Cost Recovery Debate Hampers Investment

It takes costs to keep pumping oil

Quoted from the BPMIGAS website, the following article should be a big relief for investors as it shows that BPMIGAS is taking long-term impacts into consideration.

JAKARTA – The proposal to cut cost recovery by 15% may reduce the attractiveness of oil and gas investment in Indonesia. The cost recovery reduction may cut exploration costs, which will be followed by a sharp decline in national oil output in the future, BPMIGAS Deputy for Operations Eddy Purwanto said in Jakarta on Friday (08/1).
“It’s valid for the parliament or anybody to want a cut in cost recovery as monitoring here is very important. However, we also have to remember that the average cost recovery in Indonesia is 23% of revenue and if this is cut by 15%, the cost recovery will only be 19%,” Eddy said.
Professor Profesor Ong Han Ling from Bandung Institute of Technology, quoting a study from Johnston, said that the appropriate cost recovery portion in the world is 40 percent. The calculation is based on data that 75% of production sharing contracts in the world have a level of cost recovery of between 40-60%. Johnston said that lowering cost recovery to 20% would be “cruel”.
“If Indonesia continues to force a cut in cost recovery to 19%, there’s a big possibility that Indonesia will be unattractive for investors,” Eddy said.
Eddy said further that if these companies are asked to cut cost recovery to below the normal level, they will automatically cut costs that aren’t directly related to production, such as exploration bills. Indonesia needs US$3-4 billion of investment in exploration to replace pumped reserves, based on an exploration success ratio of 10-20 percent.
“If exploration activities are reduced, the oil and gas industry in Indonesia will surely lag in the next few years,” Eddy said.
With more than 100 years experiences in managing oil and gas resources, Indonesia is one of the most efficient countries in the world, Eddy said. The costs to find and produce oil and gas in Indonesia is among the cheapest worldwide.
“Again, cheap costs and reserve availability aren’t enough to attract investors. It’s everybody’s responsibility to improve the investment climate so that we can depend more on the oil and gas sector to support the state budget,” Eddy said.