Global Oil Slump Leaves State with Increasing Recovery Costs

The fall in global oil prices over the last two years has not only resulted in sluggish national economic development but has also led to a state-revenue deficit in the upstream oil industry. The government now has the responsibility of bearing the consequences of inflated expenses resulting from various cost-recovery agreements signed with oil and gas companies before global oil prices started to decline. 

Amien Sunaryadi, Head of the Special Task Force for Upstream Oil and Gas (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyakdan Gas Bumi– “SKK Migas”), explained that recovery costs throughout 2015 had reached USD 13.9 billion, while state revenues generated by the sector only amounted to USD 12.86 billion.

“Skyrocketing recovery costs have not been followed by an increase in state revenues,” Mr. Sunaryadi added.
 
Mr. Sunaryadi also explained that recovery costs consisted of expenses which, in the past, had been borne by oil-and-gas companies but which now allowed for these companies to apply for a disbursement from the government. Mr. Sunaryadi therefore admitted that the state was now responsible for reimbursing various expenses relating to calculations of current oil revenues.
 
“Government tax revenues are down and ultimately not comparable with the costs which have already been incurred,” explained Mr. Sunaryadi.
 
Nevertheless, Mr. Sunaryadi claimed to have commenced implementation of a number of efficiency measures. These measures involve the trimming of various operational costs, including those relating to engineering renegotiation activities, procurement, construction and installation (EPCI), drilling, and turbo-machinery. According to Mr. Sunaryadi, these cuts have so far led to budgetary savings of over USD 350 million.
 
Kurtubi, a member of House of Representatives Commission VII, expressed his regret that state expenditure relating to oil-and-gas recovery costs now exceeded the revenues generated by the sector. According to Kurtubi, this indicates that SKK Migas is unable to control spiraling expenditure. In order to overcome this problem, the legislator has demanded that the government immediately reorganize and restructure the oil-and-gas sector.
 
“These problems mean that SKK Migas is unable to control recovery costs. Therefore, the government should immediately reorganize internal matters within SKK Migas so that the upstream oil-and-gas sector is no longer under the control of this failing body,” Mr. Kurtubi stated on Wednesday, 6 January 2016.
 
Furthermore, Mr. Kurtubi stressed that a reorganized recovery-cost scheme could be profitable for the country. In fact, Mr. Kurtubi believes that such a scheme could ultimately prove more profitable than the royalty and tax systems, and would allow the government to control oil-and-gas company costs. Therefore, even from the oil-and-gas companies’ perspective, a cost-recovery scheme would prove more favorable, Mr. Kurtubi believes.
 
“A cost-recovery system could be more profitable, whereas the current royalty and tax systems are actually causing a lot of problems and losses for the state,” Mr. Kurtubi declared.
 
However, Mr. Kurtubi also stressed that the management in charge of implementing any cost-recovery agreement must be regularly evaluated, and emphasized that the current SKK Migas management system was not efficient. This is due, among other factors, to the number of rules that have to be followed by the oil-and-gas sector.
 
Moreover, Mr. Kurtubi suggested that some recovery-cost components must be reduced or removed altogether, including the operational costs of oil-and-gas companies. Additionally, Mr. Kurtubi also expressed his hope that the limits of the oil-and-gas production-area blockwould be clarified, as a current lack of transparency means that the state is having to bear the burden of wells which are not yet in operation.
 
“Many wells are not currently operational, however the state is still required to bear the burden of the costs that they incur,” Mr. Kurtubi concluded.