Regulatory uncertainty in oil and gas sector must be reduced: IPA?s chairman

Reducing regulatory uncertainty is urgent for Indonesia to revive investment in the country?s oil and gas sector, the Indonesian Petroleum Association (IPA)said on Wednesday.

IPA chairman Chris Newton that the upstream sector was now in decline and no longer making contribution to the country?s economy as oil production was declining and domestic gas supply growth had been stalled by a plethora of regulatory, fiscal and commercial issues.

Oil production, which peaked 10 years ago at some 1.6 million barrels per day, was now struggling to make one million barrels per day.

?State upstream oil and gas revenue peaked in 2000 at around 40 percent of budget revenues and are now at 15 percent,? he said during a workshop in Jakarta.

While the government keeps producing statistics indicating that investment by production sharing contractors has been steadily growing, the reality was quite different, he said.

?Exploration investment has descended to 30 year lows? Development investment is rising. However, a good part of this increase is rising unit costs. Production costs are rising as fields mature and operators face increasing labor costs and government charges etc.,? he said.

There are two key drivers behind the declining trend: structural changes (primarily related to the maturing of the fields and the onset of steep production decline) and regulatory uncertainty.

With regards regulatory uncertainty, Newton said the fact that the government had yet to issue implementing regulations three years after the endorsement of the Oil and Gas Law No. 22/2001 had created substantial legal uncertainty and confusion and discouraged investment in the industry.

The draft regulations were unclear in many areas, leading to confusion, delays and unpredictable interpretation, he said.

There are several clauses in the draft regulations that may cause problems for production sharing contractors (PSC) including those on the domestic market obligation (DMO) of gas producers, the minister?s right to require PSCs? assignments to be offered to national companies, the unbundling of upstream facilities (LNG manufacturing, gas processing facilities etc), and the appointment of third party to sell the government?s share of production.

With regards DMO for gas producers, Newton said that the regulation should make clear that the DMO is not to be applied to contractors who signed their contracts prior to the issuance of the new law and that the regulation should clarify the obligation for new contracts.

He also said the regulation should make clear that assignments to affiliates and other contractors in the same PSC were not subject to offer to a national company.

Also, the regulation should make clear the role of BP Migas as the regulator of upstream facilities to avoid the unbundling of upstream facilities and conflicting jurisdiction with BPH Migas.

Newton also demanded that PSC contractors be given priority to act as the seller of government production share over third parties to avoid conflicts, unnecessary fees and buyer confusion.

Newton also called on the government to clearly define the jurisdiction of BP Migas and BPH Migas to avoid overlap that might cause confusion.

?Downstream regulations and BPH Migas authority should not extend to natural gas processing, storage, marketing and transport activities and facilities that are extension of upstream activities,? he said.

He further said that market forces, rather than BPH Migas, should determine natural gas sales price, pipeline transportation tariffs and the terms of third party access to existing gas infrastructure.

?National Master Plan for Natural Gas Transmission and Distribution Network should be only a reference and not a regulatory instrument,? Newton said.

He also said that BPH Migas should provide clarity concerning fuel oil pricing mechanism, while access to the existing fuel oil facilities should be freely negotiated.

The Ministry of Finance?s draft regulations on tax issued in early 2004 will also potentially cause problems in the oil and gas industry as it is inconsistent with the terms of existing PSCs and place significant and unreasonable new obligations upon PSC contractors, according to Newton.

He also criticized the Minsitry of Manpower Decree No. 234/2003 regulating the working hours and overtime compensation for energy industry workers and the draft law on social and health insurance.

The draft law, he said, ?does not incorporate an exemption in mandatory contribution requirements for companies with existing medical plans and requires contribution for expatriate employees even though it is unlikely such employees will use the insurance,? he said. (Alex)