January 5, 2010 / 10:23 AM / 10 years ago

Indonesia aims to drop oil/gas cost recovery limits

JAKARTA, Jan 5 (Reuters) - Indonesia plans to scrap curbs on a scheme to reimburse oil and gas firms for exploration spending in order to support flagging investment, a senior energy ministry official said on Tuesday.

Indonesia’s cost recovery scheme reimburses oil firms for exploration and production costs, although the billions of dollars paid out have come under political scrutiny at times and the country’s parliament has intervened to bring in limits.

“Investors say the fall in oil production is the impact of capping cost recovery,” Evita Legowo, director general oil and gas at the energy ministry, told reporters.

“I will talk to finance ministry officials to discuss how to abandon the cost recovery cap.”

Indonesia expects spending by contractors of oil and gas exploration in the country to fall to $2.3 billion this year, down about 15 percent from an estimated $2.7 billion in 2009, the country’s oil watchdog has said previously.

Legowo said the planned cap on cost recovery this year was $12 billion for upstream oil and gas operations.

Chief economics minister Hatta Rajasa was quoted as saying the policy of capping cost recovery was not appropriate.

“This is not supposed to be capped. We will fix this matter,” Rajasa was quoted as saying by the Jakarta Post daily on Tuesday.

Crude production, which was about 1.5 million barrels per day (bpd) in the 1990s, has nearly halved and Indonesia has become a net importer of crude oil in recent years.

Major global resource firms such as Chevron (CVX.N), ConocoPhillips (COP.N) and Total (TOTF.PA) operate in Indonesia, but the country has struggled to attract fresh investment and to develop new fields.

Many of the existing fields are ageing and plagued by sagging output.

Amir Hamzah, an official at energy watchdog, BPMIGAS, said the fall in exploration spending by oil contractors would hit future production.

“Many investors now are taking a wait-and-see attitude due to the cost recovery issue. This is really bad for Indonesia’s oil and gas industry in future,” Hamzah said.

Indonesia produced 949,100 bpd of crude oil and condensate in 2009, missing a target of 960,000 bpd in the year.

An energy ministry official, who declined to be identified, said previously a target of producting 965,000 bpd of crude and condensate this year would be very difficult to achieve since output from older wells was falling about 10-15 percent per year. Indonesia has offered new exploration rights and has said it will provide new incentives to oil and gas investors, including more favourable tax treatment and a better production split, in order to encourage exploration.

But industry insiders have said the incentives may not be sufficient, particularly since many of the unexplored fields are in remote locations and often in deep water, and so expensive to develop. (Editing by Ed Davies and Clarence Fernandez)

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