More incentives needed to lure new investors

JAKARTA. The government’s recent promise to soon settle the fate of several expiring oil and gas contracts will help ease business uncertainties that have often stalled many important projects in the country’s oil and gas sector, observers and industry sources say.

However, they added that such a maneuver alone will not be enough to draw more investments into the sector if several other important issues, such as high-cost problems in the development of new oil and gas fields, are not also addressed.

With falling oil prices, the development of new oil fields would no longer be economically feasible, if the government does not provide incentives to ease the financial burdens, the analysts said.

“Fiscal burdens, such as taxation, on carrying out exploration must be reduced. Licensing problems should also be eased as soon as possible, since it will take 10 to 15 years before we can enjoy the results of today’s exploration,” IPA president Lukman Mahfoedz said.

The new government, which took office in October, is currently working to settle stalled projects in the sector. In a recent development, the Energy and Mineral Resources Ministry also promised to settle the fate of four blocks whose contracts have expired or have nearly expired.

“We are inviting those with nearly expired contracts in the next five years to propose their plans. The faster, the better, because business players need certainty,” Energy and Mineral Resources Minister Sudirman Said noted.

There are currently 17 oil and gas blocks that will start expiring next year until 2019. Out of that total number, the ministry has recently decided the fate of the Gebang block, which will expire next year, and the Offshore North West Java (ONWJ) block, which is due to expire in 2017. The government has also indicated it wants state-owned oil and gas giant Pertamina to become the operator of the valuable Mahakam block in East Kalimantan when that contract expires in 2017.

The government has in recent years been criticized for its indecisiveness regarding the fate of the expiring blocks. Under current regulations, oil and gas contractors are allowed to submit proposals to the government to seek extensions 10 years before the expiry dates. However, there is no deadline for the government to make decisions on whether to extend or terminate the companies’ contracts, creating uncertainty for the firms’ investments.

The current government’s move to provide certainty over the expiring blocks is seen as a positive signal. However, according to analysts, it needs to work on other crucial regulatory issues.

“The challenge will be to continue this momentum by tackling the administrative and fiscal burdens. This is especially pertinent at the moment when exploration and production budgets are under pressure and spending plans are impacted by falling oil prices,” said Andrew Harwood, the upstream manager of Wood Mackenzie for southern and south-eastern Asia.

World oil prices dropped by around 36 percent since June to date because of an oversupply.

The country’s oil and gas exploration and production is carried out by contractors under production-sharing contract (PSC) schemes. The government receives 85 percent from oil and 65 percent from gas production, with the contractors receiving the remainder.

Analysts said that in the current situation, with the fall in oil prices, the PSC system is no longer attractive to investors. They said that although the government reimburses exploration and production costs, the current rate of the production split given to contractors is too small, given the growing risks in exploration activities. (Raras Cahyafitri)