Team set up to regulate cost recovery on oil and gas sector

The Directorate General of Taxes, the Finance and Development Supervisory Agency (BPKP) and the upstream oil and gas regulator, BP Migas have agreed to form a joint team with the task of regulating cost recovery in the production sharing contract of oil and gas companies, Bisnis Indonesia reported Thursday.

Director General of Taxes Darmin Nasution said in Jakarta Wednesday that the joint team will soon work to formulate the definition and the regulation on the cost recovery calculation. ?The work is expected to be completed in the first semester of 2007,? he said.

?It is not the right time to ask how the result is. It has taken three months to complete the process of forming the team. Now, the team has been set up and we can start working,? he said.

Darmin said that the forming of the joint team reflected regulators? initial agreement on the definition of cost recovery calculation.

Under the production sharing contract, all of the costs spent by oil and gas contractors since the signing of the contract until the exploitation stage are included into cost recovery to reduce the sharing given to the government.

Cost recovery can be claimed when the mining site has already started production. If the contractor fails to start production, all of the costs are at the contractor?s risk. However, soon the contractor begins with the exploitation stage, all of the costs can be reimbursed. The sharing is set between 85 percent and 15 percent (for oil) after being deducted by cost recovery.

The problem is the regulations on the contract do not explain exactly the limitation of cost recovery, he said.

The mark up of cost recovery can be seen, for example, in the result of an audit by the Finance Supervisory agency (BPK) on PT Chevron Pacific Indonesia related to its cost recovery of power and heating cost which was done in cooperation with PT Mandau Cipta Tenaga Nusantara recently, which allegedly caused state loss of US$1.23 billion.

Aside from that, an increase in the cost recovery can be seen in the lifting of crude oil which is only one million barrel per day, which automatically raises the cost of oil production in Indonesia to US$14.8 per barrel. The cost is much bigger than that in other countries, which is around US$6 per barrel. (*)