Regencies suspect markup in oil production costs

The Association of Oil and Gas Producing Regencies (FKDPM) has questioned the calculation of oil and gas production costs by the Ministry of Finance, saying the costs had been marked up so as to reduce the regencies' revenues.

"We have data indicating that the production costs of the oil and gas companies in many areas are lower than the figures released by the Ministry of Finance.

"We've asked them to clarify, but they seem reluctant to do so," Drajat Hadiwijoyo, a senior Association official, said.

At least three oil and gas producing regencies -- Indramayu in West Java, Natuna in Riau and Sidoarjo in East Java -- have questioned the figures released by the ministry, he added.

For example, based on the association's calculations, the production costs incurred by the state oil and gas company Pertamina in Indramayu stood at between US$3.5 and $4 per barrel, while the ministry had stated the costs at $8.25 per barrel, Drajat complained.

Last month, the association criticized the ministry for issuing Decree No. 214/KMK.06/2002 on oil and gas revenue-sharing, saying the revenue share received by the oil and gas producing regions was too low at only about 1 percent or 2 percent of the government's total revenue.

Under the intergovernmental fiscal balance law No. 25/1999, oil producing regions are entitled to 15 percent of the government's net oil earnings, and 30 percent of the government's net gas earnings.

Under the production sharing contracts, the government takes 85 percent of the contractors' oil output and 30 percent of their gas output after production costs have been deducted.

The Association accused the ministry of lacking transparency and breaking its earlier commitment to include the Association in determining the split.

At the peak of their anger two weeks ago, the association threatened to blockade all oil and gas operations across the country, but it later backed down.

When asked for comments on the production cost issue, Pertamina upstream director Iin Arifin Takhyan said he would check out the truth of the production cost calculation by the Association.

However, he noted that production costs varied between areas, depending on various factors, including the condition of the infrastructure in the respective areas. The contractors also took into account administrative costs in their Jakarta head offices, and included some prospecting costs in their production costs.

Regarding the Indramayu case, he said, the production costs of Pertamina's wells in the regency were high because the state firm also included some prospecting costs in the Java Sea in its production costs.(*)