JAKARTA (TheInsiderStories) - Indonesia to remodel the Government Regulation (PP) No. 79 of 2010 on Cost Recovery to bolster investment in the upstream’s oil and gas sector. This regulation governs the operating costs that can be recovered (cost recovery) by the oil and gas producton sharing contractors (PSCs) and taxation for the upstream oil and gas sector industry.
Finance Minister Sri Mulyani Indrawati said that the revision of the Government Regulation will ultimately reduce costs of investors and oil-and-gas industry players and therefore, lifting their internal rate of return (IRR). “If they are operating efficiently, the IRR could be more than 15.16 percent. This highlights the difference between the revised regulation and the previous one (PP No. 79),” she said.
Minister Sri Mulyani asserted that the revision is aimed to boost Indonesia’s competitiveness in the oil and gas investment sector. The revision of the government regulation was made following a decline of exploration activities in the past few years as well as a move by the government to boost oil and gas production for the long run.
Oil and gas industry players have long been calling on the government to scrap taxes on exploration activities as companies are not making money during exploration activities and only recover their costs in years to come, only if they discover oil and gas reserves.
The revision focuses on five points of the Government Regulation (PP) No.79/2010 on recoverable operating costs and income tax treatment in upstream oil and gas. The cost recovery bill is expected to be handed over to the State Secretariat soon before being signed by President Joko “Jokowi” Widodo.
Finance Minister Sri Mulyani Indrawati revealed that the first revision point is related to the profit sharing concept for the State, known as the sliding scale.
Sri Mulyani explained that the new concept would allow the government to enjoy profits generated by oil and gas cooperation contract holders (PSCs), in case of a dramatic increase in oil and gas prices.
The second point is a requirement to provide tax incentives during the exploration period, such as those of import tax and duty, as well as domestic and property taxes. The third point is an assurance for investors that they will be provided with tax incentives during the exploitation period.
Another point is related to the removal of income tax collection for cost sharing related to utilizations of state-owned goods in the upstream oil and gas sector and head office overhead cost allocation. The final point is related to the assurance of non-fiscal facilities, such as investment credit, accelerated depreciation, and domestic market obligation (DMO) holiday.
The Finance Minister was accompanied by acting Energy and Mineral Resources Minister Luhut Binsar Pandjaitan.
In the past, oil and gas industry has become a main source of revenues for the government’s State Budget, contributing around Rp300 trillion annually. However, the recent collapse of oil price has also reduced the contribution of the sector to the State Budget. (*)