What Business in the World does not have Cost Recovery?

Oleh John Karamoy 15 Agustus 2016

“For oil companies, there are only two revenue streams, and both are in barrels. One, oil barrel costs. Two, oil barrel profits.“

John Karamoy
Donang Wahyu | Katadata

Oil and gas businesses that are members of the Indonesian Petroleum Association (IPA) blame Government Regulation No. 79/2010 (Regulation) for slowing investment in the upstream oil and gas sector. The Regulation regulates cost recovery, or government repayment of costs and income tax in the upstream oil and gas industry.

Because it is considered to be disrupting the investment climate, there have been calls for the Regulation to be revised. However, oil and gas business practitioner John Karamoy, says there is nothing wrong with the concept of cost recovery. Every business in the world adopts the cost recovery concept.

Speaking to Katadata journalists Maria Yuniar, Metta Dharmasaputra and Miftah Ardian, the former President Commissioner of Medco Energy International explained the very concept he helped develop for the oil and gas business in Indonesia. “The problem is that someone else is handling cost recovery,” John said at his house on Thursday (4/8).

What do you think about the suggestion to revise the regulation on cost recovery? Is it really necessary?

Several government regulations are counter-productive, that are at odds with production sharing. One of those regulations is Government Regulation No. 79/2010. It’s about cost recovery, and is related to tax.

I’ve had a quick look at the regulation. There’s actually nothing wrong with it. If it were to be implemented as is, it would be fine. But then, it seems to have been twisted. I don’t know by whom. Among other things, it says that cost recovery must not cause state losses. Why make cost recovery sound bad? What business in the world doesn’t have cost recovery?

You were one of the people who drafted the regulation on cost recovery in 1967. How did you develop it and why is it not being implemented as it was intended to be?

The definition is simple. All costs related to production sharing are cost recovery. So, all activities carried out to implement a contract are included as cost recovery. So what isn’t?

In my decades of experience, there are problems defining whether something should be included in cost recovery. But that’s no big deal. As a comparison, it’s like out of one hundred million activities, only one or two million are questioned. I once said, if the government didn’t want [to pay], no problem – we’d pay. So what?

So, is cost recovery a problem?

Cost recovery is not a problem. The problem is that it’s managed by somebody else. These company costs, which we ask to be repaid. So why the ruckus when people request a repayment? It is like we’re providing a bailout. It doesn’t mean that the government pay us back with money. It’s nothing like that. Rather it will be collected from the government’s share of oil.

So, if the government is supposed to get 100 barrels, because there are costs, it only gets 90 barrels to offset the costs. So there’s no cash involved. It’s the other way around. For oil companies, there are only two revenue streams, and both are in barrels. One, oil barrel costs. Two, oil barrel profits.

With a shifting understanding of cost recovery, would it be best to replace it with a new concept? Or should it be kept to attract more interest in the oil and gas industry?

If it went back to what it was like before, it would be business as usual. Every business that generates revenue must have costs. Well then, how much is the corporate tax? Twenty percent? Okay! For the government to raise more revenue, there’s an additional tax. It’s called royalties. So, there are two concepts in the world, tax and royalties. And then there’s a concept of production sharing. They’re actually the same.

There are countries that adopt production sharing because it’s seen to be more profitable. However, there are countries that adopt the concept of tax and royalties. All we have to do is choose. There are tax and royalties in the coal (industry). Are we going to do that? The answer is, we are under contract. While the contract lasts, either tax and royalties or production sharing will apply. If it’s tax and royalties, there will be questions about where the government has ownership of the land.

So does it belong to the companies because of concessions?

Yes, but not directly. Our Constitution says that resources belong to the people, but they can be controlled and managed by the government. In terms of managing, the government has two ways to manage resources. It can manage it itself or appoint someone else. If it appoints someone else, that person will be controlled by the government. The question is, is SKK Migas is watching or not?

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