Minister issues regulation on upstream investment recovery

Minister of Energy and Mineral Resources Ignasius Jonan has issued a new Ministerial Regulation No 26/2017 on the mechanism for recovery of investment cost made by upstream oil and gas contractors.

The ministry?s Directorate General of Oil and Gas said in a statement Tuesday that the new regulation, issued on March 29, requires new contractors of an oil and gas block to cover the unrecovered investment cost of the previous contractors.

Deputy Minister of Energy and Mineral Resources Arcandra Tahar said separately that the new policy was made to help encourage contractors to maintain production level toward the end of their contracts.

He said that contractors have tended to trim down investment, thus cutting production, toward the end of their contracts due to uncertainty over recovery of their investment at the end the contracts.

The new policy comes as the government starts applying the recently introduced gross split mechanism in new oil and gas production sharing contract, where investment made by the contractors will no longer be reimbursed by the government. In the past, the investment cost was reimbursed by the government via the so-called cost recovery mechanism.

The directorate general said in the statement that in the case where the existing production contract is extended, the unrecovered cost of the contractors will be taken into account in their split of the output under the new contract using the gross split mechanism.

?In the case where the production sharing contract (is extended) and there are new operators aside from the previous ones, then the new operators will also have to bear the unrecovered investment proportionately with the size of their participating interests,? the directorate general said.

The statement said that the contracts signed before the issuance of the new regulation are also affected.

Meanwhile, Executive Director of the Indonesia Petroleum Association (IPA) Marjolijn Wajong was quoted by Bisnis Indonesia as saying that the new policy will only be attractive for assets which still offer good economic value. ?If the economic value is good, it can be accepted by the new contractors, but if the economic value is poor, it would be difficult to be accepted by the new contractors.?

The government has assigned eight oil and gas blocks whose contracts are set to end in 2017 and 2018 to state-owned oil and gas firm PT Pertamina. Company Upstream Director Syamsu Alam said Pertamina will allocate funds to cover recovered investment costs made in the blocks.

Editing by Reiner Simanjuntak