Indonesia drops ceiling plan for cost recovery payments

Unable to attract enough investors to develop new oil and gas blocks, the Indonesian government plans to abandon its recently adopted practice of capping the annual cost recovery payment reimbursed to contractors.
"The policy of capping cost recovery is not appropriate. This is not supposed to be capped. We will fix this matter," said Coordinating Economic Minister Hatta Rajasa, referring to plans by the government to reimburse all contractor cost items within the scope of the cost recovery payment rules. "We have corrected this," Hatta said. "The most important thing is not to cap the payment, but how to avoid moral hazard [in the payment]."

Under Indonesia's production-sharing contract regime, Jakarta must refund investors' full exploration costs once fields enter production. However, to head off a potential budget shortfall, members of Indonesia's House of Representatives, urged the government's upstream watchdog BP Migas to reduce the cost recovery given to oil and gas contractors.
"For now, BP Migas should limit the amount of cost recovery," to $ 10 bn from $ 11.05 bn, said Suharso Manoarfa, vice-chairman of the House's budget committee, in a hearing with the government and the central bank.

After allegations of insufficient transparency in the reimbursement process, Indonesia's parliament eventually imposed restrictions on cost recovery payments in 2009, capping the total budget for the scheme at $ 11.05 bn in 2009 and setting the cap at $ 12 bn for 2010.
However, these restrictions recently were singled out as a major contributory factor behind falling investment in the country. As a result, plans were announced by Evita Legowo, director general at the energy ministry, to encourage the finance ministry to abandon the caps.

"We as the player in this business fully support the government's decision," said Budi Basuki, president director of Medco E&P Indonesia.
While the decision to drop the caps may be welcomed by Budi and other members of the country's oil and gas industry, analyst BMI doubts the measure will do anything to improve Indonesia's efforts to attract investment.
"Although this is a step in the right direction, we doubt that it will be sufficient to stem the fall in upstream investment, and we expect the results of the country's next licensing round to be disappointing," said BMI.