Indonesia considers new oil and gas contract system to boost output

[JAKARTA] Indonesia is eyeing a new contract system for oil and gas firms to improve returns and production, government officials said, as Southeast Asia's biggest crude producer overhauls its energy sector to meet growing demand and reduce costly imports.

The former Opec member has been hit by falling oil output, insufficient gas infrastructure and a series of corruption scandals that have led to the downfall of top energy officials. The situation has scared off foreign investors and forced Indonesia to become a major fuel importer.

Newly appointed President Joko Widodo has pledged to restore Indonesia's energy independence, an ambitious target for a country whose domestic crude output has been declining since 1997 and whose reserves have been dropping since 2001.

The existing production-sharing contract (PSC) could be changed to a tax and royalties or other system, Energy Ministry Secretary General Teguh Pamudji told reporters, adding this did not need a parliamentary revision of the oil and gas law.

"There are several alternatives. In the current law there is room for other forms of joint ventures," Mr Pamudji said adding that current contracts would not be changed.

"We must respect the sanctity of contracts." Firms would be provided with an option to adopt a new system when their contracts were due to expire, he said.

According to Kardaya Wardika, who chairs the parliamentary energy commission, a government regulation could be used for different contract structures. Cost recovery is not effective for fields that are already in production, he said.

"In other countries when they extend contracts they don't use cost recovery again," Mr Wardika said.

The current system, where government and contractors'revenue share is split after subtracting recoverable costs, is actually profit sharing, said Djoko Siswanto, a member of the government reform team reviewing permits and business processes in the energy sector.

"We must return it to its real concept; the production-sharing contract," Mr Siswanto said, adding that government revenue could increase as costs are paid by contractors.

Indonesia expects to pay contractors around US$16 billion in recoverable costs in 2015, up from US$15 billion this year.

Both tax and royalties could be adjusted to ensure projects remain economically attractive to investors, he said.

A tax and royalties system would speed up production as firms would no longer need to seek regulator approval for work plans and expenditure as per the PSC system, Siswanto said.

Whether a cost recovery or royalty system was most suitable"depends on how commercially viable (work areas) are," said Indonesia Petroleum Association director Lukman Mahfoedz.

Indonesia's crude output deficit grew to US$27.7 billion in 2013, more than seven times above 2004 levels, the government says, after years of insufficient investment in exploration.

REUTERS