Sri Mulyani said a sliding scale concept is proposed to be added to Government Regulation No. 79/2010 meaning that the government will receive a higher share of revenue when the oil price climbs, but will share the loss in case the oil price plunges and - in addition - scraps various taxes. She added that a revision is needed as the existing legal framework discourages investment in oil and gas exploration. This is one of the main reasons why Indonesia's oil production realization has been on the decline for the past 20 years. If the current trend continues, then Indonesia may only produce 400,000 barrels of oil per day (bpd) in 2020, from around 834,000 bpd in 2016.

The existing 2010 regulation requires investors to pay added-value tax, land tax, import duties as well as various levies charged by regional governments during the exploration phase. Reimbursement can be obtained once the oil and gas company starts producing (production phase). However, this implies that the oil and gas company would lose a lot of money in case it fails to find oil and gas reserves. As such, investment in oil and gas exploration in Indonesia - where the average success rate is estimated at 39 percent - entails big financial risks. By reducing the financial risks, Indonesia wants to attract more investment in oil and gas exploration, hence causing a multiplier effect within the economy.

Fiscal Incentives Proposed to Revised Government Regulation No. 79/2010:

  • Scrap taxes in the exploration phase: VAT, import, and land tax
  • Scrap taxes in the production phase: import, and land tax

Non-Fiscal Incentives Proposed to Revised Government Regulation No. 79/2010:

  • Costs for exploration in an area that is part of one working area can be reimbursed through the cost recovery scheme
  • Investment credit; investment made by the oil and gas contractor will be reimbursed by the Indonesian government (including interest payment)
  • Domestic market obligation; contractors will not have to comply with mandatory sales to the domestic market for a specific period
  • A faster depreciation calculation to reduce contractors' costs

However, in a hearing on Thursday (22/09) the House of Representatives (DPR) and Ministry of Energy and Mineral Resources agreed to slash the government's cost recovery budget (a scheme for the reimbursement of exploration and production costs to oil and gas companies) in the 2017 State Budget. A lower budget allocation is regarded an encouragement for oil and gas companies to enhance efficiency. However, this move could also discourage investors and can be taken as an example of conflicting directions uttered by separate ministries.

Indonesia Crude Oil Production 2009-2016:

Year Production
2016 834,000 bpd¹
2015 786,000 bpd
2014 794,000 bpd
2013 826,000 bpd
2012 860,000 bpd
2011 900,000 bpd
2010 945,000 bpd
2009 949,000 bpd

¹ oil production January-June 2016
Source: SKKMigas