(TheJakartaPost: Monday, July 25 2016)
The government has established a new formula to calculate the nation benchmark crude oil prices, potentially increasing state revenues from the oil and gas sector amid lower-than-expected production.
The change in the Indonesia Crude Prices (ICP),Â however, may be difficult to implement as business players may be reluctant to adjust their prices. Starting from this month, the government will use a new ICP calculation formula that will rely on dated Brent oil price and another benchmark, which would be decided every month by the minister depending on the countrya oil quality and the current global oil price.
It will be at the minister discretion to decide whether the other 50 percent [of the formula] will be based on Platts or RIM, or any other benchmark. It will be evaluated every month until we find the perfect formula, so that we can have one that shows the real oil price, the Energy and Mineral Resources Ministrya oil and gas director general, IGN Wiratmaja Puja, said recently.
The ICP, which is used as a basis to calculate non-taxable income in the state budget, was calculated using references from price agencies Platts and RIM. However, the price difference between the ICP and global crude prices has been significant as of late, prompting the government to brainstorm a new formula.
With the old formula, the ICP sat at an average of US$36.16 per barrel for the first half of the year, while European benchmark Brent and American West Texas Intermediate (WTI) traded at around $47 per barrel so far this year, almost $5 per barrel more than the Indonesian benchmark.
ReforMiner Institute executive director Komaidi Notonegoro said that theoretically, by relying on dated Brent in the new formula, state revenues would automatically increase. However, it might not be as easy to implement owing to the potential reluctance of industry players to make adjustments to the new ICP.
If the market does not want to adjust then there will not be an increase in state income. If the ICP becomes closer to Brent then our friends in the industry must start selling oil at higher prices, because Platts and Rim were much lower. Buyers might not be so happy with the price adjustment, he said Sunday.
Furthermore, he criticized the ministrya decision to evaluate the formula every month, as doing so did not provide sufficient time to observe the effects of the new ICP formula. Komaidi explained that oil and gas contractors might find it difficult to negotiate flexible operating contracts, as a new benchmark might result in a different price every month.
Of course, the government must continuously evaluate it. However, every month is too often, he said.
The government hopes the new formula will bring in higher income, as every $1 increase in the ICP brings in an additional Rp 660 billion ($50.3 million). Oil and gas non-taxable revenues reached Rp 18.46 trillion by the first half of the year out of the total Rp 68.69 trillion full-year target. Meanwhile, oil and gas tax income revenues are targeted at Rp 36.34 trillion.
Oil lifting has remained low despite the lowered target in this years revised state budget. In the first semester, oil production reached 817,900 barrels of oil per day (bopd), while the target in the revised state budget sits at 820,000 bopd.
The low oil price environment has discouraged oil and gas industry players from conducting exploration and exploitation activities, with only $367 million being invested for exploration in the first half of the year, out of the $5.65 billion total investment in the oil and gas sector, data from the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) shows.
TheJakartaPost: Monday, July 25 2016