the dramatic drop of oil prices in 2014 and 2015. The Indonesian oil and gas industry is currently in a very critical phase, and Indonesian oil production has been continuously declining for the last few decades while consumption has steadily increased.

PSC contractors pay all costs during the exploration period, yet the vast majorities of PSCs do not proceed to exploitation and never achieve cost recovery. As such, the difficulties PSC contractors face in relation to permits and approvals are particularly acute during the exploration period. Approval processes and procedures during the exploration period should be streamlined significantly.

A clear incentive would be to allow one company to hold more than one PSC during the exploration period; the same PSC contractor could conduct exploration across multiple contract areas. Upon a commercial discovery, the relevant PSC would be transferred to an affiliate (establishing the ring fence).

For PSCs that have progressed to the exploitation period, IPA recommends that there be no further ring-fencing inside the contract area; further exploration would be cost recoverable from existing production.

The IPA believes that the oil and gas industry in Indonesia needs a step change. During past decades, the oil and gas industry in Indonesia has moved towards becoming a much more regulated industry, but is handicapped by regulations issued from various ministries which are not necessarily coordinated and aligned with each other. This situation has led to several difficulties in executing exploration work programs. In order to help encourage exploration, the IPA urges the Government of Indonesia to remove these difficulties such as land access, indirect taxes, relinquishment process and permitting.

Poor exploration performance in Indonesia during past decades can be attributed to several factors such as complex geology, limited data, the regulatory system and unattractive fiscal terms. Exploration opportunities in Indonesia are now primarily located in remote areas such as in Eastern Indonesia where there is minimal infrastructure as well as minimal supporting facilities and services. These factors result in expensive and lengthy exploration and production work programs.

?Today, Indonesia ranks among the least attractive countries for oil and gas investors,? said Marjolijn Wajong, IPA?s Executive Director. ?In the current oil price setting, Indonesia is increasingly competing for scarce capital with other countries, and the fiscal terms being offered are very important when comparing project opportunities, especially for high risk projects.?

In order to provide a certainty as to how PSC revenues would be shared between the government and the PSC Contractors, PSCs were agreed on a post-tax basis; the state revenues came from its portion of equity petroleum plus corporate and branch profit tax. In order to maintain this fundamental agreement, the government party has to assume-and-discharge all other taxes. The IPA believes that this principle should be reinstated for both the exploration and the exploitation period.

Better tax certainty would be obtained if the government implemented the tax regime for the upstream sector through a special regulation (lex specialis). Furthermore, tax incentives would help to promote exploration and production.

These incentives also show beneficial effects for the investors with respect to value creation and return of investment?thus, allow them to justify higher exploration activity and development investment in Indonesia.

?Therefore, the IPA urges the Government of Indonesia to introduce all of the above exploration incentives at the earliest possible stage for new PSCs in the next licensing rounds as well as for existing PSCs in Indonesia,? Wajong concluded.

Editing by Johannes Simbolon