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Indonesia To Clarify Oil And Gas Cost Recovery Rules

Monday, February 22, 2010

The Indonesian government is to issue a decree specifying the exploration and development costs able to be recovered by oil and gas companies in the country, but it has emphasized that it will not impose a cap on those recoveries.

As Indonesia’s oil industry has recently seen reduced investment, declining production and falling income tax revenues, the Finance Minister, Sri Mulyani Indrawati, has therefore tried to be clear that the new decree’s objective will be the creation of certainty for investors within the industry’s production-sharing contracts.

Cost recovery by oil companies is an integral part of the initial years of those contracts, and it has been claimed that companies have, in the past, claimed recovery for extraneous expenditures, not related to oil exploration and development.

It is expected that the decree will therefore make clear what operating costs can be utilized to calculate recoveries and tax. The government has already provided a list of non-recoverable costs, including labour costs, and the cost of expatriates and legal and tax consultants.

Sri Mulyani Indrawati has also emphasized that the government will not cap the recovery of allowable expenditure. While there may be a limit on costs recoverable in a single year, allowable expenses would then be able to be carried forward to subsequent years.

The decree can also be expected to make it clear that costs recoverable under the production-sharing contracts will include not only corporate income tax, but also customs and regional taxes.