Report: Indonesia set to introduce fiscal changes to offset low prices and regulatory uncertainty

Indonesia plans on introducing new and attractive fiscal terms in contracts beginning 2016 to combat regulatory uncertainty and weak oil prices, says a new GlobalData report.

The proposal comes at a time when oil companies operating in Indonesia’s hydrocarbons sector have resorted to selling their assets and exiting the country owing to uncertain regulations coupled with lack of market, and higher than expected costs.

Titled, ‘Indonesia Upstream Fiscal and Regulatory Report, Low Prices Prompt Fiscal Changes but Regulation Remains Uncertain‘, the report discusses the authorities’ bid to boost development and attract investment against low oil prices.

New incentives, including production sharing agreements (PSAs) have been proposed to allow exploration and development to continue without delays. It is expected that the incentives will be implemented in contracts awarded in the near future, while in the middle and long-term, the country may have to make adjustments to the incentives, subject to price increase.

The exploration periods will be extended, as per the proposal, to allow companies to retain ownership of their licenses during low oil prices, even if they default on their exploration commitments. Another incentive gives companies the liberty to transfer their exploration activities to a different contracted area, as well as opting for a similar but different activity.

Incentives have also been proposed to cover licenses already in production during the oil price slump. Producing acreages will be exempted from First Tranche Petroleum and domestic market obligation during this time.

The report also highlights that a dynamic production sharing split will replace the earlier static one.

However, GlobalData analysts note that regulatory uncertainties due to political disagreements will be a concern for the industry.

They refer to the example of SKK Migas, which was established in 2013 to replace the dissolved BPMigas as government’s representative for PSAs until a new law could be established, and the eventual failed attempts to amend the Oil and Gas Law due to political disagreement.

Given the current political scenario in the country, chances for a possible new law to survive are, however, bleak.