Govt. Limits Scope of Recoverable Upstream Investment Costs during Cooperation-Contract Transition Periods

Less than four months after the issuance of Ministry of Energy and Mineral Resources Regulation No. 26 of 2017 on the Mechanism for the Recovery of Investment Costs for Upstream Oil-and-Gas Business Activities (“Regulation 26/2017”), [1] the government has now issued Ministry Regulation No. 47 of 2017 (“Amendment”) as an amendment to Regulation 26/2017.The Amendment clarifies a number of ongoing ambiguities as regards the recovery of investment costs by upstream oil-and-gas contractors (“Contractors”) during cooperation-contract transition periods. This Amendment also addresses the subject of uncovered investment costs which were incurred prior to the issuance of the Amendment. [2] Investment CostsContractors are obliged to maintain equitable production value within a given working area throughout the relevant cooperation-contract period. In order to fulfill this obligation, Contractors are required to make the necessary investment within the working area in question. [3] Upon making the relevant investment in their working area, Contractors will then be entitled to recover their investment costs (“Investment Costs”).The Amendment redefines Investment Costs as any capital investment which is paid by contractors in order to maintain the equitable production value of a given working area during the final period of a cooperation-contract which has been approved by the Special Task Force for Upstream Oil-and-Gas Business Activities (“SKK Migas”). [4] This definition differs significantly from the one set out under Regulation 26/2017, which defines Investment Costs as any costs which are incurred during the undertaking of the relevant upstream activity, as stated in the approval of the relevant plan of development and/or working program. [5] This now obsolete definition resulted in a massive amount of Investment Costs being claimed from the government, as Contractors were claiming Investment Costs which were incurred through the entirety of their upstream oil-and-gas activities.Cost Recovery in the Event of DiscontinuationIf the government decides to discontinue cooperation contracts with existing Contractors and appoints new Contractors in order to manage certain working areas, then the recovery of the relevant Investment Costs will be undertaken by the newly appointed Contractors. It is important to note that new Contractors may also be held responsible for settling various other Investment Costs, as determined by SKK Migas. [6] Such Investment Cost recoveries will be counted as the operational costs of the newly appointed Contractors and be can be used as the basis for an income-tax reduction under the relevant Gross-Split Scheme cooperation-contract with the government. [7] The Amendment also limit the type of Investments Cost that can be recovered in the event that cooperation contracts between Contractors and the government are discontinued, including: [8]