Govt cuts tax obligations for oil and gas companies

In a bid to bolster oil production at a time of dwindling reserves, the government is trimming down the tax obligations of petroleum companies. Oil and gas contractors would be exempt from import duties, value-added tax (PPN) and luxury-goods sales tax as of April this year under the new Finance Ministry’s regulation PMK 70/2013. Upstream regulatory task force SKKMigas’ risk management and tax chief Bambang Yuwono said over the weekend that the new regulation would be applied to companies actively exploring new sites as well as contractors at the exploitation stage. “The new regulation is expected to boost exploration activities and production,” he said in a statement. Indonesia quit the Organization of Petroleum Exporting Countries (OPEC) in 2008 after aging oil fields and a lack of large, profitable reserves meant it was no longer a net importer. In the first-three months of this year, the regulator claimed average daily oil output reached 830,900 barrels per day (bpd) — much less than the 1 million bpd produced in the early 2000s. In addition, investment for the sector remains low. Of the US$26.2 billion investment expected this year, only $2.7 billion would come from a total 200 contractors for the exploration and drilling of 75 oil and gas wells. Given this fact, SKKMigas secretary Gde Pradnyana said the government’s most recent move would be appreciated. “The risk of failure in oil exploration is very high. Therefore, they [the investors] should not be burdened further with taxes,” he said. Research by the Wood Mackenzie Group earlier this year showed that Malaysia had surpassed Indonesia in 2012 as the key player in the upstream hydrocarbon industry in Southeast Asia. The Edinburgh-based global energy oil and gas research specialist noted that while Malaysia discovered 1.4 billion barrels of oil equivalent (boe) last year — or 72 percent of the total discoveries in the region — Indonesia only discovered 13 million boe of new reserves in 20 new oil and gas fields — a mere 14 percent. This year, SKKMigas plans to drill 258 exploration wells, 1,178 development wells and 1,094 work-over wells in addition to a 18,751-kilometer 2-D seismic survey and a 22,298-square-kilometer 3-D seismic survey. Last year, only 80 new wells were discovered, far below the annual target of 250. Only 51 turned out to be promising — continuing the trend of previous years. In addition, SKKMigas proposed that the government lowered the average daily output target to 840,000 bpd from the previous target of 900,000 bpd under the 2013 state budget. With the Cepu block in Central Java (operated by US-based ExxonMobil) projected to produce 165,000 bpd by October 2014, the effort to boost production to 1 million bpd is more realistic. Separately, the Indonesian Petroleum Association (IPA) deputy chairman Sammy Hamzah said the association appreciated that the government had shown commitment to the oil exploration sector. Sammy, also president director of coal bed methane (CBM) contractor PT Ephindo, said the previous tax obligations — on top of high costs and the risk of exploration activities — had further lowered investment.