Indonesia ends taxes on oil exploration

Oil and gas director-general Wiratmaja Puja said the government was aiming to remove all taxes on exploration, including a value-added tax on imported goods and a land tax that had been a deterrent to investment since it was introduced in 2010.
“Global exploration (companies) will return enthusiastically,” Puja told reporters yesterday. “Investment will increase.” The government has been trying to revive flagging oil and gas production but investors have been deterred by low global oil prices and regulatory and investment risks in Indonesia.
Indonesia’s crude oil output peaked at around 1.7 million barrels per day in the mid-1990s. But with few significant oil discoveries in Western Indonesia in the past 10 years, production has fallen to roughly half that as old fields have matured and died. Acting energy minister Luhut Pandjaitan had earlier told reporters the new regulation was due to be announced today, and “will definitely be attractive”.
“There needs to be compensation,” he said, referring to the “high risk” in offshore and deep water exploration wells that could cost more than US$100million (Bt3.5 billion) each to drill.
Under the new regulation, the government will provide oil and gas contractors an internal rate of return above 15 per cent , Pandjaitan said.
While the government is scrambling to prevent oil production from falling next year to its lowest level since 1969, it is also under pressure to keep a lid on how much the government is liable for on contractors’ recoverable costs. Those are seen hitting US$10.4 billion in 2017 above a targeted US$8bil this year.
Cost recovery is the amount of money spent on exploration, development and operations that contractors can reclaim from the government after their oil and gas operations start producing.
The government has slashed cost recovery spending with efforts to improve efficiency since 2014, but this could also discourage oil well development and maintenance and constrain its ability to boost output, an official at the industry regulator said in June.
Production costs are typically higher from mature wells.
The industry is a vital part of the Indonesian economy, but its |contribution to state revenue |has dropped from around 25 per cent in 2006 to an expected 3.4 per cent this year, according to |data compiledby consulting firm Pricewaterhouse-Coopers.